Simplifying Tax for C.A's and Taxpayers

Category Archives: Income Tax

Income Tax Audit under Section 44AB

Income Tax Audit under Section 44AB

There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. The Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law. Read More

Notification No. 47/2016 Income Tax dated 17.06.2016

Notification No. 47/2016 Income Tax dated 17.06.2016

No tax to be deducted at source on bank guarantee commission, underwriting services charges, CMS service charges, etc, paid to bank, clearing corporation of India, national payment corporation of India, American express Banking Corp., USA, Western Union Financial services Incorporated, USA, Itz cash card ltd., Paymate India Private Limited, Sodexo SVC India Pvt ltd., Tech Mahindra Limited, Muthoot finance Limited, Vakrangee Limited, Weizmann Impex Service Enterprises Limited, etc. Read More

Incomes that we unwittingly ignore

Incomes that we unwittingly ignore

July 31 is not far away. It is the time to gather all your income details and proofs for the purpose of filing of income tax return for the Assessment year 2016-17.  Wait! Think twice before you submit your return. Have you included all your incomes?

Yes, there are many incomes which a tax payer ignores while filing the return mainly due to ignorance or otherwise. And the result is, notices from tax department, is stashing of black money etc. Have a look:

1. Notional Income from second house property is taxable

The first house property that one buys is exempt from income tax. However, the second property onwards, even if it’s kept under lock and key, a notional rent value based on the market rental value will be adopted as taxable income from the second property.

To put it differently, even if a taxpayer earns no income whatsoever from the second property, it will be taxable as if he has put it out on rent. House property does not include plot of land.

To give some relaxation, there are certain deductions allowed from this notional rental income namely Municipal Taxes Paid, standard deduction of 30% and interest on the housing loan.

2. All Dividend income is not exempt

The common understanding is that all dividends are exempt from tax. Please note that:

  • Only the dividends received from an Indian Company which has suffered dividend distribution tax in the hands of company, is exempt from tax under Sec 10(34). Dividends from foreign company are not exempt.
  • Dividends received in the hands of unit holder for a mutual fund, whether equity or debt, is tax free.

Secondly, being exempt does not mean it is not an income. Many people do not show dividends in the return assuming that it won’t matter since they are exempt. Remember, the correct way is to include them under “Income from other sources” and then claiming exemption under Sec 10(34).

3. PPF income is exempt but to be disclosed as income and then claimed exempt

PPF income is exempt under Section 10(11). To reiterate, please include it under interest income in the return and then claiming exemption under the aforesaid section.

4. Long term capital gains on sale of equity shares or units of equity oriented mutual funds exempt but to be disclosed as income and then claimed exempt

Long term capital gain on sale of equity shares or units of equity oriented mutual fund is exempt under Sec 10(38) subject to fulfillment of certain conditions. To reiterate, please include it under capital gain in the return and then claim exemption under the aforesaid section.

5. Interest on fixed deposit and recurring deposit taxed on accrual basis and not on maturity.

Usually the interest on fixed deposit and recurring deposit are received on maturity and the taxpayers accordingly include the interest in the return of year of receipt. This is not correct. The interest is to be considered on accrual basis i.e. even if the deposit is not matured at the year end, interest credited to the account shall be added to the total income and should be shown in the ITR but many taxpayers tend to forget it.

6. Interest on tax saving fixed deposit is not tax free

This is a major misconception that tax payers have. Tax saving Deposit is eligible for deduction under Section 80C but the interest earned on it is 100% taxable.

7. Don’t ignore saving bank account interest

Many taxpayers ignore the saving bank interest in their returns. Perhaps the main reason is that many tax return preparers do not call for the information on this interest. Remember, sum up interest on all saving bank accounts and include this interest in return and claim relaxation under Section 80TTA up to Rs 10000.

8. Certain gifts are taxable.

Tax Laws does not barred you from receiving gifts but put a limit of which you can receive gift without paying any tax.  Gifts received from friends or other persons, other than blood relatives, for more than Rs 50000, whether in cash or otherwise, are taxable. However there are some specified cases where such gifts will not be taxable e.g. gifts received on marriage.

Further, any gifts given to the spouse, minor child and daughter-in-law for inadequate consideration shall be construed as income in the hands of the individual making the gift.

9. Interest on tax refund is taxable

We get happy when we receive tax refund from income tax department for return filed. But the department pays the amount of refund together with interest. Remember, this interest is taxable and to be included in ITR.

10. Investments made out of Pin money to homemaker is taxable

Usually we see that that the husbands give a certain amount to wife for household expenses every month. Many of them manage to save money to buy gold, invest in shares and make investments like RD or FD etc. Clubbing provision of Income Tax Act does not apply on the income from the investment made out the pin money.

But since might be incomes from such investments, which are to be shown in the return of homemaker. But only few of them file ITR, which results into creation of black money.

11. Minor child income is taxable in the hands of the parents.

Income from investments made in the name of child, like fixed deposit, NSC, PPF, shares etc. evokes the clubbing provision and the gift needs to be included in the income of the parent whose total income is higher before including the income of the minor. However, if the child earns income from his/her own skills or experience than the clubbing provision remains silent and he/she is required to file ITR in his/her own name.

12. Loan Principal repayments claimed as deduction under Sec 80C are taxable on sale of residential property before 5 years

If an individual sells this house before the expiry of five year from the end of year in which he gets possession or receives the loan, then the amount of deductions under section 80C in prior years, allowed as repayment of home loan principal is to be added back his taxable income in the year of transfer or receipt.

However, this rollback is not applicable on deduction claimed under Section 24 (b) on interest payable on such loan.

Hope you find the article useful.