Sunday, July 12, 2015

Income from funds transferred to Wife attracts clubbing provision

TAX TALK-13.07.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


Income from funds transferred to Wife attracts clubbing provision

Query 1]
I am a salaried person and pay Income Tax. I transfer my salary from salary account to a joint saving account where I am the 1st holder and my wife is 2nd holder. My wife transfers this account's deposit into term deposits where she is 1st holder and I am 2nd holder. She is having PAN and submits 15G in bank. Total interest is below Rs. 2.50 Lacs. Please tell me whose is the tax liability on the interest received from term deposit? [S.Nandi , Jabalpur-snandi1957@gmail.com]
Opinion:
"The husband who wants a happy marriage should learn to keep his mouth shut and his checkbook open." - Groucho Marx
Its not your case alone. It a global phenomenon as has been rightly recognized by Joey Adams also when he says "Marriage is give and take. You'd better give it to her or she'll take it anyway."
It happens with everyone. Wife is the only person to enjoy the privileges. However, the Tax implication is left with the Husband. Even though the ownership of funds may be transferred in favor of wife, still liability to pay income tax would be that of husband. There is a clubbing provision in the Indian Income Tax Act-1961. As a result of clubbing provision, where an asset/property/money is transferred by an individual to his/her spouse or minor Child or Daughter-in-law, directly or indirectly, otherwise than for an adequate consideration, any income from such asset by way of interest/rent etc is deemed as the income of the transferor by virtue of section 64(1A) / 64(1) (iv) / 64(1)(vi) of the Income Tax Act-1961. Effectively, even if FD stands in the name of wife, still interest come thereon would be treated as yours only & would be clubbed with your other income.

Query 2]
1.      There are saving bank a/c’s with a facility of term deposit-sweep/reverse sweeps, in which after a certain limit excess amounts are credited in term deposit and to savings a/c, whenever necessary. These term deposit A/c’s give higher rate of interest for the time the amount remains in term deposit A/c’s. Please clarify if interest of such bank A/c’s also qualify for exemption of Rs. 10000/-?
2.      A house previously given on rent has not fetched any income this year due to not getting suitable tenant. Can we show municipal taxes as loss from house property and carry forward it for future? [Chandan s fatnani-cnn_fatnani@yahoo.com]
Opinion:
1.      Section 80 TTA offers deduction of interest on deposits in saving account up to a maximum of Rs. 10,000/- and explicitly provide for exclusion of interest on "time deposits" from deduction. To my knowledge, Sweep in /out facility in a saving bank account is a benefit providing combination of both, saving A/c as well as fixed deposit A/c. It’s a bank internal feature that allows account holder to transfer funds (automatic or manual) from saving a/c to virtual fixed deposits accounts and vice versa too, to enable higher interest. An important question raised by you is whether interest, for the purpose of section 80TTA includes interest from deposits in Sweep or Flexi Account? Though deposit in Flexi/Sweep Account is a kind of term deposit, explanation to section 80 TTA clearly provides that "for the purpose this section, 'time deposit' means deposit repayable on expiry of fixed period". In normal course, Sweep Transfers are never repayable on expiry of fixed period even though there may be a fixed period for crediting interest thereon. Sweep transfers, in general, are repayable on demand & not after a fixed period. It appears to be an extension of saving account only as the customer has to merely issue a cheque for withdrawals and these deposits automatically get transferred in the account to the extent of required payment. In my considered opinion, the interest would be covered by section 80TTA and deduction up to maximum of Rs. 10,000/- would be admissible in such cases.
2.      Deduction towards municipal taxes paid is not available if there is no rental income against the property. Other readers may further note that municipal tax is deductible only if it is borne by the landlord. The deduction is available on payment basis. When municipal taxes have become due but not actually paid, the deduction would not be admissible.




[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com].

Sunday, July 5, 2015

Classification of income is important from tax planning perspective

TAX TALK-06.07.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


Classification of income is important from tax planning perspective

Query 1]
1.      Do we need to enter interest income, dividend income and long term capital gains (STT paid) anywhere else also which are already entered in schedule E-1 in column 1, 2 & 3? If yes, where?
2.      Can a salaried person having income as LIC / Mutual fund agent, file return in ITR-2, showing these commissions as income from other sources? [Shankerlal fatnani- srf.fatnani@yahoo.co.in]
Opinion:
1.      The exempt income is required to be disclosed only in “Schedule EI” of the ITR forms. Additionally, agriculture income is required to be reported in Part B to “Schedule TI”. Further, if the return is to be submitted manually, the consolidated exempt amount is required to be filled up in the acknowledgment in ITR-V.
2.     Today, it takes more brains and effort to make out the income-tax form than it does to make the income”- Alfred E. Neuman
With the bulky return form, its normal for taxpayer to feel irritated & consider the option of filing easier return forms.
Before finalizing, taxpayer should ascertain the correct ITR forms in which return has to be filed. Make sure that the correct form is chosen for filing. If the wrong form is selected, it will be considered as a failure to file returns by the IT department. Undoubtedly, ITR-1, 2, & 2A are more preferred tax return forms for the individuals without any income from business.
However, income from every facet of an occupation carried on by an individual is taxable as “Income from business & Profession”. Whether LIC & MF agent could treat their agency commission income as “Income from Other Source” is necessarily a question of facts & circumstances. If the agents are not regular in procuring new business & are getting only a renewal commission, they may consider offering the income under the head “Income from Other source” & may consider ITR-2 or 2A for return filing. However, the persons who are actively engaged in the agency business are advised to offer the income under the head “Income from Business & Profession” only even if the amount is meager. Individual with business income may have the option to file the return in ITR-4 or 4S. ITR-4S is comparatively simpler forms to fill. But, ITR-4S could not be filed in case of an individual with business income if they have (a) Income from more than one house property (b) Income from lottery or race horses (c) Capital gain income (d) Agriculture/exempt income in excess of Rs. 5,000/- (e) Speculative income or special nature income (f) Income from Profession (g) Commission Income (h) Agency business income
(i) Assets (including financial interest in any entity) located outside India; or (j) Signing authority in any account located outside India. Individual with these ten categories of income has to file return in ITR-4.

Query 2]
If taxable income from salary is below Rs. 5 lakhs, I can get tax credit of Rs. 2,000 under Section 87A. My TDS with taxes paid is Rs. 23,228. As a result of Bank FD interest of Rs. 6,701/-, my income crosses Rs. 5 Lacs. My query is whether tax credit u/s 87A will be intact or I have to pay tax difference? Whether rebate 87A will be intact? Please clarify. Also advice whether any rebate is available in income tax against professional courses college fees? [Balkrushna Bhoskar-bbhoskar@gmail.com]
Opinion:
1.      Section 87A offers a tax rebate to an individual resident tax payer whose total income doesn’t exceeds Rs. 5 Lacs. The rebate shall be equal to the amount of income tax payable on the total income or Rs. 2,000/- whichever is lower. It may be noted that tax credit of Rs. 2,000/- would be admissible only if the total income of individual assessee is not exceeding Rs. 5 Lacs. [Readers may please note that no rebate is admissible u/s 87A to HUF].
2.      Even if the income exceeds marginally over Rs. 5 Lacs, no tax credit of Rs. 2,000/- would be admissible. To be more precise, even if income exceeds by Rs. 10, no tax credit u/s 87A would be available. 
3.      No rebate is available to salaried taxpayer against the professional courses college fees for self study. However, if the fees (in the nature of tuition fees) is paid to any university, college or institution situated in India for the study of the children, whether major or minor & whether dependant or not, deduction could be claimed u/s 80C up to a maximum cap of Rs. 1.50 Lacs.

Query 3]
My Father (age 75 years) is staying separately in rental house. His income is only from buying & selling of equity share (short term capital gain) and interest of Bank FD. Please advice, what is the tax saving option? In which ITR form, return has to be filed?  [suresh_talmale@rediffmail.com]
Opinion:
1.      Which ITR form to be used:
The applicability of ITR forms depends upon the nature of income taxpayer is having. If individual taxpayers don’t have any business income but have capital gain income, return could be filed in ITR-2 or 2A. If however individual taxpayers have business income (other than income from partnership firm), ITR has to be filed either in ITR-4 or 4S.
2.      Share trading- Whether Business Income or Capital Gain Income:
Your father has income from shares trading & interest on Bank FDR. Income from delivery based share transactions could either be taxed under the head “Income from Business & Profession” or under the head “Income from Capital Gain”. Categorization would depend upon number of factors. The prominent factors that play an important role in determining whether it is a business income or capital gain income are: (a) Volume/Nature of transactions. (b) Intention/Logic behind investments. (c) Holding period of shares (d) Investment of own funds or a borrowed fund. (e) Other business activities of the assessee etc.
3.      Tax saving Tips:
Tax planning would depend upon the nature of income of the taxpayer. Classification of income as business income vis a vis capital gain income is very relevant from the tax planning perspective as well:
a] If share trading is taxable as capital gain income, LTCG would be exempt and STCG would be taxable @ 15%. If taxable as business income then, irrespective of the period of holding, it would be taxed as per applicable tax slab of the individual taxpayer.
b] Chapter VI-A deduction (which includes deduction u/s 80C towards LIC/PPF etc) is not available against capital gain income.
c] Business expenditure like petrol, telephone expenses are admissible against business income. No such deduction is admissible while computing capital gain income.
d] Your father is staying in a rented premise. If share income is taxable as business income, you may explore the possibility of claiming deduction u/s 80GG towards house rent payment.


[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com]. 

Monday, June 29, 2015

TAX TALK-29.06.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


A step-by-step guide to file income tax return

Query 1]
I am a salaried employee. Please explain in detail regarding procedure of filling income tax return. Also, please tell me whether I can fill it directly. Please explain in details the procedure to be followed for filing income tax return? [Amol Sherkhane-sherkhane.a191@gmail.com]
Opinion:
With new income tax return forms now notified, here is a step-by-step guide for filing income tax returns. Income tax return filing may seem like a big deal for the beginners. However, following sequential steps would make the task easy. July 31st is normally the last date for filing income-tax return for salaried assessee. The best part is that it is extended to 31st August for the AY 2015-16.
1.      Preparing statement of income:
First & foremost, assessee should prepare the statement of income by incorporating all the income including FD/SB Interest, exempt income details, capital gain, salary/rental income, loss brought forward & carried forward, investment eligible for deduction etc. Once income statement is ready, taxpayer should compute the tax & if there is any balance tax liability after considering TDS/advance tax paid, then pay it along with interest, if any.  One should verify the tax details by downloading Form No. 26AS from www.incometaxindia.gov.in which shows all the details like TDS & other taxes paid in the relevant year.
2.      Select correct ITR forms for filing:
Before filing, taxpayer should ascertain the correct ITR forms in which return has to be filed. Make sure that the correct form is chosen for filing. If the wrong form is selected, it will be considered as a failure to file returns by the IT department. For salaried taxpayer without any business income, ITR-1, 2 or 2A may be applicable. Salaried taxpayer may refer last week’s issue of tax talk dated 22.06.2015 to know more about applicable ITR forms.
3.      Procedure for filing the returns:
I] Whether to file online or physically?:
Return of income can be filed either online or can filed physically in paper format. However, e-filing is mandatory if
a]
the total taxable income exceeds Rs 5 lakh or
b] where the individual is an ordinary resident with foreign assets/or with the signing authority in an account outside India.
c] If there is refund due in the income tax return.
Even if taxpayers don’t fall in the above category, still option to voluntarily e-file income tax return is available.
II] Procedure for filing return online:
a]  The online filing process starts by clicking the ‘register’ link at income-tax e-filing website www.incometaxindiaefiling.gov.in. For registration, one has to provide personal details like PAN, name as per the PAN card, father’s name, date of birth, email address and contact number. The website provides required flow to complete the registration process.
b] Download the applicable return preparation form from the website and fill in the personal information and income-related details in the downloaded form. To ensure that all columns in the return form are filled in properly, there is a process to validate the information by clicking on the ‘validate’ button on the last sheet.
c] On successful validation, access the ‘generate XML’ link in the tax return software and save the generated XML file. It is the XML file which is uploaded on the e-filing website. An acknowledgement form in ITR-V is generated on successful e-filing.
d] If the return is filed without using digital signature & without mentioning aadhar card, taxpayer would be required to take the print out of ITR-V, sign it in blue ink and dispatch it by ordinary/speed post to the Central Processing Centre (CPC), Bangalore within 120 days of uploading the return. On receipt of the signed ITR-V, tax department will send an email acknowledging the receipt of the ITR-V at the email id mentioned in the return form. There is no need to send ITR-V in the local office of the income-tax department. It may be noted that ITR-V is a password protected document & the password is PAN and date of birth in small case in continuation. [Using a
adhar number is optional as of now. The government has come up with an idea of dispensing with the formality of forwarding the duly signed ITR-V form to CPC, Bengaluru, if the taxpayer provides with the Aadhaar number at the time of filing].
III] Procedure for paper filing:
One can take the printout of the ITR form from the above mentioned website. After filling all the relevant details like personal information, income details, tax deposit details in the hard copy, one can sign & submit the same with the jurisdictional assessing officer. The receiving office at the income tax office will stamp your acknowledgement and give a copy back to you. Assessee is not required to submit any other supporting documents with the tax return. Taxpayer may check the tax jurisdiction by logging at the above quoted income-tax department website.

Query 2]
Myself and my wife are pensioners. We are filing income tax returns regularly. We are having savings bank accounts in two banks. Accounts are operated by either of survivor, first name is mine. My query is about exemption allowed on interest on savings bank accounts. If interest accrued exceeds Rs. 10,000/-, what would be tax treatment? Our SB Accounts are joint accounts .Can we show excess of Rs. 10,000/- interest amount in our return form? Please guide. [Eknath Kathale, N-162, Reshim bagh, Nagpur- ekathale@gmail.com]
Opinion:
1.      Section 80TTA provides for deduction of interest on deposits in saving account up to a maximum of Rs. 10,000/- only. Interest received over & above Rs. 10,000/- is taxable.  For example, if your interest on SB A/c is Rs. 11,000/- then at the first instance Rs. 11,000/- would be added to your income under the head “Income from other sources” and thereafter Rs. 10,000/- deduction is required to be claimed in section 80TTA under chapter VI-A.
2.      In case of joint saving bank accounts, interest would be taxable in the hands of the beneficial account holder. As a tax management measures in such cases & in view of increasing compliance burden of reporting all accounts in the ITR forms, taxpayers may now consider opting for individual account instead of joint accounts.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com]







Friday, June 19, 2015

Tax impact varies with Time, Place & Heads

TAX TALK-08.06.2015-THE HITAVADA

TAX TALK
CA. NARESH JAKHOTIA
Chartered Accountant

Tax impact varies with Time, Place & Heads

Query 1]
I purchased plot on 1st June 2006 on installment bases for Rs. 1,05,500/- & incurred Rs. 7,500/- towards registry expenses. I have sold the said plot on 23/01/2015 for Rs. 5,84,000/-. The full amount is given on 23/02/2015 for purchase of plot. It is still not registered as Release Letter (RL) is not obtained from Nagpur Improvement Trust (NIT). Please clarify the following:
1.      What is the obligation in regards Income tax?
2.      What is the time limit to show in IT returns?
3.      Any delay in registration, how should overcome this?  [CRM Reddy-chavarajmohanreddy@gmail.com]
Opinion:
Most of the taxpayer may not know the fact that sale deed is not the only documents that give rise to taxable event in respect of property transactions. Likewise, receipt of entire consideration against sale of property may not be decisive factor for taxing the income thereon. The profit in respect of capital assets is taxable at the time of transfer. “Transfer” is a wider and broader term than mere “Sale”. For levy of income tax, “transfer” is utmost relevant. Tax impact varies with time, place, & heads of income. For the taxpayers who are not into the business of land trading / development /builder-ship, even handing over the possession of the property would amount to transfer & would attract income tax, even if the consideration for the same is not fully received or even if the sale deed is not executed.
In your specific case, it appears that you have received the entire amount against sale of plot on 23.02.2015. However, the sale deed of the plot could not be executed for some technical reasons. Since entire amount against sale of plot is received, the purchaser might have taken over the possession of the property either by executing some sort of unregistered document or through registered power of attorney etc. If so or if anyhow the possession is handed over by you in favor of the buyer, the profit on sale of plot would be liable to capital gain tax in the FY 2014-15. In such case, you would be required to show the transaction of transfer of plot in the income tax return for the FY 2014-15 only & you would be required to file your income tax return accordingly. In such case, your capital gain working would be based on the higher of actual sale consideration or government value prevailing at the time of handing over the possession of the property for levy of stamp duty. You would not be required to show the transaction subsequently again at the time of executing the sale deed of the plot & the subsequent government valuation/sale deed won’t attract additional tax burden provided that you properly document the fact of transaction in the sale deed, more particularly of handing over the possession of the property in the FY 2014-15.

If however the possession is not handed over by you to the buyer, then it would be taxable in subsequent year in which the sale deed is executed & the possession is handed over. In such case, there is no tax liability in the FY 2014-15 even though entire amount against the sale of plot is received by you. However, in such case, you may be subsequently subject to the rigor of section 50C as the government valuation of the property for levy of stamp duty shows an increasing trend year after year and your future tax liability would be dependent on the government valuation at the time of handing over of the possession/sale.
Now, what is better- whether to handover the possession of the property instantly in such case or defer the handing over the possession of the property. No standard & isolated opinion could be expressed in such case. The transaction could be planned in such a way that the tax bill of the taxpayer is minimized or linked with the cash flow of the transactions.
When the deal is finalized and entire consideration is received by the seller, then even though the sale deed cannot be executed for any reason whatsoever, it is normally advisable for the seller to handover the possession of the property by some documentary evidence so that capital gain can be booked in that year itself. This would nullify burden of Section 50C as the government valuation of the property shows an increasing trend.
But, in some cases, not handing over the possession of the property in such case could be a part of well planned tax tool by the taxpayer. For example, for saving long term capital gain tax, individual taxpayers has to invest the amount in a specified mode within specified time frame (which may vary from 6 months to 3 years). Now, this specified time frame would be commencing from the date of transfer of plot. Without repeating what has been mentioned earlier, taxpayers can plan the timing of their transactions in such a way that the condition of specified time frame is fulfilled for saving tax. While doing the property transaction, effect of income tax should not be overlooked. Right to tax planning has been recognized by the judiciary & timing of income could play an important role in managing tax impact.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com]