Sunday, January 18, 2015

Tax Planning: Sale of Agricultural Land vis a vis N.A. Land



TAX TALK-19.01.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

Tax Planning: Sale of Agricultural Land vis a vis N.A. Land

Query 1]
My grandfather received a farm about 40 years ago as a gift. After his death my mother's name was put up legally on 7/12 extract as his kin. Whether it was taxable? Now, we want to make the land as Non Agricultural and clear it from Town planning (NA/TP). Is it advisable or possible? If yes, then can we start our own business? Are we required to pay taxes for this gift if we start business and can we have the rights to Gift or Sale this property to other person who don't belong to our family? Please help & guide as to the aspects that we should look in to from income tax angel. We would be thankful if you can kindly suggest tax planning measures. [Neha Rathod- rathodn326@gmail.com]
Opinion:
First of all, agricultural land received by your mother as a result of inheritance is totally tax free & doesn’t have any tax attachment. After inheritance of the property, recipient (i.e., your mother in the present case) enters the shoes of original owners. She gets all the rights and duties bestowed to the original owner. As such, subject to other land related rules & regulations, she can get it converted in to Non agricultural & can also get TP sanction.

She can also start the business & can sale/gift the land to outsiders who may not be the part of your family. The transactions of sale have income tax implication attached to it. In normal course, merely starting of the business by her would not be give rise to a taxable event. It’s at the time of sale/transfer that the tax liability would emerge.
In your specific case, the land inherited is an ancestral property. Though actual cost of acquisition by her is zero, still she can adopt the fair market value of the land as on 01.04.1981 as its cost of acquisition, Courtesy- Income Tax Act. She would be able to further get the indexation benefit from 1981 itself even though she might have becomes the owner of the property only few years back after inheritance.
Many taxpayers owning agricultural land in the vicinity of the city have queries like this. Timely tax planning on such an occasion could be of great benefit for the taxpayer. A stitch in time save nine & tax planning is more effective if done at the initial stage itself. Tax cost can be reviewed & an alternate with lower tax burden can be taken by the taxpayer within the framework of law.
One of the important aspects that should be considered in such situation is whether the land should be sold before NA/TP or after NA/TP. The question is of enormous importance in view of the fact that entire profit on sale of agricultural land would be tax free if (a) it is a rural agricultural land & (b) it is used for agricultural purpose.
An agricultural land is considered as rural agricultural land if it is not situated in any area within the distance (measured aerially) of not more than:
a] 2 Kms, 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 Kms, 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 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
Rural agricultural land is outside the purview of capital assets and hence no tax is payable on sale of rural agricultural land. No similar tax benefit is available to profit arising on sale of urban agricultural land; still taxpayer can opt for an exemption u/s 54B by investing the amount of capital gain towards purchase of another agricultural land.
No such benefit is available if the land sold is not an agricultural land. To be more precise, above exemption would not be available if the land is sold after converting it to non agricultural.
Considering the amount involved, taxpayer needs to be tax cautious while doing the transactions as mentioned in the query. They should consider the tax implications of all the possibilities in such type of transactions & can legally plan the business affairs in such a way that the tax liability is kept at minimum. Tax planning aspects cannot be generalized in such case and it has to be case & individual specific. Few of the factors which should be considered by land owner in such scenario could be:
1.      Whether to sale an agricultural land itself or sale an agricultural land after doing it NA/TP?
2.      Whether to convert the land in to stock in trade & thereafter sale the land as business assets OR sale the land as capital assets only after doing NA/TP? [If taxpayer opts to convert capital assets in to stock in trade, proper documentation should suffice the transactions. It could be an excellent planning tool if owner of an agricultural land wish to sale rural agricultural land after doing NA/TP as it has the capacity to defer tax payment liability till the time of sale. However, a careful study should be done before opting for this decision in view of the fact that (a) LTCG is taxable @ 20% straightway whereas business profit is taxable @ 30% if income exceeds Rs. 10 Lacs; (b) Exemption up to Rs. 50 Lacs is available every year for investment in NHAI/REC Bonds which is not available for investment of business profit (c) Exemption u/s 54F for investment in the residential house property could be claimed against transfer of capital assets whereas no such exemption is possible against transfer of business assets].
3.      Convenient timing & liquidity to pay the tax arising in the transactions?
4.      Whether the business should be carried out in the name of the land owner itself or in the name of some other family person with POA from land owners etc?

[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 cassrpn@gmail.com]

Thursday, January 1, 2015

house rent: salaried preferred over self employed



house rent: salaried preferred over self employed

Query 1]
I am paying a house rent for Rs 14,000/- per month and additional Rs. 1,200/- towards maintenance for which receipt is being given to me every month. Will I get HRA exemption on Rs. 14,000/- or Rs 15,200/-. Please clarify. [N.K.Panda-niroj_p@yahoo.com]
Opinion:
With handful of options to save tax for the salaried taxpayers, one can definitely explore the possibility of reducing tax bill by revisiting the exemption & deduction provision. One such tool is claiming an exemption towards rent payment of residential accommodation.
Employees generally receive a house rent allowance (HRA) as a part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee for his stay. Exemption on HRA is available under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. Taxpayer would be surprised to see that there is no amount wise upper ceiling on HRA exemption.
An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from the employer. In order to claim the deduction, an employee must actually pay rent for the house occupied. [HRA exemption benefit can be claimed only by the salaried taxpayer. Self employed person may save little tax by claiming deduction u/s 80GG if they are staying in a rented premise. Interestingly, deduction U/s 80GG cannot exceed Rs. 24,000/- p.a. whereas there is no such ceiling while claiming exemption u/s 10(13A). May be it is where salaried taxpayer have better favoring tax law provision as compared to self employed.]
In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax. Exemption from HRA will be lowest of the following three factors:
1.      Actual HRA received from the employer
2.      Actual house rent paid by employee minus 10% of basic salary
3.      50% of the basic salary if employee live in a metro or 40% of basic salary if lives in a non-metro.
Minimum of above is allowed as income tax exemption on HRA. Salary here means basic salary which includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.
Whether HRA & Home loan benefit could be availed simultaneously?
Misconception prevails that HRA exemption is not available if taxpayer also have availed housing loan. It’s wrong. If the taxpayer is staying in a rented house, HRA benefit can be claimed despite the fact that he owns another house (whether rented out or vacant, whether in the same city or elsewhere) & is claiming the tax benefit available on home loan also. The tax benefits against home loan and HRA are two separate independent deductions and have no direct bearing on each other. As long as employee is paying rent for rented accommodation occupied by him, HRA exemption could be claimed while also availing tax benefits of other self owned house property.
Whether PAN of the Landlord is mandatory for HRA claim:
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 with the employer 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.] 
Present Query:
Coming to your query, HRA exemption is available towards rent payment. The question here is what type of payment could be considered as rent. Whether payment towards maintenance, electricity, additional amenities & facilities could be considered for HRA exemption?
Given the clear cut wordings of the section 10(13A) & without any precedent as of now stretching the meaning of “Rent”, I am of the view that exemption would be admissible only towards Rent payment and not payment done towards electricity, maintenance charges etc. If however, you make the lump-sum payment to the landlord towards rent who in turn makes the payment of maintenance charges or others, the exemption u/s 10(13A) could not be denied.