Key to Tax Planning Enabling the taxpayer for effective wealth management

1. Key to Tax Planning Enabling the taxpayer for effective wealth management Monday, 3rd March 2014 Forenoon Session SIRC of The Institute of Cost Accountants of India

2. Financial Year 2013-2014Rates of Income tax – a snapshot 2

3. Change in Surcharge – Super Rich to pay extra

4. Section 87A - Tax Rebate for Resident Individuals New

5. Section 87A - Tax Rebate for Resident Individuals 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.

9. FAQ on Private Trust? • Can only parents can create private trust? – Not necessary (relatives, guardians, family friends can create) • Is it necessary to register it? – Not mandatory • Filing returns? – Yes Compulsory • Tax Tip ¤ – Create one trust for one child for maximum benefit • Want to create a Private Trust? – Kindly ask a Professional!

10. Private Trust 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. 10

11. Private (Discretionary/Specified) Trust 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. 11

12. On distribution from Private 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 [2012] 139 ITD 533 (Mum) : [2012] 150 TTJ 137 (Mum)] 12

14. Tax Planning - HUF • Hindu Undivided Family can also claim basic tax exemption of Rs: 2000,000. [plus Investment Planning eligible for further deduction u/s 80C] • HUF is not a created entity. Only its existence has to be proved. • Individual Minors (below the age of 18) can also claim basic tax exemption of Rs: 2,00,000 (for boys and girls) • Caution: Minors income generally are clubbed into the hands of the parent whose income is greater. Care should be taken to make their income to accrue in the name of a private trust (where the beneficiary is the minor child).

15. How to prove the existence of a HUF? • Family (Ration) Card – is the starting point; or • HUF - Affidavit • Apply for a PAN • Open Bank Account and start doing the operations • Periodically file your returns

16. Hindu Undivided Family – (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. 16

17. Section 80EE - Deduction in respect of interest on loan taken for residential House Property New

18. Section 80EE - Interest on Housing Loan 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) New

19. Section 24(b): Interest on Borrowed Capital (Loans) • Interest payable on loans borrowed for the purpose of acquisition, construction, renovation, repairing or reconstruction (Hint: AC3R) can be claimed as deduction. • Interest relating to the year of completion of construction can be fully claimed in that year irrespective of the date of completion. • Interest accrued during the construction period preceding the year of completion of construction can be accumulated and claimed as deduction over a period of 5 years in equal installments commencing from the year of completion of construction. • When a person acquires a property and pays only part of the sale consideration, interest payable on the unpaid purchase price qualifies for deduction in the computation of income from such property.

22. It may be noted that the deduction of interest of Rs: 30,000 are allowed for purpose of acquisition or construction or repair or renewal or reconstructionof house property where as the deduction to the maximum of Rs: 150,000 is allowed only for acquisition or construction of house property. • For getting deduction of interest of maximum of Rs: 150,000, it is necessary to obtain a certificate from the person to whom such interest is payable specifying the amount of interest payable by the assessee for the purpose of acquisition / construction of the property. • According to Explanation to section 24, when a fresh (subsequent) loan has been raised to repay the original loan if the second borrowing has really been used to repay the original loan and this fact is proved to the satisfaction of the ITO, the interest paid on the second loanwould also be allowed as a deduction.

23. Interest on interest is not deductible. The assessee is entitled to deduct only the interest payable by him on the capital borrowed, and not the additional interest which because of his failure to pay the interest on the due date is considered as a part of the loan. • Any amount paid for brokerage or commission for arrangement of the loan will not be allowed as deduction.

24. Planning to buy a Second House 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.

25. Relief admissible in respect of self occupation of House Property Tax Planning: 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)]

26. 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.

27. Gifts

28. Tax Tip: Non -Taxable Gifts • Up to Rs: 50,000 in cash & Gifts in Kind • Cash Gifts from any relative [Relative means: (1) spouse of the individual; (2) brother or sister of the individual; (3) brother or sister of the spouse of the individual; (4) brother or sister of either of the parents of the individual; (5) any lineal ascendant of the individual; (6) any lineal ascendant or descendent of the spouse of the individual; and (7) spouse of the person referred in (2) to (6)] • On the occasion of marriage of the individual • Under a will or by inheritance • In contemplation of death of the payer

29. Gift ……… When taxable & to whom? 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

30. Exempted…….gifts 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.

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33. Section 56(2)(vii) – Gift of Immovable Property Amendment

34. 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.

35. 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.

36. 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.

37. 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.

38. Section 43CA – Special provision for full value of consideration for transfer of assets other than capital assets in certain cases New

39. Section 43CA 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. New

40. Section 43CA New

41. 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.

42. Computation of income under the head “PGBP” for transfer of immovable property in certain cases 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.

43. 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.

45. 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.

46. 139(9): Defective Return 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. Amendment

47. Section 56(2) – Gift of Immovable Property 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. Amendment

48. Section 80 C – Top 10 – Check the colour please • Tuition fee – paid for children (own, adopted, step) for full time education in India. [Note: Tuition fee paid for grandchildren is eligible for deduction for the HUF] • Principal repayment of Housing Loan • Stamp Duty and Registration Charges • Fixed Deposits in Banks for a LIP of 5 years • NSC – National Savings Certificate • PF – Provident Fund [SPF, PPF, RPF] • 10 year Post Office Savings Bank (CTD) • Mutual Funds • Insurance • ULIP

49. 80 E – Repayment of Education Loans • Only Interest is eligible for deduction • No Limit • Deduction eligible for initial year and immediately succeeding seven years • Deduction eligible for repayment of education loans made for spouse or children

50. 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.