Monday, September 15, 2014

“HRA EXEMPTION & PAN SUBMISSION OF THE LANDLORD ”


TAX TALK-11.08.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“HRA EXEMPTION & PAN SUBMISSION OF THE LANDLORD ”

Query 1]
I am an employee in a PSU residing at Bilaspur (CG ). I receive HRA from my Company and I live in a rented premises. But I could not submit the rent receipts to my Company for the Financial Year 2013 - 14, so the Company deducted and deposited the tax without considering the provisions of HRA exemptions.
My query is - 
1.      Whether can I claim the HRA exemptions while filing the return online? If yes, will I still require the rent receipts from the landlord?
2.      My actual rent does not exceed Rs. 1,00,000/- p.a. Will I still require the PAN of the landlord in this case?
3.      My Basic Salary & DA keep on changing every month, so will I have to take the Basic Salary & DA for every month as per the pay slip and do the calculations for HRA?
I had purchased a house in 2008 under the Self Financing Scheme from the Housing Board for which I had availed the facility of HB loan from my Company and against which the Principal and the Interest amount is being deducted from my Salary. But since I have not received any Completion Certificate from the Housing Board till date (as the house is still not completed and I have not received the possession till date), I could not submit the same to my Company. My queries are: 
i.                    As I could not submit the required papers to the Company, won't I be able to claim the Pre - Construction period Interest as the 3 year period has also been lapsed?
ii.                 Can I claim the deduction U/s 24 for Housing Interest of Rs. 34,897/- for the F.Y. 2013-14 while filing my e-return? If not, then from when can I claim the deduction U/s 24? I have not claimed any deduction regarding this till now in any year. I am eagerly waiting for your solution to my problem.  [Meena Mohan-minaraju26@gmail.com]

Opinion:
Employees in receipt of House Rent Allowance (HRA) from the employer are eligible for exemption if they are staying in a rented accommodation & paying the rent. While working out deduction of tax at source (TDS) of employee, the disbursing authorities (or employer) should satisfy themselves about the rent payment by insisting the production of evidence of actual payment of rent before granting exemption towards HRA or any portion thereof from the total income. Income Tax Department has further tightened its focus on bogus HRA exemption claimed by salaried employees in income tax returns & so now employees have to furnish the PAN of the landlord if the rent payment exceeds Rs. 1 Lacs p.a. [Circular No. 8/2013 Dated 10.10.2013 issued by CBDT]. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

[Though  incurring actual expenditure on payment of rent is a pre-requisite for granting exemption under  section  10(13A) by the employer,  as  an  administrative  measure, salaried employees drawing house rent allowance  up to Rs. 3,000/-  per  month are exempted from production  of rent  receipt to the employer/ disbursing authorities . It  may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that  the employee  has  incurred  actual expenditure on payment  of  rent.] 

With above minor background, it may be noted that
1.      Even if the employer has not considered deduction towards rent payment u/s 10(13A), employee can claim the same while filing income tax return. The receipt is not required for uploading the return. However, it CAN be demanded subsequently by the Assessing Officer.
2.      PAN of the landlord, if rent payment exceeds Rs. 1 Lacs, is required by the employer to grant deduction towards HRA while working out Tax to be deducted (TDS) from the salary income of the employee. If the rent payment is not exceeding Rs. 1 Lacs, furnishing of PAN is not mandatory and employer could grant deduction merely on the basis of rent receipt / rent agreement of the landlord. It may be noted that even if the deduction towards HRA is not considered by employer due to any reason whatsoever, employee could claim the same while filing return of income if all other eligible condition of deduction are satisfied.
3.      Monthly Basic salary & DA would be aggregated to arrive at yearly figure and then deduction towards HRA would be worked out.

As far as interest towards pre-construction period is concerned, it may be noted that interest paid during the period of construction of house property is not deductible in the year of interest payment. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the construction is completed. For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on March 31st immediately prior to the date of completion of construction /acquisition.
There is one more penal consequence in case the house property is not completed within a period of 3 years. In such case, deduction towards interest on borrowed capital is also restricted to Rs. 30,000/- only & not Rs. 1.50 Lacs (now enhanced to Rs. 2 Lacs from the FY 2014-15 onwards) otherwise available in case of self occupied house property.

In your specific case also, deduction towards pre-construction period would be eligible for deduction only after the construction of the house property. Without completion of the construction of house property, deduction would not be admissible.

“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”


TAX TALK-18.08.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”


Query 1]
I have following query. I am agent of some company and I am making advance payment on behalf of parties, who are purchasing material from company. Company is allowing me CD and these parties are making payment after 30 days. Kindly advice whether it is a business income or income from other sources? [Lalit Devpura-lalit.devpura@adityabirla.com]
Opinion:
Prima-facie, it appears that the company is selling the goods directly to the customers. The transaction of purchase & sale is between the parties and you are an intermediary through whom just payment is routed. You are making the payment to the seller on behalf of their purchaser/customers after deducting the cash discount whereas you will be receiving the billed amount from the customer. In such case, your bill discounting income ideally is taxable under the head “Income from Business/profession” as the transactions doesn’t appear to be an isolated single transaction & doesn’t appear to fall in the residual category of “Income from Other source”.

Query 2]
I have the following queries with regard to Real Estate Transactions. Kindly help.
1.      The client has entered into a JV Agreement with the Land owner for construction of 5 flats, out of which 3 flats to be given to the owner and 2 flats are to the Builder.
2.      The cost of each flat is Rs. 25 Lacs.
3.      Now, the percentage of completion is 60%.
4.      So Sales Turnover to be recognized is Rs. 25 Lacs * 2 * 60% = Rs. 30 Lacs (Please correct me if I am wrong).
5.      Cost of Construction incurred till 31st March is Rs. 25 Lacs.
6.      How to calculate the closing WIP assuming that
a. One flat is booked before 31st March?
b. Two flats are booked before 31st March? [Bhagyalakshmi Ramesh-
blassociates2003@gmail.com]
Opinion:
1.      The hardest thing to understand is income tax. It gets all the more complicated when it comes to taxation of real estate transactions. A real estate project is generally spreads over for more than one accounting period & so revenue recognition and accounting in such cases still remains a complex issue. There are lot many confusions as to revenue recognitions in such cases. In your specific case, apparently it appears that the risk & rewards in respect of the builders share in the project would be transferred in favor of the prospective or identified buyer only after completion of the scheme, at the time of executing sale deed or handing over the possession of the flat. If it is so, the revenue need not be recognized at the time of booking or during the construction phase of the project. Rather, the revenue would be recognised at the end of the project at the time of executing the sale deed in favor of buyer.  In plain words, even if 60% or more is the stage of construction, no revenue needs to be recognised. Irrespective of the number of booking (one or both), the revenue would be recognised at the time of transfer as stated above. Work in progress (WIP) would consist of all the expenses incurred till the end of the financial year. It will not have anything to do with the stage of completion & closing WIP, in such case, would be carried forward in the next year.


Query 3]
I have a query regarding second housing loan. Please provide solution to following queries. I have purchased one flat at Delhi in 2005 taking housing loan which is cleared in 2012 and the house is in my possession. I was posted at Delhi in 2005 and now shifted to Nagpur in 2007 and is residing in a rented house at Nagpur.  In January- 2014, I had purchased one plot taking a housing loan from SBI reality and now within 18 months, I have to construct a house on that plot as per the requirement of bank. I shall be applying for housing loan in march-2015 for constructing a house. At present, I am not getting any interest certificate from bank for claiming income tax exemption. Bank says after 
completion of construction of house, they will issue it. What will be my tax liability? I am a salaried employee and posted at Nagpur and residing at Nagpur. Whether tax exemption could be claimed for combine construction + plot or only for loan taken for construction?
[mskhatib@rediffmail.com]
Opinion:
1.      It may be noted that housing loan taken merely for purchase of plot is not eligible for deduction till the construction of the house property is completed. Only after the construction of the house property, deduction could be admissible. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the construction is completed. After the construction of house only, tax benefit of housing loan could be availed. [For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on 31st March immediately prior to the date of completion of construction /acquisition].
2.      In your case, Nagpur house property would be your second house property. Readers may cautiously note that the tax treatment of housing loan taken for purchase/construction of second house property is different (and not same as that of first house property loan). You & other readers may kindly refer the last month Tax Talk Dated 21.07.2014 wherein the tax benefit and tax treatment of second house property was discussed in length.

“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


Query 1]
I am BSNL employee having income from salary only. I have would like to know that which return form should I fill? One more thing I wanted to ask you that in ITR-1, what Rs. 5,000 /-exemption limit is? What exemption refers to? What is the difference between exemption & deduction? [rakeshingley123@gmail.com]
Opinion:
1.      Income tax return can be filed by an individual taxpayer in form ITR-1 where the total income consists of the following income:
i) “Salaries” or income in the nature of family pension or
ii) “Income form house property”, where assessee does not own more than 1 house property and does not have any brought forward loss under the head; or
iii) “Income from other sources”, except winnings from lottery or income from race horses and does not have any loss under the head.
It is Provided that the ITR-1  form cannot be used by the person who:
(a)  is a resident, other than not ordinarily resident in India within the meaning of sub-section (6) of section 6 and has
i) assets (including financial interest in any entity) located outside India; or
ii) signing authority in any account located outside India;
(b) has claimed any relief of tax u/s 90 or 90A or deduction of tax under section 91; or
(c) has income not chargeable to tax, exceeding Rs. 5,000/-.
2.      In your specific case, if you satisfy the above criteria, you can file the return of income in form ITR-1.
3.      Exemption and deduction are two commonly used terms many get confused with, and most of the taxpayer can’t differentiate between the two. One needs to understand the difference between the two terms that many people commonly consider as one and the same.
a]
DEDUCTION:
The word “deduct” means “to subtract or take away from the total”. Tax deduction allows you to put some of your income to use in certain specified investments or expenses and deduct the amount from your income, thereby lowering your ultimate taxable income. In short, deduction reduces the amount of income which is taxable. Deduction is always on income forming part of your total income.
[
Few deduction forming part majority of tax payers are chapter VIA deductions like Deduction u/s 80C towards investments in LIC/PPF/NSC etc, U/s 80D towards health insurance premium, U/s 80E towards education loan interest payment, U/s 80G towards donations, U/s 80DD towards medical treatment of handicapped dependant etc.]
b] EXEMPTION:
Exemption means “Tax Free”. Exempted income does not form part of your total income on which income tax has to be paid. Another major difference between deduction & exemption is that exempt income doesn’t not form the part of gross total income (GTI).
[Few exemption available to majority of tax payers are life insurance money back, PPF Maturity proceeds, Agricultural income, share of profit from the partnership firm etc]

Query 2]
Please advise me whether the LTCG out of Shares, can be appropriated towards acquiring a New House. I have purchased a Flat @ Bangalore and the same is likely to be delivered before March-2015. In the meanwhile, I am planning to sell few shares and utilize the proceeds for meeting part of the acquisition cost. The rest of the amount for acquiring the Flat has been financed by our Bank. Please enlighten me regarding the LTCG. [sivaram.ganeshan@sbm.co.in]
Opinion:
1.      Any Long Term Capital Gain (LTCG) arising on sale of shares through recognised stock exchange is totally exempt i.e., tax free. In such case, tax payer is free to utilize the amount for any purpose without any barrier or restrictions as to its utilization or investment.
2.      Any other LTCG arising on sale of shares (other than mentioned in (1) above, would not be tax free and would be taxable. In such case, taxpayers have an option to save LTCG arising on sale of shares by investing the sale proceeds for purchase of another house property. The exemption in such case would be available u/s 54F.
3.      Exemption u/s 54F shall be admissible if following conditions are satisfied: -
a) Taxpayer is an individual or a Hindu Undivided Family.
b) Capital gain arises from the transfer of any long-term capital asset other than residential house property.
c)  Taxpayer has, within a period of one year before or two years after the date on which the transfer took place purchases, or within a period of three years after that date constructs, a residential house.
d)  Taxpayer does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
e)  Taxpayer do not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or constructs any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If all above conditions are satisfied, taxpayer can claim LTCG as exempt provided entire amount of net sale consideration is invested for new residential house property as mentioned above. If entire amount of net sale consideration is not invested, then exempt LTCG would be available proportionately. [U/s 54F, it’s the investment of actual net sale consideration that determines the claim of exemption.]
4.      Apart from exemption u/s 54F, taxpayers also have an option of claiming an exemption U/s 54EC as well. To save tax u/s 54EC, taxpayers have to invest the amount of LTCG, within a period of 6 months from the date of transfer, in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). For exemption U/s 54EC, Investment of LTCG is relevant and not the amount of net sale consideration as required in section 54F. [There is a maximum investment ceiling of Rs. 50 Lacs for investment in 54EC Bonds.]
With above generalized information, in your specific case, you can utilize the sale proceeds, present as well as future, for purchase of flat at Bangalore.

“PREVENTIVE HEALTHCARE OFFERS TAX BENEFIT”


TAX TALK-08.09.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“PREVENTIVE HEALTHCARE OFFERS TAX BENEFIT”

Query 1]
I have recently retired from Central Government Service. CGHS contribution deducted during the service period was exempted u/s 80D of IT Act.  On retirement, a lump sum amount of Rs. 60,000/-is to be deposited with CGHS, as lifetime contribution for self and family. My query is, whether this lump sum amount (Rs 60,000/-) is also covered u/s 80D and if yes to what extent? [saxenarakesh1954@gmail.com]
Opinion:
1.      Section 80D offers deduction to Individual / HUF taxpayer towards the following payment:
a] Payment of health insurance premium of assessee or his family or his parents
b] Contribution to the Central Government Health Scheme (CGHS).
c] Payment for preventive health check-up of the assessee or his family or his parents.
Amount of Deduction:
Deduction can be claimed by an individual in respect of the medical insurance premium paid up to Rs 15,000/- for himself, spouse and dependent children. Additionally, he can also claim deduction for the medical insurance premium up to Rs 15,000 for his parent(s). The aforesaid
deductions shall be Rs 20,000/- in case the premium is paid for senior citizen (60 years or more).
Precaution:
i] Ensure to make the payment of premium by cheque only. However, payment for preventive health care can be made in cash also
ii] There is a max ceiling of Rs. 5,000/- on preventive health check up within the overall cap as mentioned above.
2.      There are many assessee who are not aware of tax sops available towards preventive health check up. It may be noted that an individual assessee can claim deduction towards payment on account of preventive health check up of himself, spouse, dependant children or parents. The total deduction towards preventive health check up cannot exceeds Rs. 5,000/-. The said deduction is admissible u/s 80D of the Income Tax Act-1961 & is subject to overall cap of Rs. 15,000/- or Rs. 20,000/-as discussed above.
3.      In your specific case, amount deposited in central government health scheme (CGHS) is eligible for deduction u/s 80D as deduction towards medical insurance premia. The deduction is subject to overall maximum cap of Rs. 15,000/- or Rs. 20,000/- as mentioned in (1) above.

Query 2]
With reference to Tax Talk dated 18.08.2014 & 21.07.2014 on treatment of interest on second housing loan, I have one query regarding set off of loss from second HP with salary income and whether the maximum limit of Rs. 1.50 Lakh [Rs. 2.00 Lacs from AY 15-16] on housing loan interest is applicable to only one residential house or also includes interest on loan in respect of "Deemed to be let out property ". To elaborate I am giving following example:
“A” is an employee of a PSU and draws salary of Rs. 10 Lacs [ignore deductions under chapter VI-A]. He owns a house property in Nagpur which is used by him for his residence and has paid interest of Rs. 40,000/- on housing loan during the FY 2013-14.
“A” also owns another house at Nasik and has paid interest of Rs. 80,000/- during the FY 2013-14 on housing loan taken for purchase of second house. He has not let out the Nasik property and it is considered as "Deemed to be let out property". Annual Value of Nasik house is Rs. 50,000/-.
My query is, whether “A” can set off loss from house property of Rs. 40,000 [Nagpur house] or can he claim set off of loss of Rs. 70,000/- [Rs. 40,000/- of Nagpur house and Rs. 30,000/- of Nasik house] from his salary income?
In the above example, if interest paid on Nasik property were Rs. 1,75,000/-, annual value being same, will there be any change in the treatment.
What will be the position if “A” owns more than two properties and all are shown as "Deemed to be let out"?
It is assumed that “A” has no income from any other source for the FY 2013-14.
Kindly advise. [kedar*******1959@gmail.com]
Opinion:
Tax treatment of the second house property is not same or similar as that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then assessee have the option to choose one of the house (according to his own choice) as self-occupied house, for which an assessee would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether or not actually let out] & would be taxable on the basis of its annual value.
[The annual value means the amount for which the property might reasonably be expected to be let out from year to year. Annual value of property is considered as higher of (i) Actual rent received a year or (ii) Reasonable expected rent of the property. The annual value is always taken to be NIL in case of one self-occupied property.]
Effectively, if Assessee owns more than one house property & is kept for own use,
a] one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
b] Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above.
It may interestingly be noted that the maximum deduction cap of Rs. 1.50 Lacs (Rs. 2 Lacs w.e.f. FY 2014-15) towards interest is only in respect of self occupied house property and not in respect of let out or deemed to be let out property. In respect of let out or deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit.
However, for the second house property, no deduction u/s 80C is available for repayment towards the principal portion of housing loan.
In the specific case mentioned by you, if neither of the house property (Nagpur & Nashik) is let out, you can treat anyone house property is self occupied house property and can claim actual interest paid as deduction u/s 24(b) subject to maximum cap of Rs. 1.50 Lacs (Rs. 2 Lacs w.e.f. FY 2014-15).
In short, in the first instance illustrated by you, loss of Rs. 70,000/- would be adjustable against the salary income. In the second instance mentioned by you, the Nashik house property could be deemed to have been let out and the actual interest (i.e., Rs. 1.75 Lacs) would be deductible without any maximum cap of Rs. 1.50 or Rs. 2 Lacs as such.
Ideally, in such scenario, it is always advisable to treat the property with higher interest commitment as property “deemed to have been let out”.