Key to Tax Planning Enabling the taxpayer for effective wealth management. Monday, 3 rd March 2014 Forenoon Session SIRC of The Institute of Cost Accountants of India. Financial Year 2013-2014 Rates of Income tax – a snapshot. 2. Change in Surcharge – Super Rich to pay extra.
Key to Tax Planning Enabling the taxpayer for effective wealth management
Monday, 3rd March 2014
SIRC of The Institute of Cost Accountants of India
Applicability: A tax relief of Rs.2,000/- to the individual tax payers whose total income does not exceed Rs.5 Lakhs in a year.
Consequently any individual having income up to Rs.2,20,000 will not be required to pay any tax and every individual having total income Rs.2,20,000 to Rs.5,00,000 shall get a tax relief of Rs.2,000
FM’s Statistics: On account of this relief, 1.80 crore tax payers are expected to benefit to the value of Rs.3,600 crore.
Private Trust can be formed for a single member benefit or for a group of members benefit.
For Tax Planning - Ideal for a minor child till he/she attains majority or finishes his/her higher studies or until her marriage
Tip: For each child let there be one trust
Caution:Care should be taken while drafting the clauses of the trust deed to include investment methods (take the help of a professional in that case)
A trust can be unregistered (no mandatory provision for registration)
Using the trust deed PAN can be applied for.
Whether there will be any tax incidence in the hands of the beneficiaries of the trust either at the time of creation of the trust or when they receive any benefits under the trust either out of income or corpus.
Where it is discretionary trust, definitely, the beneficiaries can escape the rigour of section 56(2)(vii) since unless and until any distribution, either of income or corpus, is made, there is no certainty for the beneficiary as to what they will get from the trust.
On the other hand, when any money/property is distributed from the trust to the benficiaries either by way of distribution of income or corpus and whether such distribution takes place during the subsitence of the trust or at the time of its dissolution, even then, the benficiaries cannot be subjected to tax on the amount/assets recived on distribution since they are already entitled to the same as per the trust deed.
This view was also upheld in [Ashok C. Pratap v Addl. CIT  139 ITD 533 (Mum) :  150 TTJ 137 (Mum)]
Tax Planning - HUF
HUF cannot be formed!
Yes. Only its existence has to be proved.
Date of Marriage is the Date of Incorporation of HUF
How? – Family Card (Ration Card) is the key.
Using Family card – We can apply for a PAN card
Then using PAN card we can open a Bank Account – then start doing operations.
Applicability: A new section 80EE is inserted in the IT Act, 1961 to provide an additional deduction upto Rs. 1 lakh in respect of interest on loan taken for residential house property to individuals.
The deduction shall be subject to the following conditions:-
The loan is sanctioned by the financial institution during the period beginning on 1st April,2013 and ending on 31st March,2014.
The amount of loan sanctioned for acquisition of the residential house property does not exceed Rs.25 lakhs.
The value of the residential house property does not exceed Rs.40 Lakhs.
The assesses does not own any residential house property on the date of sanction of the loan.
The above deduction is over and above the deduction of Rs.1.50 lakhs allowed for self occupied properties under Section 24 of the Income-tax Act.
If the limit is not exhausted, the balance may be claimed in AY 2015-16. (Carried forward of un-exhausted claim)
You are required to pay tax on rental income from the second house even if it is lying vacant.
If a person owns more than one house and it is vacant, its value is added while calculating the owner’s wealth. A 1% wealth tax is payable on the amount exceeding Rs: 30 lakh.
Commercial property is not included while calculating the wealth of a person.
The interest paid on a loan taken to purchase commercial property is also eligible for tax deduction. Commercial space usually fetches a high rent than residential property. It is also possible to take a loan against this rental income. The rental income from commercial property is eligible for 30% standard deduction as in the case of residential property.
Relief for self occupation of house is admissible under section 23 to an HUF also.
There is nothing in the words used in section 23(2) which may show that they cannot apply to HUF which is nothing but a group of individuals related to each other.
[ITO vs. Tarlok Singh & Sons 29 ITD 139 (Del)]
If you want to buy a house in your wife’s name but don’t want the rent to be taxed as your income, you can loan her the money. In exchange, she can give you her jewellery.
One can also avoid clubbing of income by opting for tax exempt investments. (PPF, LTCG on MF & Equity)
Incidentally, a wife can help her husband save tax even before they get married. If a couple is engaged, and the girl does not have any taxable income or pays tax at a lower rate, her fiancé can transfer money to her. The income from those assets won’t be included in his income because the transaction took place before they got married.
What: Gifts would be subject to income-tax in the hands of the donee (recipient).
Limit: As per section 56(2)(vi), receipts of movable property, fair market value of which exceeds 50,000 (Fifty thousand rupees), without consideration or without adequate consideration is taxable.
Who: as income in the hands of Individuals / HUFs.
Year: In the year of receipt
Section 56(2)(vii) shall not apply to any sum of money or any property received by the donee
from any relative; or
on the occasion of the marriage of the individual; or
under a will or by way of inheritance; or
in contemplation of death of the payer or donor, as the case may be; or
from any local authority; or
from any fund or foundation or university or other educational institution or hospital or other medical institution; or
from any trust registered under IT Act.
Present: The existing provisions of 56(2)(vii) sub clause (b) of the Income-tax Act, inter alia, provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds Rs: 50,000, the stamp duty value of such property would be charged to tax in the hands of the individual or HUF as income from other sources.
Catch me if you can: The existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration.
Proposal: It is proposed to amend the provisions of 56(2)(vii) so as to provide that where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs: 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources.
Differing Dates: Considering the fact that there may be a time gap between the date of agreement and the date of registration, it is proposed to provide that where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement, instead of that on the date of registration.
Caution: This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement fixing the amount of consideration for the transfer of such immovable property.
This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
May Overrule the case reported in (2012) 6 TaxCorp (DT) 53279 (DELHI), Section 50C enabling the revenue to treat the value declared by an assessee for payment of stamp duty, ipso facto, cannot be a legitimate ground for concluding that there was undervaluation, in the acquisition of immovable property.
Background: The provisions of Section 50C do not apply to transfer of immovable property, held by the transferor as stock-in-trade.
Younger Brother of Section 50C: A new Section 43CA is inserted in the Act, that where the consideration for transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be full value of consideration for the purposes of computing income under the head “Profits and Gains of Business or Profession”.
Stamp duty value may be taken as on the date of agreement of transfer and not as on the date of registration of such transfer where consideration is received by any mode other than cash.
These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
May Overrule the case reported in (2012) 6 TaxCorp (DT) 51567 (ALLAHABAD) held that section 50C has no application as it was a case of transfer of plots which was stock in trade. Since, an income earned from such transaction is liable to be taxed as income from business activity.
Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under Section 50C of the Income-tax Act. These provisions do not apply to transfer of immovable property, held by the transferor as stock-in-trade.
It is proposed to provide by inserting a new section 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.
It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value 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 shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.
Invest in their name if they are in a lower tax bracket: Every adult enjoys a basic tax exemption limit. For senior citizens (above 60 years), the basic exemption limit is Rs: 2.5 lakh a year.
If any or both of your parents do not have a high income but you have an investible surplus, you can plan tax by transferring money to them which can then be invested in their name.
There is no tax on such gifts and the income from the investments will be treated as theirs.
No such clubbing provisions come into play when money is transferred to a parent. There is also no limit on the amount you can give to your parents.
Fact: A large number of assesses are filing their return of income without payment of self assessment tax under section 140A.
A Return of income filed without payment of self assessment tax including interest to be treated as defective return.
Effective: This amendment will take effect from 1st June, 2013.
Where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs.50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to take in the hands of the individual or HUF as income from other sources.
This amended section is applicable from the Assessment Year 2014-15.
For assessment year 2014-15 and within the existing limit, a deduction of up to Rs: 5,000 for preventive health check-up is available.
Therefore, you get “health bhi aur wealth bhi”.
Even if your parents are not dependant, you can pay for medical insurance and claim deduction.
Individual / HUF
Individual = assessee + family (spouse + dependent children)
HUF = any member of the family
Rs: 15,000 (self/dependents)
Rs: 15,000 / Rs: 20,000 (parents / SC parents) -
The payment should be made by any mode of payment except cash
Deduction is allowed to an individual in respect of medical insurance premium paid for self, spouse and dependent children.
In case the premium is paid in respect of a senior citizen, then, the maximum deduction would be Rs.20,000 instead of Rs.15,000.
In the case of a HUF, such deduction is allowed in respect of premium paid to insure the health of any member of the family.
An additional deduction of up to Rs.15,000 would be allowed in respect of medical insurance premium paid for insuring the health of a parent or parents. This would be in addition to the deduction of Rs.15,000 in respect of medical insurance premium paid for self, spouse and dependent children. (Such additional deduction would be available even if the parents are not dependent on the individual).
The maximum deduction would, therefore, be Rs.30,000 [i.e. Rs.15,000 + Rs.15,000] and in case any of the persons insured is a senior citizen, Rs.35,000 [i.e. Rs.15,000 + Rs.20,000].
The maximum deduction available to a HUF would be Rs.15,000 and in case any member is a senior citizen, Rs.20,000.
The other conditions to be fulfilled are that such premium should be paid by any mode, other than cash, in the previous year out of his income chargeable to tax. Further, the medical insurance should be in accordance with a scheme made in this behalf by -
the General Insurance Corporation of India and approved by the Central Government in this behalf; or
any other insurer and approved by the Insurance Regulatory and Development Authority.
Keyman Insurance Policy which has been assigned to any person during its term with or without consideration shall continue to be treated as a keyman insurance policy.
No benefit of exemption under section 10(10D) shall be claimed on such policies.
Existing provisions: of section 10(10D), inter alia, exempt any sum received under a life insurance policy other than a KIP. Explanation 1 to the said clause (10D) defines a KIP to mean a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person.
By-pass: It has been noticed that the policies taken as KIP are being assigned to the keyman before its maturity. The keyman pays the remaining premium on the policy and claims the sum received under the policy as exempt on the ground that the policy is no longer a keyman insurance policy. Thus, the exemption under section 10(10D) is being claimed for policies which were originally keyman insurance policies but during the term these were assigned to some other person. The Courts have also noticed this loophole in law.
With a view to plug the loophole and check such practices to avoid payment of taxes, it is proposed to amend the provisions of clause (10D) of section 10 to provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy.
The above amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to assessment year 2014-15 and subsequent assessments years.
May Overrule the case reported in (2012) 6 TaxCorp (DT) 51593 (DELHI) Held that, The insurance company has itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. It is not open to the Revenue to still allege that the policy in question is keyman policy and when it matures, the advantage drawn there from is taxable; no doubt, the parties here, viz., the company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10(10D); law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of least tax possible, albeit, in conformity with the provisions of Act. It is also permissible to the assessee to take advantage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and this would not amount to tax evasion.
Wealth-tax return can be electronically filed similar to e-IT Returns.
This facility stated to have come into force from 1st June, 2013. Still the provision is yet to see the daylight
Eligibility limit for claiming deduction u/s 80C and claiming exemption u/s 10(10D) in the case of certain disability or ailment increased from 10% to 15% on actual capital sum assured.
This relaxation shall be available in respect of insurance policies issued on or after 1st April, 2013.
A new section 194-IA is inserted to provide that every transferee (buyer), at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor (resident buyer), shall deduct tax, @1% of such sum.
No deduction of tax shall be made where the total amount of consideration for the transfer of an immovable property is less than Rs. 50 Lakhs.
Existing: Section 115-O provides for payment of DDT on the amount of dividend distributed by the company as reduced by the amount of dividend received from its subsidiary if such subsidiary has paid the DDT.
This ensures removal of cascading effect of DDT in a multi-tier structure where dividend received by a domestic company from its subsidiary (which is also a domestic company) is distributed to its shareholders. But on dividend received from foreign subsidiaries so far?
Proposed: The Indian Company shall not be liable to pay Dividend Distribution Tax (Section 115-O) on the distribution to its shareholders of that portion of the income received from its foreign subsidiary.
Date: The above amendment will take effect from 1st June, 2013.
The following AIR transactions must be reported in your Income Tax Return:
• Cash deposits (10 lakh and above)
• Credit card bills (2 lakh and above)
• Mutual Fund purchase (2 lakh and above)
• Purchase of bonds/debentures (5 lakh and above)
• Purchase of shares of a company (1 lakh and above)
• Purchase of immovable property (30 lakh and above)
• Sale of immovable property (30 lakh and above)
• Purchase of RBI bonds (5 lakh and above)
Extended: The first time investors will now be allowed to invest in mutual funds as well as listed shares.
Till when: This investment can be done not in one year alone, but in three successive years.
Raised: The income limit is also being proposed to be raised from Rs.10 lakhs to Rs.12 lakhs.
Limit:The income limit is also being proposed to be raised from Rs.10 lakhs to Rs.12 lakhs.
Applicability Extended: in addition to “listed equity shares” “listed units of equity oriented fund” is also added
A Fund which satisfies the following TWO conditions:
Interest earned on Non Resident (Non-Repatriable) [NRNR] Deposit,
Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit,
Overseas income of NRIs,
Dividend income from Indian Public/Private Company, Indian Mutual Fund and from Unit Trust of India,
Long-term capital gains arising on transfer of equity shares traded on recognized Stock Exchange and units of equity schemes of Mutual Fund is exempt from tax at par with residents,
Remuneration or fee received by non-resident / non-citizen / citizen but not ordinarily resident 'consultants', for rending technical consultancy in India under approved programme including remuneration of their employees, and income of their family members which accrue or arise outside India, Interest on notified bonds.
A. Home Loan Interest Deduction: Non-residents Indians are eligible to avail deductions on home loan interest for the interest portion of the EMI paid towards the repayment of home loans.
b. Savings Deduction: From the various tax saving avenues available to the general public – Equity instruments like ELSS, Debt instruments like PPF, National Savings Certificate, Bank FDs etc and Life Insurance and Pension Plans, Non-residents Indians are not allowed the following investments:
i.) Non-residents Indians not allowed to open a PPF account. An existing PPF account can be continued till maturity.
ii.) Non-residents Indians are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.
c. Health Insurance Premium Deduction
Non-residents Indians can also claim deduction for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.
d. Other Deductions
There are many other deductions available to resident Indians – Health Insurance Premium, Medical treatment of disabled dependent, Medical treatment of certain specified ailments, Deduction for Handicapped person, Educational loan, Deduction for Donations and Rent paid. NRIs qualify for these deductions:
i). Deduction for interest paid on educational loan
ii). Deduction for certain specified donations
Deduction for Medical treatment of disabled dependent, Deduction for Medical treatment of certain specified ailments, and Deduction for Handicapped person are not available for Non-residents Indians
Tax Residency Certificate is a necessary for claiming benefits under DTAA but not a sufficient condition for claiming benefits under the agreements referred to in Section 90 and 90A.
Backdrop: Section 90 of the Income Tax Act empowers the Central Government to enter into an agreement with the Government of any foreign country or specified territory outside India for the purpose of –
granting relief in respect of avoidance of double taxation,
exchange of information and
recovery of taxes.
Further section 90A of the Income-tax Act empowers the Central Government to adopt any agreement between specified associations for above mentioned purposes.
In exercise of this power, the Central Government has entered into various Double Taxation Avoidance Agreements (DTAAs) with different countries and has adopted agreements between specified associations for relief of double taxation.
The scheme of interplay between DTAA and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the DTAA, is entitled to claim applicability of beneficial provisions either of DTAA or of the domestic law.
Sub-section (4) of sections 90 and 90A of the Income-tax Act inserted by Finance Act, 2012 makes submission of Tax Residency Certificate containing prescribed particulars, as a condition for availing benefits of the agreements referred to in these sections.
Proposal: It is proposed to amend sections 90 and 90A in order to provide that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A. This position was earlier mentioned in the memorandum explaining the provisions in Finance Bill, 2012, in the context of insertion of sub-section (4) in sections 90 & 90A.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.
May Overrule the case reported in (2003) TaxCorp (INTL) 1732 (SC) held that FIIs based in Mauritius are entitled to exemption from capital gains tax; CBDT Circular dated April 13, 2000 upheld legal and valid
Rate: A new CTT shall be levied on non-agricultural commodities future contracts at the rate of 0.01% of the price of goods.
On Whom: CTT shall be paid by the seller.
Trading in commodity derivatives will not be considered as “speculative transaction”.
Deductible: CTT shall be allowed as deduction as per section 36(1)(xvi) of the IT Act if income is included in “PGBP”
Exclusion: Agriculture commodities have been kept outside the purview of the CTT
Applicable Date:from FY 2013-2014 when Finance Bill 2013 comes into force.
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