Tag Archives: Tax

What is Section 80C Deduction In Income Tax

Whenever we think of income tax, the first thing that immediately comes into our mind is how to save it !! One of the best options for Saving Income Taxes comes under Section 80C.

What Is Section 80C?
It is an investment option to save the tax. Government has specially promoted it for long term savings.

Limit:
The maximum limit of Rs 1 lac can be deducted from your income under Section 80C. However, there is a provision for additional Rs 20,000, solely reserved for Infrastructure Bonds. In this way if you are in highest tax bracket of 30% and you have invested upto Rs 1 lac under section 80C then you are saving Rs 30,000. For example if your salary is Rs 16 lacs per annum but you are investing Rs 1 lac in 80C then your taxable income will be Rs 15 lacs only. Even if you invest more than 1 lac in 80C, you can show only 1 lac as investment in 80C .

Investment:
Following investment options are eligible for Section 80C deduction.

Market Linked:

Fixed Income:

  • Provident Fund (PF) & Voluntary Provident Fund (VPF)
  • National Savings Certificate (NSC)
  • Infrastructure Bonds
  • Public Provident Fund (PPF)
  • 5-Yr bank fixed deposits (FDs)
  • Pension Funds – Section 80CCC
  • Senior Citizen Savings Scheme 2004 (SCSS)
  • 5-Yr post office time deposit (POTD) scheme
  • NABARD rural bonds

Others:

  • Life Insurance Premiums
  • Home Loan Principal Repayment
  • Stamp Duty and Registration Charges for a home
  • Children’s tuition fees.

Sample Calculation:

Example 1
If your Taxable Income is Rs.700000 and your yearly home loans principal repayment is Rs.40000 and you don’t have any other investments, then your Taxable Income for that financial year is Rs.700000 – Rs.40000 = Rs.660000.

Example 2
If your Taxable Income is Rs.700000 and your yearly home loans principal repayment is Rs.100000, then your Taxable Income is Rs.700000 – Rs.100000 = Rs.600000.

Example 3
If your Taxable Income is Rs.500000 and your yearly home loans principal repayment is Rs.140000, then your Taxable Income is Rs.500000 – Rs.100000 = Rs.400000. Because you can exempt maximum of one lac under this section.

So the overall conclusion is the main purpose of 80C is to encourage everybody for long term investment.But there are number of investment options under 80C so we should select the investment options very carefully. Like for younger age person, we should invest more in Market Linked Investment Avenues because by taking risk we can earn much money. On the other hand, for old aged person we should invest more in Fixed Income Investment where there is little risk.

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How To e-file Income Tax Return-Online Income Tax Filing-Advantages And Disadvantages Of e-filing Of Income Tax Return

Sahaj & Sugam – New IT Return Forms. Can download from the website www.incometaxindiaefiling.gov.in and print as per colour specifications. Due date – 31st July 2011.

I am sure, most of you must have got this group-message via email, which was sent by Indian Government to all tax-payers, whose had their mobile numbers updated with Income Tax Offices. Now we all are making our loan-payments online, paying the electricity bills online, so why should filing Income Tax Returns be an exception? Yes, You heard it right, you can e-file your income tax return !! No need to seek an appointment with a CA(Chartered Accountant) or standing in a long queue outside Income Tax Offices, you can do it sitting right inside your home. This article lists out the complete process on how to go about filing your income tax returns online.

E-FILING PROCESS:

  1. First of all, You have to select an appropriate type of Income Tax Return FormIt varies from individual to individual depending on whether you are a Salaried Individual or Business-Owner or a Partner in a Partnership Firm etc.
  2. Once you have selected the right type of Income Tax Return Form, please download the corresponding Income Tax Return Preparation Software. Please fill the Income Tax Return Form with all relevant details regarding your Income/Taxes/Losses etc offline. Once you are done, please validate your entries by clicking on “Check Form” button, provided at the end.
  3. Once you are sure about your Income Tax Return Form, that you filled offline, proceed to generate an XML File out of it by clicking on “Export to XML” button, provided at the end.
  4. If you are e-Filing your Income Tax Returns for the first time, you will have register as a user on https://incometaxindiaefiling.gov.in. Once you are registered by creating a user id and password, please log into the portal using your credentials. Please browse to select the XML files (generated out of your offline Income Tax Return Form) and upload it on the same site. Now you have to attach the digital signature for yourself. Once you do that, your return gets filed !!In case, you don’t have a Digital Signature of yours, you need to generate a PDF file for your Income Tax Return Form and send it via courier to to Income Tax Department – CPC, Post Bag No – 1, Electronic City Post Office, Bengaluru – 560100, Karnataka(You can check out the details of IT offices, where you need to submit your Income Tax Return Forms on the same website). The post can be sent by ORDINARY POST OR SPEED POST only and that too within 120 days of transmitting the data electronically.

So this way, your e-filing process gets completed. As you can see, this is very easy to use and time saving at the same time. In case, you get into any problems, you can always contact the PRO(Public Relation Officer) of the Local Income Tax Office.

Advantages And Disadvantages Of e-filing Of Income Tax Return: As you know, earlier tax-filing used to be a very tedious process. You have to stand in long queue but now it is faster and efficient process because of e-filing. In e-filing chances of getting error is also lesser than physically filed.There is no postage charge also,so it is money  saving also.

Thus it is faster,efficient and money saving process but it has also a black hole that is security concern. There may be chances of hacking of computer system and unauthorized access to taxpayer’s files. But, I am sure those concerns have been raised elsewhere too. We are hoping that huge usage of computer and internet will make e-Filing of Income Tax Returns grow as mushroom.

Last Date of e-filing your Income Tax Return Form has been fixed as 31st July 2011

Capital Gain Taxation Short Term Capital Gain(STCG) Long Term Capital Gain (LTCG) And DTC (Direct Tax Code)

In one of our earlier blog-posts, we had discussed Capital Gain and Underlying Tax Benefits at length. Now that DTC (Direct Tax Code) is going to be implemented, probably from Financial Year 2011-2012 onwards, some rules regarding Capital Gain are set to be revised.

In the present Income Tax Regime, Capital Assets are classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains(LTCG) on the basis of time period, it is held. The Assert-Holding Time-Period is taken as a simple difference between Selling Date and Buying Date. But in DTC (Direct Tax Code), this Assert-Holding Time-Period is going to be calculated differently. DTC(Direct Tax Code) proposes this Holding Period to be calculated from the End of Financial Year in which asset was acquired. For example, if the Purchase Date is 20th July 09 and Selling Date is 21st July 10, under the Current Taxation Regime, Holding Period is 1 year 1 day, but once DTC (Direct Tax Code) is in place, Holding Period will become only 3 months 20 days.  You could see the difference. What qualified as a Long Term Capital Gain (LTCG) before will now be counted as a Short Term Capital Gain (STCG) !!

This modification to this act may also throw absurd results for two assets with merely one day difference. Say for example, Ram acquired an asset on 28th March 2009 and sold it on 1st April 2010, while Shyam acquired an asset on 1st April 2009 and is also selling it on same date i.e, 1st April 2010. In present Income Tax Act, both Ram as well as Shyam will get an indexed benefit and their gains will be counted as a Long Term Capital Gain(LTCG) for listed shares asset, simply because it is held for more than 1 year. Let’s see what happens, once DTC (Direct Tax Code) is in place. Ram will continue getting indexed benefit and his capital gain will be counted as a Long Term Capital Gain(LTCG) where date of acquiring is counted from 31st March 2009 to 1st April 2010 and clearly it has completed one financial year. But Shyam won’t get indexed benefit and for him gain will be a Short Term Capital Gain (STCG) because the Asset Holding-Period is only one day (01 Apr 2010 – 31st Mar 2010). So he has to wait till 1st April 2011 to complete 1 financial year, so that his gain will be counted as a Long Term Capital Gain (LTCG). As you can see, only couple of days could be the difference between Short Term and Long Term Capital Gains, resulting into you not getting the benefits of Long Term Capital Gains (LTCG).

In present Income Tax Regime, for the unlisted shares, which are acquired before 1981, the cost of acquisition is calculated from 1 April 1981 whereas in DTC (Direct Tax Code) it is shifted to 1 April 2000 and indexation will also be allowed from the same.

Presently, all assets other than listed equity shares and units of equity oriented funds are eligible for the benefits of indexation. Presently, long term capital gains for such assets is calculated after deducting the indexed cost from the net sale price and you have to pay tax at the rate of 20% of indexed capital gain. But in DTC (Direct Tax Code) the capital gains after indexation are proposed to be included in your total income and taxed according to Income Tax Slab, your Current Income falls into.

There are some very interesting resources on Web discussing the impact of DTC (Direct Tax Code) on Capital Gain and Tax Structure, lying underneath. So if you could not get what you were looking for, you can always go for more details at following places

http://www.moneycontrol.com/news/business/dtc-20-how-will-new-capital-gains-tax-impact-investors_464384.html
http://www.dnaindia.com/money/comment_defer-capital-gains-dos-till-dtc-becomes-law_1402568
http://taxguru.in/direct-tax-code/capital-gain-taxation-under-dtc-regime.html
http://www.thehindubusinessline.com/mentor/2010/04/19/stories/2010041950361100.htm

Having said all that, we would still recommend you not to take any step/actions right now (Be smart, but not over smart :-)). DTC(Direct Tax Code) is yet to be finalized and some of its provisions are still being reviewed by parliamentary committees. So its very much possible that it may undergo some changes, before DTC (Direct Tax Code) finally gets enacted as law. Let’s keep our fingers crossed 🙂

Joint Home Loans and Tax Benefits

If you have a dream of purchasing a home, but are worried about the Home Loan Amount, bank is going to sanction against your current income, relax… take a deep breathe and calm down. Usually, Banks do not allow a person to borrow to an extent where their monthly EMI(Equated Monthly Installments) payment exceeds more than 40-50% of their monthly income. If you are in a similar situation and your current income is not high enough to ensure the Required Home Loan Amount, there is a smart option that you can exercise. You can (and in fact should) go for a Joint Home Loan with your parents or spouse as co-borrower(s) of the property. With co-borrowers/co-applicants around, for Loan-Amount-Calculations,  Bank will take into account the income of all the applicants involved. Some banks even allow siblings as co-borrowers, so you may have to check with your bank, if you can have your brother as co-borrower.

But before you jump to a decision of taking Join Home Loan, it is certainly advisable to be aware of the Pros and Cons of taking a Joint Home Loan.

Pros:

  • If you need a higher loan amount but your salary is not enough to get required loan amount, Joint Home Loans is the way for you.
  • All co-applicants are eligible for getting tax rebates under Section 80 C for principal repayment(Subjected to a Maximum Amount of Rs 1 Lakh) and under Section 24 for Interest Repayment(Subjected to a Maximum Amount of Rs 1.5 Lakhs). So if a couple is taking a Joint Home Loan, in theory  they could collectively claim Tax Exemptions under Section 80 C for Principal Payment of Rs 2 Lakhs and under Section 24 for Interest Payment of Rs 3 lakhs. Though the Actual Tax Exemption depends solely on the Monthly EMI being paid.
  • Both the owners would have to show the Rental Income in Proportion of their ownership. So if your brother has a 40% stake in the house and you have 60%, for tax purposes, 40% of rental income from the house will be added to your brothers’ annual income for that financial year, while you will be responsible for rest 60% amount.

Cons:

  • In case of any dispute arising between the borrowers/owners, it could create problems, so you want to play safe, especially with your wife 😉 you should not go for it.

Apart from these, there are some important points which you need to keep in mind, before taking Joint Home Loans:

  • You should be a co-owner to enjoy tax benefits of a Joint Home Loan
  • A maximum of 6 co-applicants are allowed to be part of a Joint Home Loan.
  • You should be a co-applicant of the home loan to get tax benefits out of it.
  • Tax Benefit to individual borrowers  is available in proportion of the EMI paid by them. Say for example, you are paying 70% of the EMI and your wife is paying rest 30% , you will be able to claim tax-exemption only on your 70% payment. Similarly, your wife can also enjoy tax-benefits on her 30% payment.

So enjoy your dream house with your spouse as a Joint-Owner as well as Joint-Borrower 🙂

Capital Gain Tax Definition Tax Rate Real Estate Short Term Capital Gain(STCG) Long Term Capital Gain (LTCG) Tax Benefits

Have not we heard this term Capital Gain before ?? May be, may be not, so what exactly is Capital Gain ?? Capital  Gain is Gains/Profits that result from the Transfer of Capital Assets such as Real Estate, Stocks, Bonds etc. It is computed as the Difference between Selling Price and Purchase Price. So it might be negative also, if Selling Price happens to be lesser than Purchase Price for an asset. In that case, it is called as Capital Loss.

So when we talk about Capital Gain,essentially there are three terms, which come into picture : Gains/Profits, Transfer and Capital Assets. We will discuss all of these terms one by one.

Gain/Profits :
On the basis of time period, for which the asset is held before it’s transfered, Gain is divided into two types. First one is Short Term Capital Gain (STCG) and second  is Long Term Capital Gain (LTCG). For a capital asset gain to qualify as Short Term Capital Gain (SCTG), the duration-criteria is 1 year for Shares/Stocks, and 3 years for all other assets, like Real Estate.

Most of us may think that Gain is just the difference between Selling Price and Purchasing Price, but it’s not 100% correct. A house which was bought for, say Rs 10 Lakh, 5 years ago can very well be sold off with a Rs 20 Lakh pricetag, so does that mean Capital Gain will be computed as 20 – 10 = 10 Lakh, which is what, 50% of the final selling price ?? No, it won’t. It will be grossly unfair, if it does that. So a Cost Inflationary Index is multiplied into sum of Cost of Improvement and Purchasing Price to arrive at your Real Purchase Cost and then its compared against selling price to arrive at capital gain.

So the simple formula for Capital Gain Calculation can be given as follows

Capital Gain = Selling Price – (Purchase Price + Cost Of Improvement) * Indexation Factor, where Cost Of Improvement is your cost incurred towards maintaining the asset and Indexation Factor is the ratio of Cost Inflationary Index(CII) of selling year to that of purchasing year.

Transfer:
So one natural question arises as to what exactly can be called as an Asset Transfer ?? If a husband hands over his long-cherished diamond-collection, inherited from ancestors, to his wife, will that be counted as an Asset Transfer. An Asset Transfer includes Sale/Extinguishment of Rights, Conversion of an Asset into trade stock, Transfer of rights in properties by societies and companies, Transfer of assets by a person(partner) to a firm, or by a body of individuals or association of persons.

Capital Assets:
It includes all kinds of properties except trade stock, raw materials used for business purpose, Personal Items such as furniture, clothes and motor vehicles but not jewellery, Agricultural Land (unless it is situated within the limits of or within 8 kilometers of a municipality).

Capital Gain Tax:
I know it can get damn confusing and sound like too many jargons for a layman to understand. So let’s take a simple example to understand how Capital Gain Tax is calculated.

Let’s assume David purchase a piece of land on 12-1-1982 for Rs. 1,20,000. The land was sold by him on 2-9-2009 for Rs. 8,00,00. Total Expenses on Asset-Transfer was about 2% of the sale price. Now let’s go about computing the Capital Gain for  Financial Year 2010-11.

To calculate the capital gain first expense on transfer is calculated which may include  brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc. It is deducted from selling price to arrive at Final Selling Figure. Then, Indexed Cost of Acquisition is calculated which is  nothing but the Multiplication of purchasing price and ratio of cost inflation index for selling year to that for purchasing year. This amount is counted as Real Purchase Cost and is subtracted from Final Selling Figure to arrive at the capital gain.

Selling Price 8,00,000/-
Expenses on transfer -16,000/-
Final Selling Figure 7,84,000/-
Less: Indexed cost of acquisition – Rs. 1,20,000*632/100; Note: 632 is CII (Cost Inflation Index) for year 2009-10 and 100 is for 1981-82 -7,58,400/-
Long-term Capital Gain 25600/-

There are some very interesting resources on Web discussing every minute details of Capital Gains and the underlying Taxation Structures. So if you could not get what you were looking for, you can always go for more details at following places

http://indianblogger.com/income-tax-on-capital-gains/
http://www.etaxindia.org/2010/05/capital-gains-tax-computation-long-term-short-term.html
http://www.raagvamdatt.com/Long-Term-and-Short-Term-Capital-Gain-Income-Tax-Calculation/148/
http://business.mapsofindia.com/india-tax/capital-gain.html

Government Issues Clarification On DTC (Direct Tax Code) Clause For NRIs (Non Resident Indians)

If you are an NRI (Non Resident Indian) fretting over the New Taxation Clauses, due to be introduced as part of DTC (Direct Tax Code), adversely affecting your tax-liabilities, we have some good news in store for you. In one of our earlier blog-posts, we had mentioned a New Clause in DTC (Direct Tax Code), which when implemented will ensure NRIs (Non Resident Indians) who frequent their native country i.e, India, will have to pay More Taxes on their Global Income.

As per the existing laws, an NRI(Non Resident Indians) is liable to pay taxes on his or her global income, if he or she stays in India for a period of more than 182 days in a financial year. But DTC (Direct Tax Code) proposes to shorten this duration to just 60 days.

Indian Government has just issued a clarification on DTC (Direct Tax Code) clauses specific to NRIs. On Saturday, Finance Minister Pranab Mukherjee allayed apprehensions among Non Resident Indians (NRIs) that the proposed Direct Taxes Code (DTC), when implemented, would badly affect them in terms of their tax liability owing to a clause in the Bill defining their residential status. Moreover, no final decision has been taken as yet on the clauses incorporated in the DTC (Direct Tax Code), as the Bill is still under scrutiny by a Standing Committee Of Parliament.

He clarified that it was a “misconception” that if an NRI stays in India for 60 days in a financial year, his status turns into Indian residents for taxation purposes. As per the DTC proposal, an NRI will be deemed as resident only if he has also resided in India for 365 days or more in the preceding four financial years, together with 60 days in any of these fiscal years. “Only when the two criteria are met, an individual will be considered resident for taxation purposes,” he said.

In a further clarification, Mr. Mukherjee pointed out that even if an NRI becomes a resident in any financial year, his global income does not immediately become liable to tax in India. Global income would become taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.

Hope this convinces the NRIs (Non Resident Indians) Brigade not to abandon their plans to frequent their Home Country i.e, Hamara Bharat Mahan 🙂

Good Things Bad Things Ugly Things Pros And Cons Summary Highlights About DTC(Direct Tax Code)

Starting with Financial Year 2011-2012, Indian Government is planning to abolish the existing Income-Tax Act 1961 and replace it with DTC (Direct Tax Code) . There are going to be wholesale changes in the way, taxes are being calculated and paid by organizations and individuals, including the existing Income Tax Slabs. In an Earlier Blog Post, we have already discussed these proposals for New Income-Tax-Slabs being introduced by DTC (DTC Tax Code). Let us turn to some of other highlights, especially the good things, bad things and ugly things and Pros and Cons of DTC (Direct Tax Code)

Good Things (Pros)

  1. Earlier, as per Income Tax Act 1961, most of the investments came under EEE(Exempt-Exempt-Exempt) Category. What that meant was the tax exemption is enjoyed at all the Three Stages – Investment, Accumulation and Withdrawal. All this is going to change, once DTC regime comes in place. As per DTC proposals, most of these investments (except few mentioned in the second paragraph) will now be considered under EET(Exempt-Exempt-Tax) Category. What is means is you will have to pay taxes on any money being withdrawn from these funds.
    Earlier it was supposed to cover most of the investment avenues like Life Insurance, Mutual Funds, Equity Linked Saving Schemes etc. But Thank God, our parliament members showed some sympathy and revised the rules on 15th June, 2010 to exclude some investments from EET category. Now Provident Funds (GPF, EPF and PPF), NPS (New Pension Scheme administered by PFRDA), Retirement Benefits (Gratuity, Leave Encashment etc), Pure Life Insurance  Products & Annuity Schemes will all continue to follow the EEE Regime.
  2. On top of existing Rs 1 lakh tax benefit, an extra Rs 50,000 has been added for Pure Life Insurance (Sum insured is atleast 20 times the premium paid), health insurance, mediclaims policies and tuition fees of children.
  3. Maximum limit for medical reimbursements has been increased to Rs 50,000 per year from current Rs 15,000 limit.
  4. Tax Exemption for interest-payment on housing loan for self-occupied property will remain the same i.e,  Rs 1.5 lakhs per year.
  5. For income/losses from housing property, deductions for Maintenance and Property Tax would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from tax.
  6. Tax exemption on Education Loan Payments to continue.
  7. Surcharge and Education cess are abolished.
  8. Corporate tax to be reduced from present 34% to 30 % including education cess and surcharge

Bad Things (Cons)

  1. No tax benefit on Principal Repayment on House Loan and Stamp Duty and Registration Charges on purchase of house property either.
  2. No tax benefit for LTA (Leave Travel Allowance)
  3. No tax benefits for investments made as part of Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term Deposits, NSC (National Savings Certificates), Long Term Infrastructures Bonds.
  4. All dividends will attract 5% tax.
  5. As per the existing laws, an NRI(Non Resident Indians) is liable to pay taxes on his or her global income, if he or she stays in India for a period more than 182 days in a financial year. But DTC is going to shorten this duration to just 60 days.

We can only hope that all the good things are implemented as part of DTC and bad ones, if not dropped altogether, will at least be made reasonable. So let’s keep our fingers crossed and wait for its final implementation 🙂