• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20
BW Businessworld

Mind Your Taxes: Reading The Fine Print

Photo Credit :

The budget as contained in Finance (2) Bill  2014 contains little more than what was debated, discussed and analysed on the TV channels.

The first most important amendment proposed in the Finance Bill which is going to have impact on each and every individual and Hindu Undivided Family. Luckily these amendments are three in one which are going to benefit the individual tax payers. First time in India in one Finance Bill under three accounts namely increase in the basic exemption limit from Rs. 2,00,000 to Rs. 2,50,000 and likewise for the senior citizens increase in the basic exemption limit from Rs. 2,50,000 to Rs. 3,00,000. 

However, the super senior citizens have no increase in their basic income-tax exemption limit which continues to be Rs 5,00,000 for them.  Now the second important point is increase in the deduction available to individuals and HUF in terms of section 80C of the Income-tax Act, 1961. It is well known fact that by now known to all that an individual can invest up to Rs. 1,00,000 under various schemes of investment or repayment of the housing loan or payment of the tuition fees etc. and a deduction is allowed up to Rs 1,00,000. 

Now the honourable finance minister has proposed to increase the deduction limit under section 80C from Rs 1,00,000 to Rs 1,50,000 which means that those who are going to invest extra amount will be able to enjoy additional tax benefit between Rs. 5,000 to Rs. 15,000. The additional benefit will depend upon the taxable income of the tax payer.  Likewise, the limit for investment in Public Provident Fund Account has also been increased from Rs. 1,00,000 to Rs. 1,50,000.  Hence, all those tax payers who desire to invest higher amount in PPF Account can do so. 

The third important point is with reference to deduction under section 24 of the Income-tax Act, 1961 wherein presently interest on residential house property for self occupation was allowed as a deduction up to Rs 1,50,000 but it has been enhanced to Rs 2,00,000. Thus, on the additional deduction available for self occupied residential house property the net impact of income-tax that can be seen will between Rs 5,000 to Rs 15,000 depending upon the income of the tax payer.  This deduction will be permissible on existing properties also. Thus, as a result of these three big amendments most of the individual tax payers will be able to save anything between Rs 15,000 to Rs. 35,000 depending on  their slab of income.       

Changes In Income-tax Slab, Surcharges, Cesses etc.     

The Finance (2) Bill 2014 has not got out any amendment with reference to cess. Hence, the slab continues as in the previous year. The two types of education cesses as also the surcharge also continues to remain the same as in the previous year, There is no change at all on this front.  

Investment In Capital Gain Bonds To Save On Capital Gains
The present limit of investment is Rs  50 lakh in one year. As many tax payers by proper planning are able to take double the advantage by making investment of Rs 50 lakh in these bonds in the month of March and again in April they invest further Rs. 50 lakhs.  But has there been some change in respect of this type of arrangement which was allowed in the past?
The existing provision contained in Section 54EC of the Income-tax Act provides that where the capital gains arises from the transfer of a long-term capital asset and the assessee has invested within a period of six months, the whole or part of the capital gain in capital gain bonds, then the tax payer will be able to save tax in respect of the capital gains arising to him. However, the law provides for investment in one financial year not to exceed Rs. 50 lakhs.  However, for those tax payers where such Capital Gains arose after September of a particular financial year, they were able to make Rs. 50 lakhs investment in the Capital Gain Bonds in the same financial year and again in the earlier start of the next financial year they were able to further invest Rs. 50 lakhs thereby the total of Rs. 1 crore could be invested by them in Capital Gain Bonds for tax saving.

However, the budget has provided that the investment made by an assessee in the long- term specified asset that is the Capital Gain Bonds etc. the maximum deduction which can be availed is Rs 50 lakh in one financial year in which the original asset or the assets are transferred and separate deduction cannot be claimed in the subsequent financial year. 

Investment In Real Estate
Latest statistics show that a large number of Indians have invested in real estate in London in last one year. As per the existing rules of the Income-tax a person can sell his capital assets and can make investment in buying another residential property and luckily as per the provisions contained in the Income-tax law, this property can be purchased anywhere in the world. There is no restriction with regard to purchase of the property only in India. 

As per section 54 or section 54F of the Income-tax Act, exemption is available to a tax payer when he sells his property and invests the money in buying another residential property.

The law is silent about the place or the area where this property can be purchased. Hence, taking advantage of this provision a large number of Indians were selling their property in India and through proper banking channels making the investment in real estate in London, USA and other countries of the world.  Now an amendment has been brought which says that the exemption either under Section 54 or Section 54F will be available only if the investment is made in one residential house situated in India. Hence, it is now very crystal clear that if you sell some property in India, you cannot buy another residential property outside India to save your taxes. 

What Is Business Trust Concept?
A new clause known as Clause 2(13)(8) has been inserted in the Income-tax Act, 1961 which provides for the first time definition of business trust. Business trust has been defined to mean a Trust registered as an Infrastructure Investment Trust or a real estate investment trust the units of which are required to be listed on a recognized Stock Exchange as per the regulations of Sebi. Another big advantage of the business trust popularly known as Reit is that as per the budget as per section 10(23FC) the income of a business trust by way of interest received or receivable from a special vehicle will be exempt from income-tax.

Till recently, persons receiving money by way of advance for selling their Real Estate and due to some reason the said amount was forfeited; they were not required to make payment of income-tax. But we understand that there is some change in this year's budget.  Can you please explain that in greater detail?    
Amendment has taken place in section 56 of the Income-tax Act 1961 whereby it is now provided that any sum of money received as advance during the course of negotiation for transfer of capital asset if such sum is forfeited and negotiations finally do not result in the transfer of capital asset, then the same will be treated as income from other sources. 

TDS On Life Insurance Policy
For the first time tax is required to be deducted at source on payments received from insurance company in respect of the maturity of the Life Insurance Policy.

A new section 194DA is proposed to be inserted in the Income-tax Act whereby TDS at the rate of 2 per cent is to be deducted at source in respect of the amount paid to a resident in terms of Life Insurance Policy including sums allocated by way of bonus etc. but happy news is that this 2 per cent TDS will not be in respect of each and every item of payment of the maturity proceeds of Life Insurance Policy but the same will be applicable only in respect of such insurance policy where the amount is not exempted in terms of section 10(10D) of the Income-tax Act, 1961. 
Clarification om Income-Tax Law On Cash Payment For Business Expenditure, Cash Loans
Generally the law is cash payment in excess of Rs 20,000 will not be allowed as a deduction for business expenditure purposes.  Similarly, if cash loan exceeds Rs 20,000, then there is a penalty on it. However, the government has clarified through the budget that transfer through electronic clearing system will be outside the ambit of such disallowance. This is good provision and this would in practical parlour means that RTGS and other transactions involving electronic clearing system through bank would be valid. 

Amendments To Section 44AE Provisions In I-T Act: For Or Against Consumers
As per the provisions contained in Section 44AE of the Income-tax Act, relating to presumptive taxation on income of goods carriage company, certain amendments were proposed in the Finance Bill.

As per Section 44AE of the Income-tax Act, a person going in for taxation with the presumptive system of income taxation on goods carriers is required to declare income of Rs 5,000 per month for each heavy goods vehicle and Rs. 4,500 per month or part of the month for other vehicles. Now the amendment is proposed whereby under the presumptive system of taxation the amount equal to Rs 7,500 or part of the month will be treated as income where the goods carriage vehicle is owned by the assessee. 

Proposed Amendment With Regard To Taxation Of Mutual Funds
It may be noted that equity-related mutual funds continue to enjoy the same tax benefit as in the past and a new amendment which has been proposed is only with reference to debt related mutual fund where it has been provided that the period of treating the long-term capital gain from debt related mutual fund will be three years and not one year.  Hence, only when you sell the debt-related mutual fund after holding it for three years, the capital gains will be treated as long-term capital gains. Moreover, the rate of income-tax on long-term capital gain of debt related mutual fund which was 10 per cent has been enhanced to 20 per cent. 

New Amendments to Investment Allowance
With reference to investment allowance, it was there last year but ould be availed only by those companies where the new assets purchased were Rs 100 crore.  Now due to the new amendment proposed in the Finance Bill through section 32 AC, the benefits of investment allowance will be available to such companies also where the new investment exceeds 25 crore.  I think this is very good which will help encouragement of development of industry.    

Corporates & Corporate Social Responsibility
While it is compulsory to incur expenditure for corporate social responsibility on selected companies as mentioned in the Companies Act, as per Section 37 of the Income-tax Act, 1961 the budget has specifically mentioned that the expenditure incurred by the corporate enterprise on corporate social responsibility shall not be deemed to be an expenditure by the assessee for the purpose of his business or profession.  I feel this is not a good step. 
What Does Amendment To Dividend Distribution Tax Mean
The Dividend Distribution Tax has not been abolished. Rather, there has been proposed amendments to Section 150 O and 150 R of the Income-tax Act whereby a new formula has been enunciated by the Government for computation and calculation of Dividend Distribution Tax. For example, for computing the the Dividend Distribution Tax, if the company let us say makes a payment of Rs 85 by way of dividend, the same at the rate of 15 per cent would come to Rs 12.75 but now the Government has clarified and amended the law to say that the calculation process for calculating the tax on dividend distribution will be on gross basis. 

The net impact of this is that even when dividend is paid on Rs. 85 it has to be increased further by Rs. 15 and the assessee is required to make payment of Dividend Distribution Tax at the rate of 15 per cent on Rs 100 that is Rs 15.   Thus, this would mean extra outflow from the account of the company for distribution of dividend.   .

Clarification On Commercial Derivatives
The Government has clarified that eligible transactions in respect of trading in commodity derivatives which was carried out in a recognized association and are chargeable to Commodities Transaction Tax shall not be considered as a speculative transaction. This clarification will help out those persons who are engaged in Commodity Derivative because their profit and loss will be treated as business income and not speculation income or loss.

The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R.N. Lakhotia & Associates & The Strategy Group