Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

DOUBLE HOUSING BONANZA!

How to avail tax benefit for housing loan interest on your second house, while also enjoying it for your first? 

            The tax benefits that can be availed of in respect of a housing loan can be broadly categorized under two heads. 

  • Firstly, interest paid on the housing loan, borrowed from any agency including a private source, is deductible under Sec.24(b) while  computing  the  income under  the  head  ‘House  Property’.
  • Secondly, repayment of the principal amounts of a housing loan borrowed from specified sources is eligible for income-tax deduction under Section 80C of the Income-tax Act. 

            In the case of a let-out house property, where the interest paid is eligible for set off against the rental income, there is no monetary ceiling for the maximum amount of interest that can be claimed as a deduction.

           However,  in the case of one self-occupied residential  house whose  annual  value is treated as ‘Nil’, the  maximum  amount  of interest that can be claimed as a deduction is Rs.1,50,000/- per annum. (more…)

PRESUMPTIVE INCOME SCHEME!

Freedom from accounting, audit, scrutiny & advance tax for small businesses declaring 8% or higher profits

Business entities having an annual turnover or gross receipts of less than Rs. 1 crore need to be familiar with the special provisions of Section 44AD of the Income-tax Act in regard to computing profits and gains of business on presumptive basis. The major highlights of the ‘Presumptive Income Scheme’ are as under:

  • It applies to any ‘eligible taxpayer’ being an individual, HUF or partnership firm (not claiming any exemption or deduction in respect of special undertakings or incomes under the Section 10 or 80 family), who has income from ‘eligible business.’

  • An ‘eligible business’ means any business, other than business of a transport operator (since the same is covered under Section 44E), whose annual total turnover or gross receipts does not exceed Rs.1 crore. (more…)

PENALTY NOT AUTOMATIC!

 

Latest HC decision holds that mere agreement for addition cannot constitute concealment of income leading to penalty!

      A number of real life situations arise, where a taxpayer, either during the course of his scrutiny assessment proceedings or during an income-tax survey at his business premises, accepts an addition or disallowance as proposed by the Assessing Officer or even offers the survey team to pay tax on income disclosed during the survey. Can a taxpayer be penalized for concealment in such cases, when such acceptance or offer is made by the taxpayer bonafide, with a view to buy peace of mind and avoid litigation?

     The latest decision of the Karnataka High Court in the case of CIT vs. Manjunatha Cotton and Ginning Factory 35 taxmann.com 250 (2013), deserves a special mention, not just because it answers the above question in favour of the taxpayer with a categorical ‘no’ and clearly holds that “levy of penalty is not automatic,” but also because, it can be acknowledged as a masterly treatise on the subject. The High Court has, in its elaborate, well reasoned and absorbing judgement, lucidly analyzed diverse perspectives on the ever raging controversy of penalty and finally rested its conclusion in the light of the underlying ratios of landmark rulings of the Apex Court and various High Courts. (more…)

TWO DEDUCTIONS ON A DEBUT!

Don’t miss tax breaks for SB interest earned upto Rs.10,000 and preventive health check up expenditure of Rs.5,000!

While you are all set to file your income-tax returns for Assessment Year 2013-14, here is a gentle reminder to ensure that you do not miss to claim two new deductions under the Section 80 family, which are making their first appearance this year.

Under section 139(1C), the Central Government has been authorized to exempt any class or any classes of persons from the requirement of furnishing a return of income, subject to such conditions as may be prescribed, through the issue of a notification in the official gazette.

Accordingly, for the Assessment Years 2011-12 and 2012-13, salaried employees, whose total income did not exceed Rs.5 lakhs and whose income consisted only of salaries and income from other sources, by way of interest from a savings account in a bank, not exceeding Rs.10,000, were granted exemption from filing of their income-tax returns. This was subject to the condition that the taxpayer had discharged his total tax liability in respect of both salary and interest income through tax deduction at source by his employer and no claim of refund of any tax was due to him. (more…)

DON’T SWEAT, KEEP IT SWEET!

Be prepared to handle situations, where law requires you to file your return even though no tax is payable in your case!

        Section 139 of the Income-tax Act provides that an individual or a Hindu Undivided Family (HUF) is required to file his Income-tax Return, if his Gross Total Income (GTI) prior to various deductions under Section 80 family (such as 80C, 80D, 80G etc.) exceeds the basic income-tax exemption limit. From Assessment Year 2013-14, the prescribed exemption limit is Rs.2,00,000 (in case of both a male and female taxpayer), Rs.2,50,000 for resident Senior Citizens, aged 60 years and above but below 80 years and Rs.5,00,000 for resident Super Senior Citizens aged 80 years and above.

       GTI includes within its scope the total of all taxable incomes, after considering the relevant deductions available under the five heads of income, but before allowing the eligible deductions under Section 80 family for purpose of computing the Total Income (TI). The case studies below will meaningfully illustrate this point.

Case Study – 1: Mr. J earned gross salary of Rs.4,00,000 in FY 2012-13. After excluding his exempt allowances and perquisites of Rs.70,000, his taxable salary works out to Rs.3,30,000. The interest payable on housing loan eligible for deduction under Section 24 is Rs.1,00,000 and his taxable income from other sources is Rs.30,000. His GTI thus works out to Rs.2,60,000 (3,30,000-1,00,000+30,000). Mr. J has invested Rs. 1,00,000 in investments eligible for deduction u/s 80C and also paid Mediclaim premium of Rs.10,000 entitled to deduction under Section 80D. His TI stands determined at Rs.1,50,000 (2,60,000-1,00,000-10,000) and therefore, the income-tax payable by him is Rs. Nil. However, in this case, Mr. J would be required to mandatorily file his tax return for Assessment Year 2013-14. (more…)

FREEDOM OF CHOICE FOR HOUSE!

Courts hold that exemption u/s. 54 is available even for multiple houses, if they are adjacent, lateral or vertical!

The term ‘a residential house’ used in the Sections 54 & 54F of the Income-tax Act has of late drawn quite significant and interesting interpretations from Courts paving way for an investor to invest his taxable capital gains in even more than one residential house and claim exemption, if the residential units are adjacent or have a common point of entry or are located in the same building, though on different floors.

In its very recent decision in the case of CIT vs. Syed Ali Adil 33 taxmann.com 212, (2013) the Andhra Pradesh High Court has clarified that the expression ‘a residential house’ has to be understood in a sense that the building should be of residential nature and should not be understood to indicate a singular number. The Court thus held that even where a taxpayer had purchased two residential flats under separate purchase deeds out of the capital gains arising out of sale of his residential house, he was entitled to exemption under Section 54, more so, since the flats were situated side by side and the builder had carried out modifications in the same, so as to make it as one unit.

The Andhra Pradesh High Court disapproved the decision of the ITAT Special Bench (Mumbai) in the case of Sushila M. Jhaveri 107 ITD 327, holding that the view of the Tribunal to the effect that only one residential house should be given relief under Section 54 does not appear to be correct.

On this very issue, the Karnataka High Court in the case of CIT vs. Smt. K.G.Rukminiamma 196 Taxmann 87 has also held that the expression ‘a residential house’ used in Section 54 makes it clear that it was not the intention of the legislation to convey the meaning that it refers to a single residential house. If that was the intention, they would have used the word ‘one’. (more…)

REAPING GAINS FROM LOSSES!

Even in the gloom and doom of the capital market, you can make a boom by planning some tax saving strategies!

      As a logical corollary to Section 10(38) of the Income-tax Act exempting long term capital gains (LTCG) arising from transfer of securities upon implementation of STT, long term capital losses (LTCL) arising from such security transactions are required to be ignored.  Short term capital losses (STCL) are however, eligible for set-off against STCG and the net STCG amount is taxed at the flat rate of 15.45%.

SET OFF & CARRY FORWARD OF LOSSES

      Let us take a quick overview of the provisions relating to set off and carry forward of capital losses under the provisions of Sections 70, 71 and 74 of the Income-tax Act:

  • LTCL can be set off only against LTCG of the year and not against any other income.

  • STCL can be set off against STCG or even LTCG of the year, but not against any other income.

  • LTCL or STCL, which cannot be fully set off during the year, can be carried forward for set off against gain of any subsequent year in the aforesaid manner, for a maximum of upto 8 years.

      Taxpayers are aware of the fact that LTCL arising from any ‘off-market transaction’ is not eligible for exemption u/s. 10(38), since no STT is payable in respect of the same.  On the same analogy, if the LTCL arises to the taxpayer from any ‘off-market transaction’ (where no STT has been paid), such loss cannot be ignored and the same would be entitled to be set off against any other taxable LTCL of the year.

      Keeping in view the above provisions, let us consider some smart strategies that can be designed by a taxpayer for maximizing his tax savings: (more…)

HNI PROPERTIES UNDER I.T. SCAN

  • Income earners beyond Rs.25 lakhs required to declare their assets & liabilities in income-tax returns from 2013

    The Income-tax Department seems to have set its eyes on the properties of high net worth individuals (HNIs). And the start has been made by seeking information in regard to their assets and liabilities, which will be required to be declared in their Income-tax returns (ITRs) due to be filed by end July or September, 2013. 

This move comes in close sequel of the requirement to declare all foreign assets, which was made mandatory in the ITRs since last year 2012. This obligation has been cast on all individual and HUF taxpayers, either proprietors or partners, earning income from business and profession and declaring total income exceeding Rs.25 lakhs.

SALARIED & INVESTORS SPARED

Salaried and investment income earners (not earning any income from business or profession) are the lucky taxpayers, who have been spared from this exercise for now. However, it can be reasonably expected that they too may be covered in a year or two and the current Rs.25 lakhs income-limit for this mandatory declaration may also be brought down so as to rope in more number of taxpayers under the I.T. scanner. (more…)

PLANNING FOR RENTAL INCOME!

30% standard deduction & unlimited deduction for interest on loan are attractive tax incentives for earning rent!

    The income from house property for purposes of income tax is based on the ‘annual value’ of the property. The Annual Value (AV) of a let-out property is determined on the basis of the following:

  • The fair rental value of the property, not exceeding the standard rent determined or determinable under the relevant Rent Control Act.

  • Actual rent received or receivable, if such amount is higher than the fair rental value. 

  • Where the property has remained vacant for whole or part of the year and owing to such vacancy, the rent received or receivable is less than the fair rental value, such lesser amount.

From the Gross Annual Value as computed above, municipal taxes (including service taxes such as education cess, water taxes, etc.) levied by any local authority in respect of the house property are required to be deducted if these are borne by the owner. The amount left after deduction of municipal taxes is known as the Net Annual Value.

From the Net Annual Value as determined above, the relevant deductions as available under Section 24 (discussed hereinafter) are to be deducted. (more…)

TAX INCENTIVES FOR HOUSING

Liberal deductions for interest on housing loan & repayment of loan installments are provided under the Income-tax Act!

If a taxpayer has taken a housing loan either for purchase, construction, repair, renewal or reconstruction of his house property, interest on the borrowed capital is allowable as deduction. Whereas there is no limit as regards the amount of interest allowable for deduction in respect of a property which is let out on rent, in case of a self occupied house property, the amount of interest allowed as a deduction is Rs.30,000.

With a view to give a boost to the house building activity, it was provided that where a property is acquired or constructed with capital borrowed on or after 1st April, 1999, the limit for deduction of interest of Rs.30,000 shall stand enhanced to Rs.1,50,000.

Following important points need to be borne in mind in this connection:

  • As the deduction is available on ‘accrual basis’ it can be claimed annually, even if the interest is not actually paid during the year.

  • As per the CBDT’s Instruction No.28 dated 20th August, 1969, interest paid on a fresh loan, taken to repay the original housing loan, is also allowable as deduction.

  • As per the CBDT’s Instruction No.363 dated 24th June, 1983, it has been clarified that in the case of Central Government employees, interest on house building advance taken under the Housing Building Advance Rules would be deductible on the basis of accrual of interest which would start running from the date of withdrawal of advance, although the actual liability of payment of the same would be in the future years. 

  • Interest payable by a taxpayer in respect of funds borrowed for the acquisition or construction of a house property and pertaining to the period prior to the financial year in which the said property has been acquired or constructed, is also eligible for deduction in five equal annual installments, commencing from the financial year in which the house is acquired or constructed. (more…)

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