Tag: GST compliance

Income from capital gains represents a significant source of income for investors and individuals engaged in the sale or transfer of capital assets such as stocks, real estate, mutual funds, and other investments. Understanding the tax treatment of capital gains is essential for investors to optimize their investment decisions, comply with tax laws, and minimize tax liabilities.

Definition of Capital Gains:

Capital gains arise when a capital asset is transferred or sold, resulting in a profit or gain. Capital assets include various types of assets such as land, buildings, securities, jewelry, artwork, and any other property held for investment purposes. The difference between the sale consideration received and the cost of acquisition of the asset determines the capital gain or loss.

Classification of Capital Gains:

Capital gains are classified into two categories based on the holding period of the capital asset:

• Short-term capital gains (STCG):

Gains arising from the sale or transfer of capital assets held for a period of up to 36 months (24 months for certain assets such as immovable property and unlisted shares) are considered short-term capital gains.

• Long-term capital gains (LTCG):

Gains arising from the sale or transfer of capital assets held for more than 36 months (24 months for certain assets) are classified as long-term capital gains.

Taxation of Capital Gains:

The tax treatment of capital gains differs for short-term and long-term gains:

• Short-term capital gains are taxed at applicable slab rates applicable to the taxpayer’s total income. For individuals, Hindu Undivided Families (HUFs), and other non-corporate taxpayers, short-term capital gains are taxed at the respective slab rates applicable to their total income.
• Long-term capital gains are subject to tax at specified rates depending on the type of asset and the applicable indexation benefit. As of the current tax regime, long-term capital gains on listed equity shares and equity-oriented mutual funds are taxed at a flat rate of 10% without indexation, provided the gains exceed Rs. 1 lakh in a financial year. For other long-term capital assets, such as real estate and debt mutual funds, gains are taxed at 20% with indexation benefit.

Cost of Acquisition and Indexation:

The cost of acquisition of a capital asset is the amount paid to acquire the asset, including purchase price, expenses incurred in acquiring the asset (such as brokerage, stamp duty, and registration charges), and any improvement costs. In the case of inherited or gifted assets, the cost of acquisition is determined based on the previous owner’s acquisition cost or fair market value as on specific valuation dates. Indexation allows taxpayers to adjust the cost of acquisition and improvement cost for inflation using the Cost Inflation Index (CII) published by the Central Board of Direct Taxes (CBDT). Indexation helps in reducing the taxable capital gains by accounting for the impact of inflation on the asset’s value over time.

Exemptions and Deductions:

The Income Tax Act provides certain exemptions and deductions to reduce the tax burden on capital gains:

• Exemption under Section 54:

Individuals can claim exemption from long-term capital gains tax on the sale of a residential property if the proceeds are reinvested in purchasing or constructing another residential property within specified timelines.

• Exemption under Section 54F:

Similar to Section 54, this provision allows exemption from long-term capital gains tax on the sale of any capital asset (other than a residential property) if the proceeds are reinvested in purchasing or constructing a residential property.

• Deduction under Section 80C:

Taxpayers can avail deductions for investments made in specified instruments such as Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), National Savings Certificates (NSC), and other eligible investments, subject to the overall limit of Rs. 1.5 lakh per financial year.

Capital Gains from Equity Investments:

Special provisions apply to capital gains from the sale of listed equity shares and equity-oriented mutual funds:

• Long-term capital gains from listed equity shares and equity-oriented mutual funds held for more than one year are taxed at a concessional rate of 10% without indexation, provided the gains exceed Rs. 1 lakh in a financial year.
• Short-term capital gains from listed equity shares and equity-oriented mutual funds held for one year or less are taxed at the applicable slab rates.

Tax Planning Strategies:

Investors can implement various tax planning strategies to optimize their capital gains tax liability:

• Tax Loss Harvesting:

Selling investments with unrealized losses to offset gains and reduce tax liability.

• Timing of Sales:

Strategically timing the sale of assets to qualify for long-term capital gains tax rates or exemptions.

• Rebalancing Portfolio:

Adjusting investment allocations to optimize tax efficiency and diversification.

• Availing Exemptions and Deductions:

Leveraging available exemptions, deductions, and tax-saving investments to reduce taxable capital gains.

The term “house property” includes any building or land appurtenant thereto, owned by the taxpayer and used for residential or commercial purposes. It covers a wide range of properties, including residential houses, apartments, commercial buildings, shops, offices, warehouses, and vacant land. Income from house property may arise from rental income, self-occupied property, deemed let-out property, or capital gains from the sale of property.

When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.

1. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.

2. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes

3. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self-occupied one or a let out one based on its usage as discussed above.

Deductions Allowed:

From the annual value of the property, certain deductions are allowed under Section 24 of the Income Tax Act to arrive at the taxable income from house property. These deductions include:

• Standard deduction: A flat deduction of 30% of the annual value is allowed towards repairs, maintenance, and other expenses.
• Interest on housing loan: Deduction is allowed for interest paid on a loan taken for the purchase, construction, repair, or renovation of the property. The maximum deduction allowed is Rs. 2 lakh for self-occupied properties and the actual interest paid for let-out or deemed let-out properties.

Treatment of Losses:

If the net annual value of a property (after allowing deductions) results in a loss, such loss can be set off against income from other heads, such as salary, business income, or capital gains, in the same financial year. Any unadjusted loss can be carried forward for up to eight subsequent years and set off against income from house property in those years.

Taxation of Deemed Let-Out Property:

If a property is not let out or self-occupied but deemed to be let out, it is treated as let-out for taxation purposes. This provision applies when an individual owns more than one house property and chooses to occupy only one property for self-use. In such cases, the other property/properties are deemed to be let out, and income is calculated accordingly.

Taxation of Vacant Property:

Even if a property is vacant and not yielding any rental income, it is still considered to have an annual value for tax purposes. The owner is required to pay tax on the deemed rental income, which is calculated based on the fair market rent that the property would fetch if let out. However, deductions for interest on housing loan and standard deduction are still allowed.

Steps to Calculate Income from House Property

• Determine Gross Annual Value (GAV) of the property:

The gross annual value of a self-occupied house is zero. For a let out property, it is the rent collected for a house on rent.

• Reduce Property Tax:

Property tax, when paid, is allowed as a deduction from GAV of property.

• Determine Net Annual Value (NAV):

Net Annual Value = Gross Annual Value – Property Tax

• Reduce 30% of NAV towards standard deduction:

30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.

• Reduce home loan interest:

Deduction under Section 24 is also available for interest paid during the year on housing loan availed.

• Determine Income from house property:

The resulting value is your income from house property. This is taxed at the slab rate applicable to you.

• Loss from house property:

When you own a self occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.

Income from other sources represents a diverse category of earnings under the Indian Income Tax Act, 1961, encompassing various types of income not specifically covered under other heads such as salaries, house property, business or profession, or capital gains. This head of income includes a wide range of receipts, earnings, and gains, both monetary and non-monetary, that accrue to an individual during a financial year. Understanding the tax treatment of income from other sources is essential for taxpayers to accurately compute their taxable income and fulfill their tax obligations.

1. Definition and Scope:

Income from other sources includes any income that does not fall within the ambit of the other four heads of income—salaries, house property, business or profession, and capital gains. It covers various sources of income, such as interest income, dividend income, rental income from machinery, plant, furniture, or other assets, income from gifts, winnings from lotteries, races, or games of chance, royalties, annuities, and any other income not specifically categorized under other heads.

2. Interest Income:

Interest income earned from savings accounts, fixed deposits, recurring deposits, bonds, debentures, loans, or any other financial instruments is one of the most common types of income from other sources. Interest income is fully taxable and is added to the taxpayer’s total income for the financial year. However, certain exemptions and deductions may be available for specific types of interest income, such as interest from savings accounts or tax-saving bonds.

3. Dividend Income:

Dividend income received from domestic companies, mutual funds, or other investment instruments is also classified as income from other sources. Dividend income is generally exempt from tax in the hands of the recipient shareholder under Section 10(34) of the Income Tax Act. However, dividend income exceeding Rs. 10 lakh is subject to tax at a flat rate of 10% under Section 115BBDA for individual, Hindu Undivided Family (HUF), or firm.

4. Rental Income:

Income derived from renting out machinery, plant, furniture, or any other assets not constituting a house property is taxed as income from other sources. Rental income is taxable at the applicable slab rates, and deductions for expenses incurred in generating rental income may be allowed under Section 57 of the Income Tax Act.

5. Winnings from Lotteries, Races, or Games of Chance:

Income earned from winnings in lotteries, crossword puzzles, races, card games, or other games of chance is considered income from other sources and is subject to tax at a flat rate under Section 115BB. The tax rate varies depending on the nature of the winnings and ranges from 30% to 60% of the income.

6. Royalty Income:

Royalty income received by an individual for the use of intellectual property rights, such as patents, copyrights, trademarks, or industrial designs, is taxable as income from other sources. Royalty income is added to the taxpayer’s total income and taxed at the applicable slab rates.

7. Annuity Income:

Annuity income received from annuity plans, insurance policies, pension schemes, or other financial instruments is categorized as income from other sources. Annuity income is taxable at the applicable slab rates, and certain deductions may be available for specific types of annuities under Section 80CCC of the Income Tax Act.

8. Gift Income:

Gifts received by an individual exceeding Rs. 50,000 in a financial year are taxable as income from other sources under Section 56(2)(x) of the Income Tax Act. However, certain exemptions may be available for gifts received from specified relatives or under specific circumstances, such as gifts received on marriage, through wills, or by inheritance.

Profit and Gains of Business or Profession (PGBP) represent another important head of income under the Indian Income Tax Act, 1961. This head encompasses earnings derived from business activities, including trade, commerce, manufacturing, professions, vocation, or any other activity undertaken with a profit motive. Understanding the tax treatment of PGBP is essential for businesses, professionals, freelancers, and self-employed individuals.

In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of trade, commerce or manufacture. It covers every facet of an occupation carried on by a person with a view to earning profit.

• The word “business” is one of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit.
• Business arises out of commercial transactions between two or more persons. One cannot enter into a business transaction with oneself.

As per section 2(36), profession includes vocation. As profits and gains of a business, profession or vocation are chargeable to tax under the head “Profits and gains of business or profession”, distinction between “business”, “profession” and “vocation” does not have any material significance while computing taxable income. What does not amount to “profession” may amount to “business” and what does not amount to “business” may amount to “vocation”.

Business Incomes Taxable under the head of ‘Profit and Gains of Business or Profession’ (Section 28).

Under section 28, the following income is chargeable to tax under the head “Profits and gains of business or profession”:

• Profits and gains of any business or profession;
• Any compensation or other payments due to or received by any person specified in section 28(ii);
• Income derived by a trade, professional or similar association from specific services performed for its members;
• The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
• Any profit on transfer of the Duty Entitlement Pass Book Scheme;
• Any profit on the transfer of the duty free replenishment certificate;
• Export incentive available to exporters;
• Any interest, salary, bonus, commission or remuneration received by a partner from firm;
• Any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how, patent, copyright, trademark, etc.;
• fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;
• Any sum received under a Keyman insurance policy including bonus;
• any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD;
• Income from speculative transaction.

Business Income Not Taxable under the head ‘Profit and Gains of Business or Profession’

In the following cases, income from trading or business is not taxable under section 28, under the head “Profits and gains of business or profession”:

• Rental income in the case of Dealer in Property:

Rent of house property is taxable under section 22 under the head “Income from house property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent.

• Dividend on Shares in the case of a Dealer-in-Shares:

Dividends on shares are taxable under section 56(2)(i), under the head “Income from case of a dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade or the recipient of dividends is a dealer-in-shares. Dividend received from an Indian company is not chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions).

• Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable under the head “Income from other sources” etc. (even if derived as a regular business activity).

• Interest received on Compensation or Enhanced Compensation:

Such interest is always taxable in the year of receipt under the head “Income from other sources” (even if it pertains to a regular business activity). A deduction of 50 % is allowed and effectively only 50 % of such interest is taxable under the head “Income from other sources”.

Profits derived from the aforesaid business activities are not taxable under section 28, under the head “Profits and gains of business or profession”. Profits and gains of any other business are taxable under section 28, unless such profits are exempt under sections 10 to 13A.

Mode of Taxation on Certain Incomes (Section 145B)

Section 145B has been inserted by the Finance Act, 2018. It is applicable from the assessment year 2017-18 onwards. It provides mode of taxation of the following incomes:

1. Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received (however, it is taxable under section 56 under the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

Basic Principles for computing income Taxable under the head ‘Profit and Gains of Business or Profession’

1. Business or profession carried on by the assessee:

Business or profession should be carried on by the assessee.

2. Business or profession should be carried on during the previous year:

Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at any time during the previous year (not necessarily throughout the previous year). There are a few exceptions to this rule.

3. Income of previous year is taxable during the following assessment year:

Income of business or profession carried on by the assessee during the previous year is chargeable to tax in the next following assessment year. There are, however, certain exceptions to this rule.

4. Tax incidence arises in respect of all businesses or professions:

Profits and gains of different businesses or professions carried on by the assessee are not separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or professions carried on by the assessee. If, therefore, an assessee earns profit in one business and sustains loss in another business, income chargeable to tax is the net balance after setting off loss against income. However, profits and losses of a speculative business are kept separately.

5. Legal ownership vs. beneficial ownership:

Under section 28, it is not only the legal ownership but also the beneficial ownership that has to be considered. The courts can go into the question of beneficial ownership and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in receipt of the income which is going to be taxed.

6. Real profit vs. anticipated profit:

Anticipated or potential profits or losses, which may occur in future, are not considered for arriving at taxable income of a previous year. This rule is, however, subject to one exception: stock-in-trade may be valued on the basis of cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are the real profits and not notional profits. For instance, no person can make profit by trading with himself in another capacity.

8. Recovery of sum already allowed as deduction:

Any sum recovered by the assessee during the previous year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business income of the year in which it is recovered.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot override the substantial character of a transaction.

10. illegal business:

The income-tax law is not concerned with the legality or illegality of a business or profession. It can, therefore, be said that income of illegal business or profession is not exempt from tax.

Accounting Methods:

Taxpayers engaged in business or profession have the flexibility to adopt either the cash basis or the mercantile (accrual) basis of accounting for computing taxable income. Under the cash basis, income is recognized when received, and expenses are recognized when paid. Under the mercantile basis, income is recognized when earned, and expenses are recognized when incurred, irrespective of actual receipt or payment. Taxpayers are required to maintain proper books of accounts and records to support their accounting method.

Presumptive Taxation Scheme:

To simplify the tax compliance burden for small businesses and professionals, the Income Tax Act provides for a presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE. Under these provisions, eligible taxpayers can declare income at a prescribed rate (usually a percentage of turnover or gross receipts) without maintaining detailed books of accounts. This scheme offers administrative relief and ensures a minimum level of tax compliance for small taxpayers.

Depreciation Allowance:

Businesses are allowed to claim depreciation on assets used for business purposes, such as machinery, equipment, vehicles, buildings, and intangible assets. Depreciation represents the gradual wear and tear, obsolescence, or loss in value of assets over time. The Income Tax Act prescribes depreciation rates for different categories of assets, and taxpayers can claim deductions for depreciation expenses while computing taxable income under PGBP.

Set-off and Carry-forward of Losses:

If a business or profession incurs a loss in a financial year, such loss can be set off against income from any other head of income, including salary, house property, capital gains, or other business income, in the same year. Any unadjusted loss can be carried forward for up to eight subsequent years and set off against income from the same head. However, losses from speculative business are subject to specific set-off and carry-forward restrictions.

Clubbing of income under the Indian Income Tax Act is a crucial concept aimed at preventing tax evasion and ensuring fair taxation. It essentially refers to the inclusion of certain incomes in the hands of someone other than the actual recipient or earner of that income. This provision is primarily intended to curb tax avoidance strategies wherein individuals may attempt to transfer their income to family members or related entities with lower tax liabilities.

Introduction to Clubbing of Income:

Clubbing provisions are laid out in Sections 60 to 64 of the Indian Income Tax Act, 1961. These sections outline situations where income, though earned by one person, is deemed to be the income of another person and taxed accordingly. The underlying principle is to prevent the misuse of legal entities or relationships to evade taxes.

Applicability of Clubbing Provisions:

Clubbing applies primarily in cases where there’s an attempt to transfer income without transferring the underlying asset or where income is diverted to a spouse, minor child, or any other person or entity. The provisions cover various scenarios, including income from assets transferred to spouse, minor child’s income, income from assets transferred to a person for the benefit of the spouse or minor child, etc.

Specific Provisions of Clubbing:

• Transfer of Assets to Spouse:

If an individual transfers assets to their spouse without adequate consideration, any income derived from such assets will be deemed to be the income of the transferor.

• Minor Child’s Income:

Income arising to a minor child from assets transferred by a parent (either directly or indirectly) is clubbed with the income of the parent who has higher taxable income.

• Transfer of Income without Transfer of Asset:

If a person transfers income without transferring the underlying asset, the income is clubbed with the income of the transferor. This provision prevents the practice of assigning income without transferring the ownership of assets.

• Income from Assets Transferred to a Person for the Benefit of Spouse or Minor Child:

If an individual transfers assets to another person for the benefit of their spouse or minor child, any income arising from such assets is clubbed with the income of the transferor.

Exceptions to Clubbing Provisions:

• Minor Child’s Income:

There are exceptions when the minor child’s income is not clubbed with the parent’s income, such as when the child has earned the income through manual work or any activity involving application of skill, knowledge, or experience.

• Assets Acquired Through Previous Year’s Income:

Income arising from assets acquired by a spouse or minor child with their own income (not from income clubbed in previous years) is not clubbed with the income of the transferor.

Implications of Clubbing Provisions:

• Tax Liability:

The income clubbed under these provisions is taxed in the hands of the transferor at the applicable tax rates.

• Compliance Requirements:

Transferors need to disclose such clubbed income in their tax returns and pay taxes accordingly.

• Penalties:

Non-compliance with clubbing provisions may attract penalties and legal consequences, including tax evasion charges.

Case Studies and Examples:

• Property Transfer:

If an individual transfers property to their spouse without adequate consideration, any rental income generated from that property will be taxed in the hands of the transferor.

• Investment in Minor Child’s Name:

If a parent invests in financial instruments in the name of their minor child, any income generated from those investments will be clubbed with the parent’s income for taxation purposes.