Friday, April 29, 2011

“LTCG: PAYING TAX MAY BE BETTER THAN SAVING TAX”

“LTCG: PAYING TAX MAY BE BETTER THAN SAVING TAX”

CA. PAYAL MANISH RATHI
THE FACT:
- Long Term Capital Gain (LTCG) is blatantly taxable @ 20%.
- No deduction under Chapter VIA (like u/s 80C towards PPF/LIC/NSC etc) is available against the Long term capital gain.

TAX SAVING OPTIONS:
A tax payers having long term capital gain have the following two options:
- Pay Tax @ 20% or
- Save Tax by investing in Approved mode.

SAVING LTCG TAX U/S 54EC:
One of the most popular tax saving option for all spectrum of tax payers is to save tax by investing the LTCG in the bonds issued by the
- National Highway Authorities of India (NHAI) or
- Rural Electrification Corporation (REC).

This are very commonly referred to as the “54EC Bonds”.

The maximum amount that can be invested in such bonds is Rs. 50 Lacs p.a. Presently, Interest offered by NHAI/REC on this bond is around 6% p.a.

The fund has an opportunity cost. The fund, if not invested in the 54EC bonds, can be utilized elsewhere having higher return perspectives.

The questions remains: Is it worth Investing in the bonds considering such a lower rate of interest offered?

This is particularly more important in the current scenario where
a] Bank FDR offers returns in the range of 9% to 11% p.a.
b] Mutual Funds/ Equity investment offering returns in the range of 15% to 20% p.a.
c] Business or Gold/ Silver or Other Investment yielding more than 20% p.a.

Of the two options available with the tax payer, paying or saving, which is favorable? At what rate of return, paying tax is better than saving tax?

Let us analyze the case of Mr. X who has earned a Long term capital gain of Rs. 10 Lacs during the F.Y. 2010-11. For the sake of simplicity, it is presumed that other income of Mr. X is in 30% tax bracket (i.e., 30.90% with Education Cess).

1st OPTION:
SAVE TAX BY INVESTING IN THE 54EC BONDS:
1. The interest rate offered by the bonds is around 6% p.a.
2. After investment, the Long term capital gain tax liability would be Nil.
3. Mr. X have entire amount of Rs. 10 Lacs to invest in the Bonds.
4. The interest income from this bond is taxable.
5. The value of Rs. 10 Lacs invested on 31.03.2011 @ 6% p.a. would be as under:
Amount Invested Rs. 1000000
Interest offered 6.00% 6.00% 6.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 1000000 1041460 1084639
Interest Income [b] 60000 62488 65078 187566
Tax on Interest Income [c] 18540 19309 20109 57958
Interest ater Tax [d] = [b-c] 41460 43179 44969 129608
Value of the Fund at the Year End [e] = [a+d] 1041460 1084639 1129608 1129608
RESULT: The value of the fund at the end of 3 years would be Rs. 11.29 Lacs.

2nd OPTION:
PAY TAX @ 20% & INVEST THE AMOUNT ELSEWHERE:
If Mr. X pays tax @ 20.60% (including 3% of education cess). He would be required to pay tax of Rs. 2.06 Lacs & would be left with amount of Rs. 7.94 Lacs to invest elsewhere.
The various investments option could be of Investment in:
- Bank FDR with interest in the range of around 9% to 10% or
- Equity Market/ mutual fund or in the business where the yield could vary depending upon the market conditions or the business prospective. Businessmen normally prefer to invest the amount in the business where they may able to earn even more than 20% return on the capital.

Let us compare the value of Rs. 7.94 Lacs invested by Mr. X at different rate
A] If the return is @ 9% p.a.:
Amount Invested Rs. 794000
Interest offered 9.00% 9.00% 9.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 794000 843379 895829
Interest Income [b] 71460 75904 80625 227989
Tax on Interest Income [c] 22081 23454 24913 70448
Interest ater Tax [d] = [b-c] 49379 52450 55712 157541
Value of the Fund at the Year End [e] = [a+d] 843379 895829 951541 951541
RESULT: The value of the fund at the end of 3 years would be Rs. 9.51 Lacs.

B] If the return is @ 12% p.a.:
Amount Invested Rs. 794000.00
Interest offered 12.00% 12.00% 12.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 794000 859838 931136
Interest Income [b] 95280 103181 111736 310197
Tax on Interest Income [c] 29442 31883 34526 95851
Interest ater Tax [d] = [b-c] 65838 71298 77210 214346
Value of the Fund at the Year End [e] = [a+d] 859838 931136 1008346 1008346
RESULT: The value of the fund at the end of 3 years would be Rs. 10.08 Lacs.

C] If the return is @ 15% p.a:
Amount Invested Rs. 794000.00
Interest offered 15.00% 15.00% 15.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 794000 876298 967126
Interest Income [b] 119100 131445 145069 395614
Tax on Interest Income [c] 36802 40617 44826 122245
Interest ater Tax [d] = [b-c] 82298 90828 100243 273369
Value of the Fund at the Year End [e] = [a+d] 876298 967126 1067369 1067369
RESULT: The value of the fund at the end of 3 years would be Rs. 10.06 Lacs.

D] If the return is @ 18% p.a:
Amount Invested Rs. 794000.00
Interest offered 18.00% 18.00% 18.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 794000 892758 1003799
Interest Income [b] 142920 160696 180684 484300
Tax on Interest Income [c] 44162 49655 55831 149648
Interest ater Tax [d] = [b-c] 98758 111041 124853 334652
Value of the Fund at the Year End [e] = [a+d] 892758 1003799 1128652 1128652
RESULT: The value of the fund at the end of 3 years would be Rs. 11.28 Lacs.

E] If the return is @ 21% p.a:
Amount Invested Rs. 794000.00
Interest offered 21.00% 21.00% 21.00%
YEAR I II III TOTAL
Value of the Fund at the beginning of the year [a] 794000 909217 1041154
Interest Income [b] 166740 190936 218642 576318
Tax on Interest Income [c] 51523 58999 67560 178082
Interest ater Tax [d] = [b-c] 115217 131937 151082 398236
Value of the Fund at the Year End [e] = [a+d] 909217 1041154 1192236 1192236
RESULT: The value of the fund at the end of 3 years would be Rs. 11.92 Lacs.

Now back to the place from where we have moved. What should Mr. X do?
If Mr. X is able to earn the return of more than 18.05% p.a., he may conclude that
“PAYING TAX IS BETTER THAN SAVING TAX”
[The Author is a practicing Chartered Accountants & a partner of M/s. SSRPN & CO. Authors may contacted at ca_payal@yahoo.co.in ]

Sunday, April 24, 2011

TAX TALK-25.04.2011-THE HITAVADA

TAX TALKBY CA. NARESH JAKHOTIA
(Chartered Accountant)

“DUE DATE OF PAYMENT FOR TDS DONE IN THE MONTH OF MARCH-2011 IS 30th APRIL 2011”

Query 1]

Due to my carelessness, I could not file my return of income for the F Y 2009-10. If I file now i.e., in April 2011, whether penalty of Rs. 5,000/- will be imposed compulsorily in the following scenarios:
1. Gross Total Income below exemption limit.
2. Net Income below exemption limit.
3. Self assessment tax is paid
4. Refund Due.
[itr_ngp@rediffmail.com]

Opinion:

1. The penalty of Rs. 5,000/- may be levied for non-filing the income tax return if the assessee, who is required to file the income tax return, fails to file the income tax return on or before the end of the relevant Assessment year. The liability to file the income tax return, for individual/HUF, arises if the Gross Total Income exceeds the maximum amount not chargeable to tax.

2. The penalty is not a compulsory or mandatory penalty. The penalty shall be imposable after giving a reasonable opportunity of being heard. If there exists a reasonable cause for not filing the income tax return before the end of the relevant Assessment Year, Assessing officer may drop the penalty proposed.

3. The fact that a] Net income is below the basic exemption limit orb] Self Assessment Tax is fully paid within the Assessment Year orc] Refund is due in the relevant Assessment Year do not discharge Assessee from the liability of filing income tax return. However, this fact MAY be considered by the Assessing Officer while considering the reasonable cause for levying penalty u/s 271F.

Query 2]

Sir, What is the due date of payment of T.D.S. where the income is credited (not paid) to the payee account on 31.03.2011? What will be the date of T.D.S Payment if the income is paid in the Month of March-2011?
[Kamal R]

Opinion:

All Tax Deducted At Source (T.D.S) by any Deductor (other than an office of the Government) shall be paid to the credit of the Central Government—

(a) On or before 30th day of April where the income or amount is credited or paid in the month of March; and
(b) In any other case, on or before seven days from the end of the month in which deduction is done.In your case, whether the income is credited OR paid in the Month of March-2011, the due date of T.D.S deposit will be same i.e., 30th April-2011.

Query 3]
I am state Government employee, my total income from salary from April-2010 to March- 2011 is Rs. 1, 53, 369/- & Salary for year 2009 to March-2010 was Rs. 35,032/-. I have received arrears of Rs. 2, 15, 000/- out of Rs. 1, 28, 000/- for year 2009 to March 2010 & Rs. 87,000/- for April- 2010 to July-2010 which I received in July-2010. HRA & Profession tax is Rs. 16,400/-. I have invested Rs. 35,000/- in NSC in February- 2011. For above detail how much tax I have to pay? My department already deducted Rs. 13,096/-from February salary. Can I get relief under section 89? Can I file income tax refund? If yes, then how much amount I can get as refund?
[harshad.boharupi@sbi.co.in]

Opinion: -

In the absence of all the relevant information like various allowances included in the salary income, details about your house property whether rental or self owned, other income details etc, the amount of tax /refund & relief in respect of arrears of salary cannot be determined. However, you may note that:

1. RELIEF U/S 89:

You can get relief u/s 89 of the Income Tax Act-1961 towards the arrears of salary pertaining to F.Y. 2009-10 received by you in the year F.Y. 2010-11. Prima facie, it appears that you can save entire amount of additional tax arising out of the arrears of F.Y. 2009-10.

2. HOUSE RENT ALLOWANCE (H.R.A.) :
You can also claim deduction towards HRA U/s 10(13A) if you are living in a rented house. For H.R.A
the least of following is exempt from tax:

a] An amount equal to 50% of salary, where the residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where residential house is situated at any other place;

b] House rent allowance received by the employee in respect of the period during which the rental accommodation is occupied by the employee during the previous year; or

c] The excess of rent paid over 10% of salary.

3. PROFESSION TAX:Entire amount of Profession tax paid is deductible u/s 16(iii) of the Income Tax Act-1961.

Monday, April 18, 2011

TAX TALK-18.04.2011-THE HITAVADA

TAX TALK BY CA. NARESH JAKHOTIA (Chartered Accountant) “INCOME TAX ON SALE OF SHARES & MUTUAL FUNDS” Query 1] I had purchased some shares and Mutual fund a few years back (exact date can not be determined). I have sold these in the previous year 2010-11. Will it attract long- term capital gain tax? Will it be taxable or tax free? Please clarify. [jyti_mhjn@rediffmail.com] Opinion: 1. INCOME ON SALE OF SHARES: - a) For sale within a period of one year from the date of its purchase, the difference between sale price & cost of acquisition would be treated as Short Term Capital Gain in the hands of Investor & would be taxable @ 15% u/s 111A of the I.T. Act-1961.b] For sale after one year from the date of purchase, the difference between sale price & cost of acquisition would be treated as Long Term Capital Gain in the hands of Investor & would be exempt from tax u/s 10(38). 2. INCOME ON SALE OF MUTUAL FUNDS: - The tax treatment of income arising from sale of mutual funds is different for debt funds vis a vis equity fund, as under: i) Debt Fund: a] For sale within one year from the date of its purchase, the difference between sale price & cost of acquisition would be taxable as Short Term Capital Gain in the hands of Investor. It will be taxable like other regular income of the assessee. b] For sale after one year from the date of purchase, the difference between sale price & cost of acquisition would be taxable as Long Term Capital Gain in the hands of Investor & would be taxed at a rate which is lower of the following two: - 10% without indexation or - 20% with indexation benefit ii) Equity Fund: a] For sale within one year from the date of its purchase, the difference between sale price & cost of acquisition would be treated as Short Term Capital Gain in the hands of Investor & would be taxable @ 15% u/s 111A of the I.T. Act-1961.b] For sale after one year from the date of purchase, the difference between sale price & cost of acquisition would be treated as Long Term Capital Gain in the hands of Investor & would be exempt from tax u/s 10(38). Query 2] Sir, I need the following clarification in my case. I had purchased a plot of land in March-1994 & have sold it in December-2010. In January-2011, I have booked a flat for my self for Rs. 43 Lacs & I fulfill the conditions as enumerated for section 54F. I am investing entire Rs. 16 Lacs being the sale proceeds of my land by July -2011. I am a Government servant. I want to know the following: 1. I should seek exemption u/r sec 54 or 54F? Is residential plot included in the definition of residential house property? 2. I should file my return in the new notified (as and when) form ITR-1 or ITR-2 ? 3. If exemption is under 54F then is it necessary to show calculations for indexation in the return, since I have to invest and investing entire sale proceed? [roysoumo@yahoo.co.in] Opinion: 1. You can claim an exemption u/s 54F as you have transferred plot. Exemption u/s 54 is available when the residential house property is transferred. What you are selling is a plot which is a long term capital asset. It doesn’t matter whether it is a commercial plot or a residential plot. You will be eligible for exemption u/s 54F. 2. The new income tax returns forms are recently notified by the Government for the F.Y. 2010-11 (i.e., A.Y. 2011-12). You would be required to file the Income Tax Return in ITR-2. 3. Even though you are investing the entire amount of sale proceeds for purchase of a residential house property & claiming an exemption u/s 54F for the entire amount of long term capital gain, still you are required to show the same in the Income Tax Return. Query 3] I have purchased a Flat on home loan from bank (Rs. 5 Lacs) & a non-refundable advance from my provident Fund (Rs. 2.15 Lacs) in the year 2010. Kindly inform 1. Under which section I can claim tax exemption for the interest which I am loosing by withdrawing the amount from my provident fund? 2. If so, how it is to be calculated? [dhanukakailash50@gmail.com] Opinion: - 1. Deduction towards interest on housing loan is available u/s 24(b) of the Income Tax Act -1961. The same is available only if the interest is payable. In your case, no interest is payable as such on the amount withdrawn from your provident fund A/c. As such, no deduction shall be available on the basis of notional interest amount. 2. Only deduction towards the housing loan availed by you shall be available to you.

Monday, April 11, 2011

TAX TALK-11.04.2011-THE HITAVADA

TAX TALK BY CA. NARESH JAKHOTIA (Chartered Accountant) “FILING INCOME TAX RETURN FOR THE F.Y. 2010-2011” Query 1] I remember to have read that an individual can get exemption of 1 Lacsunder section 80C by investing in the PPF. Rs.70000/- in own name & Rs. 30,000/- in relatives of six categories, as stated in Tax Talk dated 04.04.2011expressed by you. Of course, the relative concerned cannot claim the exemption nor mention in his returns. I shall be obliged for getting the opinion on this early in view of the time for submitting the returns early. [shivdev_gupta@hotmail.com]Opinion:1. Deduction u/s 80C is available for deposit in the PPF A/c of the spouse or children of the Individual.2. In Tax Talk dated 04.04.2011, it was mentioned that the Gift from “Relatives” is not taxable U/s 56(2) (vii). The seven categories of the persons mentioned therein are with reference to the “Relatives” for the purpose of Gift only. Deposit in the PPF A/c of those persons may not enable you to claim deduction u/s 80C. Query 2] I am a salaried employee. I would like to donate some amount in the marriage of my late sister's daughter. Can I get tax exemption on donated amount? If so, kindly inform me the exemption limit and mode/process of donation. [snmishra.fzd1972@gmail.com] Opinion: You can surely get the blessing & satisfaction from the noble task even though no tax exemption is available on the gift / donation by you to your late sister’s daughter. Query 3] I am unable to find online form for income tax return filing on www.incometaxindia.gov.in for the Financial Year 2010-11. When the online form will be available? [s_c_swami@yahoo.com] Opinion: It’s very pleasant to see the initiatives & efforts that our readers are taking in timely complying with the Income Tax Law. There is penalty if assessee makes delay in submission or in filing/complying with the Law. There is no such penalty for the other side. The return form has not yet been notified for the Financial Year 2010-11. The Income Tax Return can be filed only after it is notified for the F.Y. 2010-11. Query 4] Please guide on the following points give below:-1. Can TDS apply to first year of proprietorship?2. From where the first year should be considered? i.e., from commencing business or from the date of starting the firm? [ravic799@gmail.com] Opinion: 1. TDS is not at all applicable to the Individual if he/she is starting an altogether new business. As far as the TDS provision are concerned, for individual assessee, the date of business commencement / date of starting the firm are immaterial. 2. An individual would be required to comply with the TDS provision if his turnover in the immediately preceding financial year exceeds the limit prescribed for tax audit (i.e., Rs. 15 Lacs for professional & Rs. 60 Lacs for non-professional). For example, if Mr. X, a businessmen, turnover during the F.Y. 2010-11 has crossed Rs. 60 Lacs, then he would be required to comply with the TDS Provision in the F.Y. 2012-13 (& not for the F.Y. 2010-11).

Monday, April 4, 2011

TAX TALK-04.04.2011-THE HITAVADA

TAX TALK BY CA. NARESH JAKHOTIA (Chartered Accountant) “GIFT RECEIVED FROM GRANDMOTHER’S BROTHER – TAXABLE OR EXEMPT?” Query 1] Gift is received by an individual from Grandmother's Brother. Whether exempt u/s. 56(2) of the IT Act, 1961? Any case law to support such claim? [sthiagamohan@gmail.com] Opinion: 1. Gift exceeding Rs 50,000/- in a year is taxable in the hands of recipient (Donee) U/s 56(2) (vii) of the I.T. Act, 1961.However, gift shall not be taxable if it is received from the Relative. 2. The term Relative, for the purpose of Section 56(2(vii) means- (i) spouse of the individual;(ii) brother or sister of the individual;(iii) brother or sister of the spouse of the individual;(iv) brother or sister of either of the parents of the individual;(v) any lineal ascendant or descendant of the individual;(vi) any lineal ascendant or descendant of the spouse of the individual;(vii) spouse of the person referred to in clauses (ii) to (vi). 3. The definition of the term “Relative” needs to be interpreted from the recipient’s angel. 4. With the above detailed backdrop on the provision of law, the gift received by an individual from Grandmother’s brother will not be exempt u/s 56(2) of the Income Tax Act-1961. Similar views was upheld in Assistant commissioner of Income Tax Vs. Lucky Pamani, 2011 (49) DTR ((Mumbai) (Tribunal) 501. Query 2] I have invested Rs. 1,00,000/- in bank FD for a period of 1000 Days @ 9.25% interest. My bank will deduct TDS on maturity i.e, after 1000 Days and not at the end of each Financial Year. My question is: 1. Can I show interest earned, as income in the corresponding FY at the end of FD tenure? 2. If I show interest earned every year and pay advance tax on the basis of interest earned statement of Bank, what will happen if Bank deducts TDS on entire interest paid on maturity. 3. Please advice me how to handle such situation in a better manner. [gcmaji@gmail.com] Opinion: 1. As per the provision of Income Tax Act-1961, Tax Deduction at Source (T.D.S) is required at the time of credit or at the time of payment, whichever is earlier. Interest provision is required to be done by the bank at the end of each year and so ideally bank should deduct the tax at source at the end of each year if the interest amount exceeds the prescribed amount of Rs. 10,000/- p.a. 2. Ignoring the mistake the bank is committing in not deducting tax at source at the correct timing, point-wise replies to your queries are as under: a] The interest to be offered for taxation depends upon the method of accounting regularly followed by you in recognizing the income.b] If you are following cash (Receipt) system of accounting, you can offer the entire interest income at the end of FD Tenure. At that time, you can claim entire amount of T.D.S done as credit against your income tax liability.c] If you are following mercantile (Accrual) system of accounting then you have to show interest due every year as income of that year only. You have to accordingly pay the income tax for that year. T.D.S. credit can be claimed at the end of the FD tenure for the entire amount of T.D.S. You may be required to offer the evidences to prove the interest income offered in earlier years before the I.T. Authorities so as to enable them to give credit for the entire T.D.S amount. 3. In view of the Circular No. 371 dated 21.11.1983 issued by the Central Board of Direct Taxes (CBDT), we advise the readers to offer the interest on Bank FDR on accrual (due) basis only. Query 3] 1. I have received salary arrear for the period from 01.01.2007 to 30.04.2009 (28 months) in April-2010 i.e., FY -10-11. The housing perk tax was implemented w.e.f. F.Y. 2007-08 in our company and was paid by company for the F.Y. 2007-08 & 20 08-09 AND by the employee from FY -09-10 (FBT abolished). Will the housing perk tax is to be paid on arrear amount? Who will bear the tax amount, if it is to be paid for the FY 2007-08 & 2008-09? Can I pay (if at all it is to be paid) housing perk tax for one month arrear amount (Apr-09 amount) as employee has to pay w.e.f. FY-09-10, this financial year ?Please advise. 2. I am getting Rs. 1,000/- as education allowance pm & Rs. 2,000/-hostel allowance pm apart from salary as perks. I am also paying Rs. 1,000/- pm as tuition fees for my single child. Can I get tax rebate on education allowance & hostel allowance apart from tuition fee u/s 80C? [s_c_swami@yahoo.com] Opinion: 1. The entire amount of arrears received by you will be taxable as your income for the F.Y. 2010-11. In normal course, the tax arising out of this is to be borne by the employee only. You may examine the availability of relief u/s 89(1). 2. Children Education Allowance:Children education allowance is exempt up to a maximum of Rs. 100/- per month per child up to a maximum of two children 3. Hostel Allowance:Any allowance granted to an employee to meet the hostel expenditure on his child up to Rs. 300/- per month per child up to a maximum of two children is exempt from tax. 4. Deduction towards Tuition Fees:You can deduct the deduction towards the tuition fees paid by you u/s 80C. You will be eligible for exemption towards children education allowance & hostel allowance apart from tuition fees deduction u/s 80C.