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].