Sunday, April 28, 2013

“TAXATION OF LEAVE SALARY/LEAVE ENCASHMENT”


TAX TALK-29.04.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

“TAXATION OF LEAVE SALARY/LEAVE ENCASHMENT”

Query 1]
I have a query on exemption of leave encashment. I request you to please clarify on the same through Tax-Talk column. I have retired on 28th February 2013 from the Post of Executive Engineer from Maharashtra State Electricity Transmission Company limited, a wholly owned corporate entity under the Maharashtra Government, which  was incorporated under the Companies Act, in June, 2005 after restructuring the erstwhile Maharashtra State Electricity Board. I understand that the employees of Central Government as well as the State Government are allowed accumulation of earned leave up to 300 days and are fully exempt from payment of Income Tax on encashment of leave to his credit at the time of superannuation. All other employees of private sector are allowed exemption up to a limit of Rs. 3 Lacs from payment of tax.
I am likely to get around Rs. 10 Lacs as amount of leave encashment. Therefore the tax exemption depends on the factor whether employees of MSETC which is a wholly owned corporate entity under the Maharashtra Government are treated as State Government employee or not. My queries are:  
1.      Whether being an employee of a wholly owned corporate entity under State Government, I come under the category of State Government Employee? Whether there are any guidelines issued under the I.T. Act to define a Government employee? and
2.      I have retired on 28th February 2013. If the amount of leave encashment [which shall be around Rs. Ten Lacs] is received and deposited in Bank after 1st April 2013, may I treat the leave encashment income as income for the financial year 2013-14? In other word whether this amount should be accounted for on accrual basis or actual receipt basis? Please guide elaborately.  [Shankarlal Meghani - gopalvan@sify.com]
Opinion:
Before stepping up to your query, let us have a look at the basic provision related to taxability of leave salary. Leave salary, also known as leave encashment, means that employee will receive the cash for leaves which are not taken by the employees. The leave encashment received during the service period is taxable for all the employees as per the income tax slab applicable to the employee. However, the tax treatment is different for the leave encashment received at the time of retirement/ superannuation. Further, the tax treatment is different for Government employee (Central or State) vis a vis  Non –Government employee as under:  

·        In the case of Central/ State Government employee, any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of retirement/ superannuation is fully exempt from tax u/s 10(10AA)(i). 
·        In the case of Non-Government employee (i.e., the employee other than an employee of the Central Government or a State Government) leave salary is exempt from the tax u/s 10(10AA) (ii) to the extent of the least of the following:
i] Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired): or
ii] 10 month “Average Salary” or
iii] The amount not chargeable to tax as specified by the Government. (Presently, Rs. 3 Lacs has been specified).
iv] Leave encashment actually received at the time of retirement.
Average salary, as mentioned above, is to be calculated on the basis of average salary during the period of 10 months immediately preceding the retirement/ superannuation.
”Salary” here means basic salary & includes dearness allowances if term of employment so provided. It also includes commission based on a fixed percentage of turnover achieved by an employee as per term of contract of employment but excludes all other allowances & perquisites.

Now, with above basic brief up about taxability of leave salary, the opinions on the issue raised in your queries are as under:
1.      Leave salary received at the time of retirement is exempt only in the hands of State or Central Government employee. It will not be exempt in the hands of the employee of PSU or Local Authorities. The definition of “Government Employee” is not specifically given in the Income Tax Act-1961. However, the Act has specifically incorporated the PSU employees, Government undertaking employee, Local Authorities employees etc in various other Sections / clauses in the Income Tax Act-1961 where the benefit is meant to be conferred to them. The same is not there in Section 10(10AA).
2.      The Leave Salary is taxable under the head “Income from Salary”. The Salary Income is taxable in the year in which it has accrued or in the year in which it is received, whichever is earlier. Accordingly, the leave encashment is taxable as income of the FY 2012-13 and not FY 2013-14.

TAXABILITY OF LEAVE SALARY AT A GLANCE:
S.No.
Particulars
Tax Treatment
A]
Encashment of leave during service
It is charged to tax.
B]
Encashment of leave at the time of retirement


1. If Central or State Government Employees
Fully exempt from tax u/s 10(10AA)(i)

2. For any other employees
Lease of the following is exempt:
1. Earned leave months x Average salary
2. Avg. monthly salary x 10
3. Maximum amount Rs. 3,00,000/-
4. Actually received


Sunday, April 21, 2013

“WHETHER HOUSING LOAN BENEFIT IS AVAILABLE AGAINST THE DEMAND OVERDRAFT LOAN AVAILED BY ME?”


TAX TALK-22.04.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

“WHETHER HOUSING LOAN BENEFIT IS AVAILABLE AGAINST THE DEMAND OVERDRAFT LOAN AVAILED BY ME?”

Query 1]
1.      I am an re-employed ex-servicemen drawing defense pension @ Rs. 10,756/- per month. I am also drawing salary from my re-employment @ Rs. 32,000/- per month on which I am paying applicable IT as TDS after deductions under 80C and others. My query is -Whether I am liable to pay IT on pension income and what are the provisions for exemption of pension income from IT?
2.      Secondly, I have taken a demand loan of Rs. 4,50,000/- in 2011 and invested that amount for purchase of plot with already constructed house. I did not mention the purpose of loan in my DL application to banker as I was not aware of any provision of housing loan exemption from IT. Also the OD account created for this purpose is flexible means I repay my full salary in the account and withdraws as required (through ATM) to meet my other domestic requirements. Kindly guide me how can I get IT exemption from this transactions under 24(b)? Can I ask my banker to treat this loan as house loan and issue me TDS certificate now? Can I reflect these transactions from back date i.e., 2011? Please guide. [pradeepfadnis@yahoo.com] 
Opinion:
1.      Both, the Salary Income as well as pension income, received by you is taxable under the head “Income from Salary”. Its only the amount of disability pension receivable from Ministry of Defence is totally exempt by virtue of Instruction No 136 dated 14th January, 1970 [F.No.34/3/68-IT(A.I) & Instructions No. 2 dated 2nd July, 2002 [F. No. 200/51/99-IT(A.I)] issued by Central Board of Direct Taxes.
2.      Considering the overall scheme of deduction u/s 24(b) towards Interest on Housing Loan and u/s 80C towards the principal repayment of the housing loan, I am of the considered opinion that you cannot claim the deduction [U/s 24(b) & U/s 80C] against the Demand Overdraft Loan availed by you.

Query 2]
I have sold two plots which were developed under Talegaon Dabhade pattern and were from Non-Agriculture Layout land at Village Shankarpur, Nagpur (Gramin) in Nagpur District in March-2013 for Rs. 7 Lacs each. Thus, I have received total amount of Rs. 14 Lacs. I have purchased the said two plots in the year 2005 for around Rs. 2 Lacs. I want to know whether the amount received from above transaction comes under the purview of Capital Gain tax? I am also planning it to reinvest in purchase of flat in Nagpur. Please guide me whether the tax can be saved if I invest in the flat? [Prakash Bhaskarrao Kapse-kapseprakash@rediffmail.com]
Opinion:
1.      The transactions would come in the capital gain tax purview and the difference between the sale consideration and the indexed cost of acquisition would be taxable long term capital gain.
2.      The long term capital gain tax arising from the transfer of plot could be saved u/s 54F if you invest the sale consideration for purchase of a residential house property/flat.
3.      Time limit to Purchase the Property:
Exemption u/s 54F is available if the Assessee invests net sale consideration for purchase of a residential house property
a] within O
ne year before or two years after the date of transfer; or
b] constructs a residential house within a period of three years from the date of the transfer of the original house.
4.      Scheme of Deposits:
Although under section 54F, the taxpayer is allowed 2 years to purchase or 3 years for construction of the house property, but the capital gain on transfer of the original assets is taxable in the previous year in which the transfer took place. The return of income of that previous year is to be filed before the specified date i.e., due date. Hence, the tax payer will have to take a decision for the purchase/ construction of the house property before the date of furnishing of the return otherwise the capital gain would be taxable.
To avoid the above situation, the Income Tax Act has specified an alternative in the form of a Deposit under the Capital Gain Deposit Accounts Scheme-1988 (CGDAS). The amount of net sale consideration, which is not utilized by the assessee for purchase or constructions of the new house before the due date of furnishing the return of income, need to be deposited by him/her under the Capital Gain Accounts Scheme, before the DUE DATE of furnishing the return. After Deposits, the amount already utilized by the assessee for purchase/ constructions of the new house, along with the amount so deposited, shall be eligible for exemption under section 54F in the year in which LTCG has arisen. Later on, whenever you purchase the flat within a specified time slot, you can make the payment from the CGDAS.

Query 3]
Myself & my friends have similar query about Mutual Funds, including Tax Free Mutual Fund in which lock-in period is 3 years. What I found is that in many Funds, we get dividends which normally are not more 10%. These are not taxable. It’s OK. But when we want to encash the Mutual Fund investments, in return, it gives much less than amount invested.  For example, if Rs. 1 Lacs is kept and when we ask for maturity value, it is hardly Rs. 70 or 80 thousand. It means a big loss. Even if we calculate the IT relief we enjoyed (10% or 20%) at the time of investments, the yield in long run, say 4/5 years, is a loss. It seems better to keep money in Fixed Deposit which gives some 10% assured income. We can pay income tax on such interest and can easily get minimum 9% net interest return. In this situation, do you suggest to go for Mutual Funds? You may kindly reply to this query through the Tax Talk Column. [Bhaurao Hedaoo- blhedaoo@hotmail.com]
Opinion:
One must understand that Equity mutual funds means stock market by proxy. When you buy a unit of mutual fund, you are buying a small basket consisting of very small portion of different shares that the particular fund has purchased. So a mutual fund investor is in reality an investor in the stock market. In the long run, theoretically speaking, mutual fund should give a return more or less equal to the market return. In the short run, the divergence between stock market return and the mutual fund return is because of selection of different shares in their basket as compared to the shares in the market basket.
Historically over a long period of time stock market has given much higher return than the fixed income instruments. However this may hold true only in the long run, in the short run market idiosyncrasies and noise determines the price. The risk reward ratio in the stock market is high which means that while you take a high risk, the reward potential is also high (high risk means that if the spiral works against you, it may wipe off your capital too).
In comparison, fixed income securities are fairly stable, and their return predictable with mathematical accuracy. But, they do not offer the kind of appreciation that stock market may offer.
Having explained that, it is for an individual to decide which would be a better investment for him. A judicious mix of the two is suggested, so that you can take advantage of capital appreciation from your mutual fund investment, and continue to get a fixed return on your fixed income securities. What is the right mix for you will depend upon your risk appetite, and investment time-frame.

Monday, April 15, 2013

“BUILDER ALSO LIABLE TO PAY TAX ON THE DIFFERENCE IF THE STAMP DUTY VALUATION IS HIGHER THAN THE ACTUAL SALE CONSIDERATION”


TAX TALK – 15.04.2013- THE HITAVADA

“BUILDER ALSO LIABLE TO PAY TAX ON THE DIFFERENCE IF THE STAMP DUTY VALUATION IS HIGHER THAN THE ACTUAL SALE CONSIDERATION”


Query 1]

Please refer to your Tax Talk Dated 08.04.2013 which was very informative. In continuation to that, we have been told that there are changes on the taxability in the hands of builders also if the flat/office block/ etc are sold at a price lower than the Stamp Duty Valuation. As of now, we are liable to pay tax on the basis of actual sale price and not on the basis of the Stamp Duty valuation. Is it true? Whether the income tax would be applicable on the basis of the value which may not have been received by us? What is the remedy available? Is there any exception to this provision like date of agreement as mentioned in the last issue of Tax Talk? We also read about the change in the agricultural income tax base? What is the change in the agricultural land taxability? We would be thankful if you can kindly elaborate the provision in detail vis a vis existing provision. [rao2319k@gmail.com] 

Opinion:
1.      So far, section 50C (which provides for taxability of property on the basis of higher of Stamp duty valuation or the actual sale consideration) is applicable only when the capital asset is sold. It don’t have any application if the assets sold is not a capital assets i.e., it is not applicable when the stock in trade is sold by the tax payer. In short, Section 50C is not applicable to the builder since in most of the cases the assets/property is the part of stock in trade and resultantly the profit on sale of assets was taxable on the basis of actual sale consideration and not taxable on the basis of Stamp Duty Valuation of the property.
2.      To bring land or building or both held as business assets within the scope of stamp duty value based taxation, the Finance Bill-2013 has proposes to incorporate a new section 43AC in the Income Tax Act-1961.  As a result of proposed insertion of Section 43AC, even the immoveable property forming the part of stock in trade would be taxable on the basis of Stamp Duty Valuation or Actual sale price, whichever is higher.
3.      Exception:
a] It is provided that where the tax payer claims before any assessing Officer that the value adopted or assessed or assessable by the authority under section 43CA(1) exceeds the fair market value of the property as on the date of transfer and the value so adopted etc by the authority under section 43CA(1) has not been disputed in any appeal or revision or no reference has been made before any other authority, the assessing officer may refer the valuation of the assets to the valuation officer. Where the value ascertained on reference to valuation officer exceeds the value assessed by the stamp valuation authority, the value so assessed shall be taken as the full value consideration.
b] It is also proposed that where the date of an agreement fixing the value of consideration for the transfer of the assets and the date of registration of the transfer of the assets are not same, the stamp duty valuation 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 is applicable only where amount of consideration or part thereof for the transfer has been received by any mode other than cash on or before the date of agreement.
4.      It’s true that the definition of Agricultural land is proposed to be amended by the Finance Bill-2013. Presently, Rural Agricultural Land is defined to mean land not situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than ten thousand or in any area within such distance not exceeding eight kilometers from the local limits of any municipality or cantonment board as notified. For that purpose, the Central Government had issued Notification No SO – 9447 dated 06.01.1994. In that notification, more than 400 cities have been listed and corresponding relevant distances have been mentioned. Any transfer of agricultural land falling within the relevant distance of the cities mentioned in the notification would be subject to capital gains tax. It is to be noted that presently only notified areas were covered under the scope of agricultural land. Now, the definition is proposed to cover all areas whether notified or not. Moreover, various limits are proposed for land to qualify as a Rural Agricultural Land. A land will be considered as an “Rural Agricultural Land” if it is not situated in any area within the distance, measured aerially of not being more than:
a] 2 kilometers, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
 b] 6 kilometers, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
 C] 8 kilometers, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
 It is now further clarified that the distance has to be measured aerially. The amendments are proposed to take effect from 1st April, 2014 & will accordingly, apply in relation to assessment year 2014-15 and subsequent assessment years.

“PURCHASING THE PROPERTY BELOW THE STAMP DUTY VALUATION IS TAXING NOW!”


TAX TALK-08.04.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

“PURCHASING THE PROPERTY BELOW THE STAMP DUTY VALUATION IS TAXING NOW!”

Query 1]
I have a query in Capital Gains. Mr. A enters into an agreement with Mr. B for purchase of an Agricultural land and paid Rs. 8,00,000/- as advance. In 2004, the balance of Rs. 1600000/- was to be paid at the time of registry. Mr. B has made another agreement with Mr. C for the same Land. Both Mr. A & C sued Mr. B for performance of contract. In the year 2012, all the three parties made compromise and Mr. A & C withdraws there case against Mr. B and the land was sold to Mr. D for sale consideration of Rs. 48,00,000/- whereas the Market value of stamp duty purpose was Rs. 140,00,000/-. The sale consideration of Rs. 48,00,000/- was shared by all the three parties equally (i.e., Mr. A , B &C each receiving Rs.16 Lacs). In addition to his share in the Sale Consideration of Rs. 16 Lacs, Mr. A further received 1/7th share of the same land for which he has made agreement with Mr. B earlier. Mr. A is my client and I want to what will be treatment of these transactions for him? [CA. R*******-s*****.***@gmail.com]
Opinion:
It is indeed a very usual query with many option and alternatives as far the income tax issues are concerned. I have tried to break up the query in various parts to resolve the taxability of income in such cases and have two options which could be considered for working out capital gain tax.
1st OPTION:
1.      By paying Rs. 8 Lacs, Mr. “A” has acquired a “Right” in the property.
2.      Transfer/surrender / Relinquishment of “Rights” in a capital assets rise to capital gain & would accordingly attract capital gain tax.
3.      In lieu of surrender of Rights in the property by Mr. A, he has received Rs. 16 Lacs in cash/Cheque and 1/7th Share in the property. To be precise, against Rs. 8 Lacs of Advance paid by Mr. A for acquiring the Right in the property, he has received Rs. 16 Lacs PLUS 1/7th Share in the property. The total of Rs. 16 Lacs plus market value of the 1/7th Share of the Land could be treated as the sale consideration. The benefit of indexation would be available on Rs. 8 Lacs paid initially for acquiring the Rights in the property. The difference between the sale consideration and the indexed cost of acquisition would be the amount of Long Term Capital Gain.
4.      The market value of the land so added in the sale consideration as mentioned above could be treated as the cost of acquisition in the hands of Mr. A.
2nd OPTION:
The alternate argument could be to treat Rs. 3.42 Lacs [i.e., 1/7th share in the property for an agreed price of Rs. 24 Lacs (Rs. 8 Lacs paid initially as advance & Rs. 16 Lacs balance payable at the time of Registry)] as the cost of acquisition of 1/7th share of Land and the difference between Rs. 16 Lacs of amount received by you and indexed value of Rs. 4.58 Lacs (i.e., Rs. 8 Lacs less Rs. 3.42 Lacs) as the amount of long term capital gain.

Query 2]
We are dealing in properties as a broker. Recently, we have been told that the purchaser of the property will also be liable to pay the tax if the property is purchased for an amount lesser than the stamp duty valuation? Is it true? Please elaborate on the provision if it is so? If it is so, from which date it will be applicable? Is it applicable even if the actual price is lesser than the stamp duty valuation? Is there any exception to the rule? So far, the seller were liable for the tax on the basis of stamp duty valuation if it was higher than the actual sale price. Whether the same rule will be applicable for the seller? If yes, then will it not be harsh & improper?  [NPBA]
Opinion:
Presently, Section 56(2)(vii) taxes the receipts of all moveable properties by Individuals or HUF’s, if it is received without consideration or it is received at a consideration less than the fair value.
However, the receipt of any immoveable property is taxable only if its received without consideration (from non-relatives), and is not taxable if it is received for a consideration lesser than the fair value.

By the Finance Bill-2013, it is now proposed to amend the provisions with effect from 01.04.2013 so as to provide that even if the immoveable property is received for an inadequate consideration (i.e. the difference between stamp duty valuation and transactions value is more than Rs.50,000/-), then such difference shall be taxable in the hands of the recipient individual or HUF as Income from Other Source. It is also proposed that where the date of agreement and date of registration are not the same, then the stamp duty valuation may be taken on date of agreement and not transfer in such cases where the amount of consideration or part thereof has been received by any mode other than cash on or before the date of agreement. The existing provision in respect of taxability in the hands of seller remains unchanged.
Now, this, in my view is illogical and harsh and purchasing the property below the stamp duty valuation is taxing now. It would make two people pay tax on the same transaction. If the seller has transferred immoveable property at a price lower than the to stamp duty valuation, then the seller would pay tax based on stamp duty valuation & on the other side, even the buyer is made to pay tax on the difference between the stamp duty valuation & actual purchase price of the property. One more harsh part of the provision is that the cost of acquisition in the hands of the buyer would be the actual purchase price and not the stamp duty value of the property.