Tax Planning - by CA. GOPAL KRISHNA RAJU -- 03.03.14

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Transcript Tax Planning - by CA. GOPAL KRISHNA RAJU -- 03.03.14

Key to Tax Planning

Enabling the taxpayer for

effective

wealth management

Monday, 3 rd March 2014

Forenoon Session SIRC of The Institute of Cost Accountants of India

CA. GOPAL KRISHNA RAJU

| FCA, AICWA, ACS, PGDOR, PGDFM, DISA, (ICA) M.Phil

Tax Partner: M/s

. K. Gopal Rao & Co.,

Chartered Accountants, Chennai

Member – Southern India Regional Council of The Institute of Chartered Accountants of India

Financial Year 2013-2014 Rates of Income tax –

a snapshot

Income Slab Upto 2,00,000 VSC ≥ 80 NIL 60 ≤ SC < 80 IND < 60 NIL NIL 2,00,001 to 2,50,000 2,50,001 to 5,00,000 5,00,001 to 10,00,000 NIL NIL 20% NIL 10% 20% 10% 10% 20% 10,00,001 & above 30% 30% 30% Education Cess and Secondary & Higher Education Cess = 3% on Tax

Change in Surcharge –

Super Rich to pay extra

To Whom?

Income Individuals, HUF, Firms, LLPs, Co-operative Societies & Local Authorities More than 1 Crore Domestic Company More than 10 Crore Surcharge 10% (New) 10% (New)

More than 1 Crore to 10 Crore 5% (Existing) Domestic Company

Foreign Company

Foreign Company

More than 10 Crore

More than 1 Crore to 10 Crore

5% (New)

2% (Existing)

Section 87A Tax Rebate for Resident Individuals

Rebate u/s. 87A (I am back in new form) Max Rebate Rs: 2000 Applicable Slab is below 5 Lakh

New

Section 87A Tax Rebate for Resident Individuals

• • •

Applicability:

A tax relief of Rs.2,000/- to the individual tax payers whose total income does not exceed Rs.5 Lakhs in a year .

Consequently any individual having income

up to Rs.2,20,000

will not be required to pay any tax and every individual having total income

Rs.2,20,000 to Rs.5,00,000

shall get a tax relief of

Rs.2,000 FM’s Statistics:

On account of this relief, 1.80 crore tax payers are expected to benefit to the value of Rs.3,600 crore.

Example

Entity

Without Tax Planning

–

Alas God only Save him!

Annual Income Investment u/s. 80C Taxable Income Annual Tax Liability

Raman (Individual)

13,00,000 1,00,000 12,00,000 1,95,700

Net Cash Inflow

10,04,300 + 100,000

(after redemption of investment)

Example Entity

Tax Planning at its best for a businessman or professional

Annual Income Investment u/s. 80C Taxable Income Tax Liability

M/s. Raman (HUF)

3,00,000 1,00,000 2,00,000 NIL

Mr. Raman (IND) Mrs. Raman (IND)

3,00,000 3,00,000 1,00,000 1,00,000 2,00,000 2,00,000 NIL NIL

Master Shyam (Pvt Trust)

2,00,000 2,00,000 NIL

Baby Shruthi (Pvt Trust)

TOTAL Net Cash Inflow 2,00,000 2,00,000 NIL 13,00,000 3,00,000 10,00,000 + 300,000

(after redemption of investment)

NIL

FAQ on Private Trust?

• • • • • Can only parents can create private trust? – Not necessary (relatives, guardians, family friends can create) Is it necessary to register it? – Not mandatory Filing returns? – Yes Compulsory Tax Tip ¤ – Create one trust for one child for maximum benefit Want to create a Private Trust? – Kindly ask a Professional!

Private Trust

      Private Trust can be formed for a single member benefit or for a group of members benefit.

For Tax Planning Ideal for a minor child till he/she attains majority or finishes his/her higher studies or until her marriage

Tip:

For each child let there be one trust

Caution:

Care should be taken while drafting the clauses of the trust deed to include investment methods (take the help of a professional in that case) A trust can be unregistered (no mandatory provision for registration) Using the trust deed PAN can be applied for.

Private (Discretionary/Specified) Trust

  Whether there will be any tax incidence in the hands of the beneficiaries of the trust either at the time of creation of the trust or when they receive any benefits under the trust either out of income or corpus.

Where it is discretionary trust, definitely, the beneficiaries can escape the rigour of section 56(2)(vii) since unless and until any distribution, either of income or corpus, is made, there is no certainty for the beneficiary as to what they will get from the trust.

On distribution from Private trust

  On the other hand, when any money/property is distributed from the trust to the benficiaries either by way of distribution of income or corpus and whether such distribution takes place during the subsitence of the trust or at the time of its dissolution, even then, the benficiaries cannot be subjected to tax on the amount/assets recived on distribution since they are already entitled to the same as per the trust deed.

This view was also upheld in

[

Ashok C. Pratap v Addl. CIT [2012] 139 ITD 533 (Mum) : [2012] 150 TTJ 137 (Mum)

]

   

Tax Planning - HUF

Hindu Undivided Family can also claim basic tax exemption of Rs: 2000,000.

[plus Investment Planning eligible for further deduction u/s 80C] HUF is not a created entity. Only its existence has to be proved.

Individual Minors (below the age of 18) can also claim basic tax exemption of Rs: 2,00,000 (for boys and girls)

Caution:

Minors income generally are clubbed into the hands of the parent whose income is greater. Care should be taken to make their income to accrue in the name of a private trust (where the beneficiary is the minor child).

How to prove the existence of a HUF?

• • Family (Ration) Card – is the starting point; or HUF - Affidavit

   Apply for a PAN Open Bank Account and start doing the operations Periodically file your returns

Hindu Undivided Family – (HUF)

      HUF cannot be formed!

Yes. Only its existence has to be proved.

Date of Marriage

is the Date of Incorporation of HUF How? – Family Card (Ration Card) is the key.

Using Family card – We can apply for a PAN card Then using PAN card we can open a Bank Account – then start doing operations.

Section 80EE Deduction in respect of interest on loan taken for residential House Property

New

Interest on Residential House Property Additional deduction upto Rs:100,000 4 conditions to be satisfied Let-out or Self Occupied (is immaterial)

New

Section 80EE Interest on Housing Loan

• • • •

Applicability:

A new section 80EE is inserted in the IT Act, 1961 to provide an additional deduction

upto Rs. 1 lakh

in respect of interest on loan taken for residential house property to

individuals

The deduction shall be subject to the following conditions:-

The loan is sanctioned by the financial institution during the period beginning on 1st April,2013 and ending on 31st March,2014 .

The amount of loan sanctioned for acquisition of the residential house property does not exceed Rs.25 lakhs.

The value of the residential house property does not exceed Rs.40 Lakhs.

The assesses does not own any residential house property on the date of sanction of the loan.

The above deduction is over and above the deduction of Rs.1.50 lakhs allowed for self occupied properties under Section 24 of the Income-tax Act.

If the limit is not exhausted, the balance may be claimed in AY 2015-16.

(Carried forward of un-exhausted claim)

Section 24(b): Interest on Borrowed Capital (Loans)

    Interest

payable

on loans borrowed for the purpose of

acquisition, construction, renovation, repairing or reconstruction

(Hint: AC3R) can be claimed as deduction.

Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion.

Interest accrued during the construction period preceding the year of completion of construction can be accumulated and claimed as deduction over a period of 5 years in equal installments commencing from the year of completion of construction.

When a person acquires a property and pays only part of the sale consideration, interest payable on the unpaid purchase price qualifies for deduction in the computation of income from such property.

Interest on Borrowed Capital Self Occupied Property Let Out Property Borrowing before 1/4/1999 Deduction restricted to 30,000 Used for P/C/R/R/R Deduction restricted to 150,000 Used for P/C Borrowed on or after 1/4/1999 Deduction restricted to 30,000 Used for R/R/R

Where the property has been

acquired, constructed, repaired, renewed or reconstructed

with borrowed capital before 1/4/1999 Actual interest payable subject to the maximum of

Rs: 30,000

Where the property is

acquired or constructed

with capital borrowed on or after 1/4/1999 and such acquisition or construction is completed within 3 years of the end of the financial year in which the capital was borrowed Actual interest payable subject to maximum of

Rs: 150,000

if certificate mentioned in point 2 is obtained In any other case, i.e., money borrowed after

repairs or renewal

31/3/1999 for Actual interest payable subject to maximum of

Rs: 30,000

It may be noted that the deduction of interest of Rs: 30,000 are allowed for purpose of acquisition or construction or repair or renewal or reconstruction of house property where as the deduction to the maximum of Rs: 150,000 is allowed only for acquisition or construction of house property.

For getting deduction of interest of maximum of Rs: 150,000, it is necessary to obtain a certificate from the person to whom such interest is payable specifying the amount of interest payable by the assessee for the purpose of acquisition / construction of the property.

According to Explanation to section 24, when a fresh (subsequent) loan has been raised to repay the original loan if the second borrowing has really been used to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loan would also be allowed as a deduction.

Interest on interest is not deductible. The assessee is entitled to deduct only the interest payable by him on the capital borrowed, and not the additional interest which because of his failure to pay the interest on the due date is considered as a part of the loan.

Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as deduction.

Planning to buy a Second House

• • • • You are required to pay tax on rental income from the second house even if it is lying vacant.

If a person owns more than one house and it is vacant, its value is added while calculating the owner’s wealth. A 1% wealth tax is payable on the amount exceeding Rs: 30 lakh.

Commercial property

is not included while calculating the wealth of a person.

The interest paid on a loan taken to purchase commercial property is also eligible for tax deduction. Commercial space usually fetches a high rent than residential property.

It is also possible to take a loan against this rental income. The rental income from commercial property is eligible for 30% standard deduction as in the case of residential property.

Relief admissible in respect of self occupation of House Property

• • • •

Tax Planning:

Relief for self occupation of house is admissible under section 23 to an HUF also.

There is nothing in the words used in section 23(2) which may show that they cannot apply to HUF which is nothing but a group of individuals related to each other.

[

ITO vs. Tarlok Singh & Sons 29 ITD 139 (Del)

]

• • • If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery.

One can also avoid clubbing of income by opting for tax exempt investments.

(PPF, LTCG on MF & Equity) Incidentally, a wife can help her husband save tax even before they get married. If a couple is engaged, and the girl does not have any taxable income or pays tax at a lower rate, her fiancé can transfer money to her. The income from those assets won’t be included in his income because the transaction took place before they got married.

Gifts

• • • • •

Tax Tip: Non -Taxable Gifts

Up to Rs: 50,000 in cash

Gifts in Kind Cash Gifts from any relative

[Relative means: (1) spouse of the individual; (2) brother or sister of the individual; (3) brother or sister of the spouse of the individual; (4) brother or sister of either of the parents of the individual; (5) any lineal ascendant of the individual; (6) any lineal ascendant or descendent of the spouse of the individual; and (7) spouse of the person referred in (2) to (6)]

On the occasion of marriage

of the individual

Under a will

or by inheritance In contemplation of death of the payer

Gift ……… When taxable & to whom?

• • • •

What:

Gifts would be subject to income-tax in the hands of the

donee

(recipient).

Limit:

As per section 56(2)(vi), receipts of movable property, fair market value of which exceeds

50,000

(Fifty thousand rupees), without consideration or without adequate consideration is taxable.

Who:

as income in the hands of

Individuals / HUFs

Year:

In the year of receipt

Exempted…….gifts

Section 56(2)(vii) shall not apply to any sum of money or any property received by the donee

1. from any

relative

; or 2. on the occasion of the

marriage

of the individual; or 3. under a

will

or by way of

inheritance

; or 4. in contemplation of death of the payer or donor, as the case may be; or 5. from any

local authority

; or 6. from any fund or foundation or university or other

educational institution

or hospital or other medical institution; or 7. from any

trust

registered under IT Act.

Section 56(2)(vii) – Gift of Immovable Property Situation Taxable Income

  

Without consideration For consideration > Rs: 50,000 but < stamp duty value The date of the agreement and the date of registration are not the same,

the stamp duty value of which exceeds Rs: 50,000, the stamp duty value of such property; the stamp duty value of such property as exceeds such consideration: the stamp duty value on the date of the agreement may be taken

Amendment

• •

Present:

The existing provisions of 56(2)(vii) sub clause (b) of the Income-tax Act, inter alia, provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds

Rs: 50,000

, the stamp duty value of such property would be charged to tax in the hands of the individual or HUF as income from other sources.

Catch me if you can:

The existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration.

•

Proposal:

It is proposed to amend the provisions of 56(2)(vii) so as to provide that where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs: 50,000, the stamp duty value of such property as exceeds such consideration, shall be

chargeable to tax in the hands of the individual or HUF

as income from other sources.

• •

Differing Dates:

Considering the fact that there may be a time gap between the date of agreement and the date of registration, it is proposed to provide that where the

date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same

, the stamp duty value may be taken as on the date of the agreement, instead of that on the date of registration.

Caution:

This exception shall, however, apply only in a case where the amount of consideration , or a part thereof, has been paid by any mode other than cash on or before the date of the agreement fixing the amount of consideration for the transfer of such immovable property.

• •

This amendment will take effect from 1 st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.

May Overrule the case reported in (2012) 6 TaxCorp (DT) 53279 (DELHI)

, Section 50C enabling the revenue to treat the value declared by an assessee for payment of stamp duty, ipso facto, cannot be a legitimate ground for concluding that there was undervaluation, in the acquisition of immovable property.

Section 43CA – Special provision for full value of consideration for transfer of assets other than capital assets in certain cases

New

Section 43CA

• • •

Background:

The provisions of Section 50C do not apply to transfer of immovable property, held by the transferor as stock-in-trade.

Younger Brother of Section 50C:

A new Section 43CA is inserted in the Act, that where the consideration for transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be full value of consideration for the purposes of computing income under the head “Profits and Gains of Business or Profession”.

Stamp duty value may be taken as on the date of agreement of transfer and not as on the date of registration of such transfer where consideration is received by any mode other than cash.

New

Section 43CA Situation Taxable Income



For consideration paid < stamp duty value

the stamp duty value of such property as exceeds such consideration paid; 

The date of the agreement

the stamp duty value on the date of the

and the date of registration are not the same,

agreement may be taken

• •

These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.

May Overrule the case reported in

(2012) 6 TaxCorp (DT) 51567 (ALLAHABAD)

held

that section 50C has no application as it was a case of transfer of plots which was stock in trade. Since, an income earned from such transaction is liable to be taxed as income from business activity.

Computation of income under the head “PGBP” for transfer of immovable property in certain cases

• Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under

Section 50C

of the Income-tax Act.

These provisions do not apply to transfer of immovable property, held by the transferor as stock-in-trade.

• • • It is proposed to provide by inserting a new section 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration

for the purposes of computing income under the head “Profits and gains of business of profession

”.

It is also proposed to provide that where the

date of an agreement

fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer.

However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

• • • • Invest in their name if they are in a lower tax bracket: Every adult enjoys a basic tax exemption limit. For senior citizens (above 60 years), the basic exemption limit is Rs: 2.5 lakh a year.

If any or both of your parents do not have a high income but you have an investible surplus, you can plan tax by transferring money to them which can then be invested in their name.

There is no tax on such gifts and the income from the investments will be treated as theirs.

No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents.

Amendment

139(9): Defective Return

• • •

Fact:

A large number of assesses are filing their return of income without payment of self assessment tax under section 140A.

A Return of income filed without payment of self assessment tax including interest to be treated as defective return.

Effective:

This amendment will take effect from 1st June, 2013.

Section 56(2)

–

Gift of Immovable Property

• • Where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs.50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to take in the hands of the individual or HUF as income from other sources.

This amended section is applicable from the Assessment Year 2014-15.

Amendment

Section 80 C

–

Top 10

–

Check the colour please

10.

Tuition fee – paid for children (own, adopted, step) for full time education in India. [ Note: Tuition fee paid for grandchildren is eligible for deduction for the HUF ] Principal repayment of Housing Loan Stamp Duty and Registration Charges Fixed Deposits in Banks for a LIP of 5 years NSC – National Savings Certificate PF – Provident Fund [SPF, PPF, RPF] 10 year Post Office Savings Bank (CTD) Mutual Funds Insurance ULIP

80 E – Repayment of Education Loans

Only Interest is eligible for deduction 2.

No Limit 3.

Deduction eligible for initial year and immediately succeeding seven years

4. Deduction eligible for repayment of education loans made for spouse or children

• • • For assessment year 2014-15 and within the existing limit, a deduction of up to Rs: 5,000 for preventive health check-up is available.

Therefore, you get “health

bhi aur wealth bhi” .

Even if your parents are not dependant, you can pay for medical insurance and claim deduction.

• • • • • • • • • Individual / HUF Individual = assessee + family (spouse + dependent children) HUF = any member of the family Rs: 15,000 (self/dependents) Rs: 15,000 / Rs: 20,000 (parents / SC parents) The payment should be made by any mode of payment

cash except

Deduction is allowed to an individual in respect of medical insurance premium paid for self, spouse and dependent children.

In case the premium is paid in respect of a senior citizen, then, the maximum deduction would be Rs.20,000 instead of Rs.15,000.

In the case of a HUF, such deduction is allowed in respect of premium paid to insure the health of any member of the family.

• • An additional deduction of up to Rs.15,000 would be allowed in respect of medical insurance premium paid for insuring the health of a parent or parents. This would be in addition to the deduction of Rs.15,000 in respect of medical insurance premium paid for self, spouse and dependent children. ( Such additional deduction would be available even if the parents are not dependent on the individual ).

The maximum deduction would, therefore, be

Rs.30,000 [i.e. Rs.15,000 + Rs.15,000]

and in case any of the persons insured is a senior citizen,

Rs.15,000 + Rs.20,000].

Rs.35,000 [i.e.

• • The maximum deduction available to a HUF would be Rs.15,000 and in case any member is a senior citizen, Rs.20,000.

The other conditions to be fulfilled are that such premium should be paid by any mode, other than cash, in the previous year out of his income chargeable to tax. Further, the medical insurance should be in accordance with a scheme made in this behalf by 1.

the General Insurance Corporation of India and approved by the Central Government in this behalf; or any other insurer and approved by the Insurance Regulatory and Development Authority.

Amendment

Section 10(10D) - Keyman Insurance Policy - KIP

• • Keyman Insurance Policy which has been assigned to any person during its term with or without consideration shall continue to be treated as a keyman insurance policy.

No benefit of exemption under section 10(10D) shall be claimed on such policies.

Amendment

• •

Existing provisions:

of section 10(10D), inter alia, exempt any sum received under a life insurance policy other than a KIP. Explanation 1 to the said clause (10D) defines a KIP to mean a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person.

By-pass:

It has been noticed that the policies taken as KIP are being assigned to the keyman before its maturity. The keyman pays the remaining premium on the policy and claims the sum received under the policy as exempt on the ground that the policy is no longer a keyman insurance policy.

Thus, the exemption under section 10(10D) is being claimed for policies which were originally keyman insurance policies but during the term these were assigned to some other person.

loophole in law.

The Courts have also noticed this

• • With a view to plug the loophole and check such practices to avoid payment of taxes, it is proposed to amend the provisions of clause (10D) of section 10 to provide that a

keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy.

The above amendment will take effect from 1 st April, 2014 and will, accordingly, apply in relation to assessment year 2014-15 and subsequent assessments years.

•

May Overrule the case reported in

(2012) 6 TaxCorp (DT) 51593 (DELHI)

Held that,

The insurance company has itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. It is not open to the Revenue to still allege that the policy in question is keyman policy and when it matures, the advantage drawn there from is taxable; no doubt, the parties here, viz., the company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10(10D); law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of least tax possible, albeit, in conformity with the provisions of Act. It is also permissible to the assessee to take advantage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and

this would not amount to tax evasion.

Amendment

Wealth-Tax Returns

• • Wealth-tax return can be electronically filed similar to e-IT Returns.

This facility stated to have come into force from 1st June, 2013. Still the provision is yet to see the daylight

Eligible Limit- U/s 10(10D) & 80C

• • Eligibility limit for claiming deduction u/s 80C and claiming exemption u/s 10(10D) in the case of certain disability or ailment increased from 10% to 15% on actual capital sum assured.

This relaxation shall be available in respect of insurance policies issued on or after 1 st April, 2013.

Amendment

New

TDS on transfer of Immovable Properties

• • A new section

194-IA

is inserted to provide that every transferee (buyer), at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor (resident buyer), shall deduct tax, @1% of such sum.

No deduction of tax shall be made where the total amount of consideration for the transfer of an immovable property is less than Rs. 50 Lakhs.

Dividend from Foreign Subsidiary Companies

• • • •

Existing:

Section 115-O provides for payment of DDT on the amount of dividend distributed by the company as reduced by the amount of dividend received from its subsidiary if such subsidiary has paid the DDT.

This ensures removal of cascading effect of DDT in a multi-tier structure where dividend received by a domestic company from its subsidiary (which is also a domestic company) is distributed to its shareholders.

from foreign subsidiaries so far?

But on dividend received Proposed:

The Indian Company shall not be liable to pay Dividend Distribution Tax (Section 115-O) on the distribution to its shareholders of that portion of the income received from its foreign subsidiary.

Date:

The above amendment will take effect from 1st June, 2013.

Amendment

The following AIR transactions must be reported in your Income Tax Return:

 • Cash deposits (10 lakh and above)  • Credit card bills (2 lakh and above)       • Mutual Fund purchase (2 lakh and above) • Purchase of bonds/debentures (5 lakh and above) • Purchase of shares of a company (1 lakh and above) • Purchase of immovable property (30 lakh and above) • Sale of immovable property (30 lakh and above) • Purchase of RBI bonds (5 lakh and above) 64

80 CCG : Rajiv Gandhi Equity Savings Scheme

• • •

Extended:

The first time investors will now be allowed to invest in mutual funds as well as listed shares.

Till when:

This investment can be done not in one year alone, but in three successive years.

Raised:

The income limit is also being proposed to be raised from Rs.10 lakhs to Rs.12 lakhs.

Amendment

80 CCG : Rajiv Gandhi Equity Savings Scheme

• •

Limit:

The income limit is also being proposed to be raised from Rs.10 lakhs to Rs.12 lakhs.

Applicability Extended:

in addition to “listed equity shares”

“listed units of equity oriented fund”

is also added

New Amendment

Taxation of Mutual Funds : Snap-shot

Dividends received from Mutual Funds

Exempt - Dividend – Section 10(35)

• •

Where:

Under section 10(35) of IT Act,

What:

Any income (except Capital Gains) received by any person in respect of the units of the mutual fund is exempt from income tax.

Surplus / Deficit on (Transfer) Redemption of Units

• 

What:

Gains arising on transfer / redemption of Units as well as switching between schemes will be chargeable to tax under the Act.

Caution:

The characterization of income from investment in securities as

‘Business Income'

‘Capital Gains'

will have to be examined on a case-to-case basis.

Equity Oriented Fund

A Fund

which satisfies the following

TWO

conditions: A.

the investible funds are invested by way of equity shares in

domestic companies

to the extent of

more than 65%

of the total proceeds of such fund,

AND

 The fund has been

set up under

fund specified in

section 10(23D)

a scheme of mutual [

the transaction should be chargeable to securities transaction tax which implies that the transfer should take place through a recognized stock exchange

] 77

• • •

Equity Oriented Fund

What:

Units of Equity Oriented fund including subjected to STT.

ELSS being

Where:

LTCG arising from transfer of such units are exempt under section 10(38) of the Act.

Caution:

The mutual fund would recover STT from the unit holder as per the applicable rates.

Other than Equity Oriented Fund

Default in Furnishing PAN

Where:

Section 206AA of the Act

Effective:

Operative with effect from April 1, 2010

–

Mandatory:

The deductee (investor) is required to mandatorily furnish his PAN to the deductor (MF) failing which the deductor shall deduct TDS at higher of the following rates: the rate prescribed in the Act; or at the rate in force i.e., the rate mentioned in the Finance Act; or at the rate of 20%.

For STCG - 30%, LTCG – 20%

Section

Eligible persons Asset to be purchased to claim exemption Time-limit for purchase from date of sale of Capital Asset

54 EC

All assesses Specified Bonds of NHAI and RECL (cap of Rs.

50 lakhs

in a financial year)

months

54F

Individual and HUFs Residential House Property

Purchase: 1

year backward /

years forward &

Construction: 3

years forward

Amount Exempt Lock-in period

Investment in the new asset or capital gain whichever is lower

3 years Capital gains proportionate the investment made from the sale proceeds to

(subject to other conditions of owning / purchasing residential house mentioned in the section)

3 years



Tax Tip – Maximum amount eligible for reinvestment u/s. 54EC

Aspi Ginwala v. ACIT, Circle 5 Baroda [2012] TMI 211909 ITA No: 3226 & 3227 (Ahd)/2011 dated 30 th March 2012

Tax Tip – Investments in Mutual Funds

 

How much:

Under section 80C of the Act, an assessee, being an individual or HUF, is eligible to claim a deduction upto an aggregate of Rs. 1 lacs on account of sums paid as subscription to units of an Equity Linked Savings Scheme.

What is ELSS:

The expression "Equity Linked Savings Scheme " refers to Equity Linked Savings Scheme, 2005 as notified by the CBDT, MOF, GOI vide notification dated 3/11/2005 as amended vide notification dated 31/12/2005 83

Dividend Stripping – Caution

• • • – –

Where:

As per Section

94(7)

of the Act

What:

The

loss

due to sale of units in the schemes (where income distributed on MF units is tax free)

will not be available for set-off

to the extent of the

tax free dividend income

distributed; if units are:-

How: Bought

within distribution;

AND 3

months prior to the record date fixed for income

Sold

within

months after the record date fixed for income distribution.

Bonus Stripping – Caution

• • • • – –

Where:

As per Section

94(8)

of the Act

What:

issued) The

loss

due to sale of original units in the schemes (where bonus units are

will not be available for set-off

; if units are:-

How: Bought AND

within

months prior to the record date fixed for allotment of bonus units;

Sold

within

months after the record date fixed for allotment of bonus units.

Relief:

However, the

amount of loss

so ignored shall be deemed to the

cost of purchase

or acquisition of such

unsold bonus units

held on the date of transfer of original units 85

• • •

MF Investments – Religious & Charitable Trusts

Set-Apart:

The charitable trust can keep the total income for future use in charitable or religious purposes for a period of

five

years, and claim tax exemption in the year in which the income is earned, if the amount so earned is invested in investments specified under Section

11(5)

of the IT Act read with Rule 17C of the I-T Rules, 1962.

Intimate AO:

If the trust wish to avail of this exemption, they will need to give a prior notice to the Assessing Officer specifying the purpose for which the amount is accumulated or set apart.

Alternatively:

The trusts can

allocate

upto

15%

of a year's income for application to charitable or religious purposes in future years, without attracting income tax – under section

11(2)

Wealth-Tax for MF Investments

Units held under the any scheme of the Mutual Fund are not treated as assets under section 2(ea) of the Wealth-tax Act, 1957 and are, therefore,

not liable to Wealth-tax

Tax Free Income for Non-residents Indians

• • • • Interest earned on Non Resident (Non-Repatriable) [NRNR] Deposit, Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit, Overseas income of NRIs, Dividend income from Indian Public/Private Company, Indian Mutual Fund and from Unit Trust of India,

Tax Free Income for Non-residents Indians…

• • Long-term capital gains arising on transfer of equity shares traded on recognized Stock Exchange and units of equity schemes of Mutual Fund is exempt from tax at par with residents, Remuneration or fee received by non-resident / non-citizen / citizen but not ordinarily resident 'consultants', for rending technical consultancy in India under approved programme including remuneration of their employees, and income of their family members which accrue or arise outside India, Interest on notified bonds.

Various Deductions for Non-residents Indians…

• A. Home Loan Interest Deduction: Non-residents Indians are eligible to avail deductions on home loan interest for the interest portion of the EMI paid towards the repayment of home loans.

Various Deductions for Non-residents Indians…

b. Savings Deduction: From the various tax saving avenues available to the general public – Equity instruments like ELSS, Debt instruments like PPF, National Savings Certificate, Bank FDs etc and Life Insurance and Pension Plans, Non-residents Indians are not allowed the following investments: • i.) Non-residents Indians not allowed to open a PPF account. An existing PPF account can be continued till maturity.

• ii.) Non-residents Indians are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.

Various Deductions for Non-residents Indians…

c. Health Insurance Premium Deduction • Non-residents Indians can also claim deduction for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.

Various Deductions for Non-residents Indians…

• • • d. Other Deductions • There are many other deductions available to resident Indians – Health Insurance Premium, Medical treatment of disabled dependent, Medical treatment of certain specified ailments, Deduction for Handicapped person, Educational loan, Deduction for Donations and Rent paid. NRIs qualify for these deductions: i). Deduction for interest paid on educational loan ii). Deduction for certain specified donations Deduction for Medical treatment of disabled dependent, Deduction for Medical treatment of certain specified ailments, and Deduction for Handicapped person are not available for Non-residents Indians

Section 90 & 90A: Tax Residency Certificate

• Tax Residency Certificate is a

necessary for claiming benefits under DTAA

but not a sufficient condition for claiming benefits under the agreements referred to in Section 90 and 90A.

Amendment

•   

Backdrop:

Section 90 of the Income Tax Act empowers the Central Government to enter into an agreement with the Government of any foreign country or specified territory outside India for the purpose of –

granting relief in respect of avoidance of double taxation, exchange of information and recovery of taxes.

• • • • Further section 90A of the Income-tax Act empowers the Central Government to adopt any agreement between specified associations for above mentioned purposes.

In exercise of this power, the Central Government has entered into various Double Taxation Avoidance Agreements (DTAAs) with different countries and has adopted agreements between specified associations for relief of double taxation.

The scheme of interplay between DTAA and domestic legislation ensures that

a taxpayer, who is resident of one of the contracting country to the DTAA, is entitled to claim applicability of beneficial provisions either of DTAA or of the domestic law.

Sub-section (4) of sections 90 and 90A of the Income-tax Act inserted by Finance Act, 2012 makes submission of Tax Residency Certificate containing prescribed particulars, as a condition for availing benefits of the agreements referred to in these sections.

• • •

Proposal:

It is proposed to amend sections 90 and 90A in order to provide that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A. This position was earlier mentioned in the memorandum explaining the provisions in Finance Bill, 2012, in the context of insertion of sub-section (4) in sections 90 & 90A.

These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.

May Overrule the case reported in (2003) TaxCorp (INTL) 1732 (SC) held

that FIIs based in Mauritius are entitled to exemption from capital gains tax; CBDT Circular dated April 13, 2000 upheld legal and valid

Bilateral Relief

–

Methods

 

Exemption Method:

A particular Income is taxed in only one of the two countries; and

Tax Relief Method:

An income is

taxable in both countries

in accordance with their respective tax laws read with the double taxation avoidance agreement. However,

the country of residence of the tax payer allows him credit for the tax charged thereon in the country of source

Types of Tax Transactions

Section 90 or Section 90A

Taxing Foreign Income

Section 91, Explanation

Remittances to non-residents under section 195 of the Income-tax Act –– matters connected thereto

 The revised procedure for furnishing information regarding remittances being made to non-residents

2009 is as follows: w.e.f. 1st July,

1. The person making the payment (remitter) will obtain a certificate from a CA (other than employee) in Form 15CB.

2. The remitter will then access the website to electronically upload the remittance details to the Department in Form 15CA (undertaking). The information to be furnished in Form 15CA is to be filled using the information contained in Form 15CB (certificate).

104

Set off or Carry forward of Loss- Synopsis

Set off of Loss

-Inter source adjustments and exceptions -Inter head adjustments and exceptions Carry forward of loss -Loss from House property -Loss from Business / profession -Loss of amalgamating company / demerged company / firm / proprietary concern -Loss of Banking company -Speculation Loss Loss under “Capital Gains” -Loss from activity of owning and maintaining race horses

Section

70 71 71B 72 72A 72AA 73 74 74A

72: Set off or Carry forward of Loss from Business or Profession

HEAD

Set-Off

Salary

Strictly NO

IFHP

Yes

PGBP

Current Year Loss

CG

Yes

IFOS

Yes Carried Forward Loss to be set-off No No Only against this head No No

74: Set off or Carry forward of SHORT TERM CAPITAL LOSS

HEAD Set-Off Salary No IFHP No PGBP No CG Against current year STCG / LTCG IFOS No No Carried Forward Loss to be set-off No No Only against STCG / LTCG No

74: Set off or Carry forward of LONG TERM CAPITAL LOSS

HEAD Set-Off Salary No IFHP No PGBP No CG Against current year LTCG IFOS No Carried Forward Loss to be set-off No No No Only against LTCG No

Section 70 Inter Source Adjustments and exceptions

Exceptions are the following: 1)

Speculation Loss (commodity exchanges)

2) 3)

Income from owning and maintaining race horses Long term capital Loss



Loss on gambling can neither be set-off nor be carried forward.

Section 71 Inter Head Adjustments and exceptions

Exceptions are the following:

1) 2)

Speculation Loss (commodity exchanges) Income from owning and maintaining race horses

3) 4)

Loss under capital gains (both ST and LT) Loss from PGBP cannot be set off against Salary Income

Section 72 Carry forward and setoff of business loss

•

Order of setoff:

1) 2) • 3)

Current year depreciation Brought forward business or profession losses Unabsorbed depreciation Period of carry forward can be made not more than EIGHT assessment years However, unabsorbed depreciation can be carried forward indefinitely (

since these are not cash losses

)

• •

Section 73 Speculation Loss

Speculative business loss can set off against income from speculative business of the current year only and the balance loss can be carried forward for

FOUR

years only.

It may be noted that speculative business loss can be carried forward for a maximum of four years as per section 73(4).

Section 36(1)(vi) : Commodities Transaction Tax (CTT) & Chapter VII of Finance Bill, 2013

New

• • • • • •

Rate:

A new CTT shall be levied on non agricultural commodities future contracts at the rate of

0.01%

of the price of goods.

On Whom:

CTT shall be paid by the seller.

Trading

in commodity derivatives will

not

be considered as

“speculative transaction”

Deductible:

CTT shall be allowed as deduction as per section 36(1)(xvi) of the IT Act if income is included in “PGBP”

Exclusion:

Agriculture commodities have been kept outside the purview of the CTT

Applicable Date:

from FY 2013-2014 when Finance Bill 2013 comes into force.

43(5)(d) ‘Eligible Transaction’ means

• • As per clause (d) of the proviso to section 43(5), an eligible transaction in respect of

trading in derivatives

shall not be a speculative transaction.

Therefore,

loss from trading in derivatives is not a speculative loss

and such loss is eligible for set off against profit from the non speculative business income.

• • •

Section 71B Loss under the head Income from House Property

If there is a loss under the head “

Income from house property

”, it can be set-off against income under any other head during the current year ( no loss can be set-off against winnings from lotteries, races, etc .).

If it is not possible to set-off the loss (fully or partly), it can be carried forward to the next year for being set off only against the income under the head “Income from house property”.

Loss from house property can be carried forward for a maximum period of 8 years for set-off against income from house property.

Set off or Carry forward of Loss from House Property

HEAD

Set-Off Carried Forward Loss to be set-off MAX 8 years

Salary

Yes

IFHP

Current Year Loss

PGBP

Yes No Carry Forward & Set-off Only against this head No

CG

Yes No

71B

IFOS

Yes No

• • • •

Disclaimer

These are my personal views and cannot be construed to be the views of the

SIRC of ICAI

or my firm M/s .

K. GOPAL RAO & Co

., CAs No representation or warranties are made by the

SIRC of ICAI

or its

branches

with regard to this presentation These views

do not

and shall not

be considered as professional advice

This presentation should

not be reproduced

in part or in whole, in any manner or form, without my written permission

Your reflections please send to my email:

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