Thursday, 28 January 2010

Availing section 54 benefit on sell of residential house

Question - I made long term captial gains of Rupees 30 Lakhs by selling my mumabi flat on Feb 1, 2008. I did not deposit the money in the Captial Gains Account in the Bank. But I re-invested all the gains in an under-construction residential project on June 1, 2008 (before filing my returns for the year). I claimed the exemption of long term captial gains in my tax returns(AY 2008-2009) by showing this re-investment in under-construction project. However, now after 18 months of booking my flat, I intent to cancel this booking in the under-construction project and re-invest it entirely in a ready to occupy home (before 2 years of selling my mumbai flat). Is my claim of tax exemption(AY 2008-2009) still valid if I do that? If yes, do I need to inform the IT about the change in status of the re-invested home.

Answer - Dear friend, B4 I comment on ur query, here is the Section 54, which u want to use for ur Tax benefit.

Quote -
Section 54


(1) Subject to the provisions of sub-section (2), where in the case of an assessee being an individual or a Hindu undivided family, the
capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head 'Income from house property' (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, aresidential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, - (i) If the amount of thecapital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of thecapital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset anycapital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil...........

Unquote -
Now from the facts of ur case, U fulfilled the condition of investing ur money in an under const. house b4 filing of ur return. The same was accepted by the Income Tax department.
Once opted for under construction house, To claim Tax benefit on LTCG, the completion of this house is mandatory within 3Y i.e. on or b4 31st of January 2011.

Here I`m agree with dear subasu that carry over of money from under construction house to ready built house `ll nullify ur earlier claim of Tax benefit on LTCG & u w`d have to pay Tax in this FY (2009-2010).



Monday, 25 January 2010

Tax Calculation under New Direct Tax Code

Dear Friends, A lot of U r already worried for the Tax implication of proposed New DTC. Recently I had a chat session with one of my online friend. The chat session is reproduced below for benefit of all of U. The name of the friend is changed to protect his identity.

10:34 Rahul: hi


me: hi gm to u too

10:36 so waht's up?

10:38 Rahul: fine how r u

me: i'm fine too

10:41 so any new query

Rahul: no exemption for ULIPs under new dtc?

10:43 me: ha ha ha

Rahul: y

me: i think u r giving a lot of importance to DTC

but my dear friend

10:44 it's merely a proposal

Rahul: no jst going thorugh dtc

me: & final drafting may be different from what we r seeing as of now

Rahul: u r right but i m jst going thr it

10:45 me: regarding


10:46 if u r following my posts regualrly

u have noticed that I'm not a great supporter of ULIPs

Rahul: ys i know that

me: so no matter what direction DTC takes on ULIPs

I'm not interested

10:48 Rahul: ok

10:58 me: Dear Rahul After discussing DTC on taxation on life insurance policies claim i recheked

Rahul: ys

me: & to my utter surprize my earlier stand is correct

Rahul: means

10:59 me: Computation of income from residuary sources
55. The income computed under the head "Income from residuary sources" shall be the
gross residuary income as reduced by the amounts referred to in section 57.

u were talking about this one right

Rahul: income from other sources

11:00 me: that's called as income from residuary sources

in DTC

11:01 Rahul: ys

me: now read the section 57

which deals with the deduction available for residuary income

11:02 Rahul: its in typical finance language

me: Deductions
57. (1) The amount of deductions referred to in section 55 shall be the aggregate of -
(a) the amount of expenditure specified in sub-section (2), if -
(i) the expenditure is laid out or expanded, wholly and exclusively, for the
purposes of making or earning the gross residuary income; and
(ii) it fulfills all other conditions, if any, specified therein; and
(b) the amount of deductions specified in sub-section (3) subject to the fulfilment
of the conditions, if any, specified therein;

Rahul: cant get it

me: let me complete

(3) The amount of deduction referred to in clause (b) of sub-section (1) shall be the
following -
(a) any sum received under a life insurance policy, including the sum allocated
by way of bonus on such policy, if -
(i) the premium payable for any of the years during the term of the policy
does not exceed five per cent of the actual capital sum assured; and
(ii) the sum is received only upon completion of the original period of contract
of the insurance or upon the death of the insured;

now sum up this way

11:03 the income which is not covered under normal sources like - salary, capital gain, business income, houseproperty etc.

'll be considered as residuary income


now while calculating Tax liability on Res. income under section 55,

we can avail deductions under section 57

11:04 now under section 57

sub section 3

there is clearly mention that

the amount of claim in case of received on the death of life insured is Tax free

11:05 so i hope in case of term plan now ur worries r over

Rahul: ys

me: so as per our earlier chat no need to increase our term cover from 25L to 35L :)

11:06 :)

Rahul: so even endowment plans / whole life cover when ur prem is not exceeding 5% of total SA is tax free? isnt it like this?

me: in simple words

11:07 what u r paying as annualized prem.

ur sum assured should be around 21 times or even more to get tax free return

say u r paying 1K mly. prem. it means 12K annualized prem.

11:08 so ur Sa should be at least 2.5L or even more

happy ?

Rahul: thnks

my confusion is over now

11:09 me: my pleasure

11:10 actually

the more u explore the financial world

more u 'll be able to understand

& believe it or not

all the people who interact with me

Rahul: thats right

me: teaches few things to me

like in ur case

11:11 I revisit the DTC again & again

to understand

the Tax implication on claims of life ins. policies

11:12 Rahul: what do u think when dtc wl be implement

11:13 me: in all probaility not b4 than 1st April 2012

Rahul: after rewriting

me: & may be 2013-2014

at least from next year i.e. april 1, 2011

it's going to miss the deadline

Rahul: thats sure

11:14 me: had u gone thru one of my post on PPF in post DTC era on OLM Facebook

Rahul: but i think they have to implement it from 2012 becuase again in 2013 there wl be election season and preparation for general election in 2014

11:15 me: well let's see how the things pan out in near future

Rahul: no i haven't

me: just check that

Rahul: ok

whats that about

11:16 me: It 'll help u to understand the importance of PPF in POST DTC era & specially keeping in mind the EET

Rahul: is PPF good option after EET ?

me: answer is very simple


but the only rider


pool ur money in PPF for ur retirment goal

11:17 & don't try to redeem early i.e. in ur earning year

even if u r redeeming partly

try to avoid

11:18 Rahul: ok

11:29 Rahul: power problem

me: no prob.

Rahul: so jst asking ppf is good option post dtc?

11:31 me: read my reply to u in continuation with my post on OLM FB

Rahul: ok

me: PPF may be a good retirement tool

under DTC & EET

11:32 Rahul: one que

me: 2 question plz.

arre yaar u r free to ask as many u want to

Rahul: is it necessary to make contribution to ur ppf account once u extend it 4-5 yrs

11:33 me: yes every year at least minimum 500 Rs.

Rahul: ok

me: & it's not 4-5 years but a fixed term of 5 years

Rahul: in every 5 yrs slot

me: yes

Rahul: not my means for (4)

me: once u avail the facility of extension of ur acct.

u w'd have to pay annual minimum amount regularly

11:34 Rahul: and in extention period u 'll get interest of 8%

on ur current balance

me: yes

11:36 Rahul: jst an example. my ppf acc wl get over in 2023 (15 yrs). at that time i wl be 43. so i can extend it for 15 yrs more. when i turn 58 i can withdraw it.

11:37 is it good idea

me: nope

11:38 Rahul: then

me: keep extending ur PPF acct. for a block of 5Y every time

& run it for ur age 75-80 or even beyond

the interesting part is in post retirement life

once ur other savings r also settled

11:39 U may start withdrawing partially from PPF acct.


the Tax. slab 'll come down

the impact of taxtion on withdraw 'll be less

11:40 In fact I'll prefer to start withdraw only after attaining Sr. Citizenship

Rahul: ok

me: in case in future

Govt. amends rule to start Sr. citizenship from age 60 onwards

we may start withdraw from 62 or 63 age


11:41 had u checked a post regarding Tax free retirement income on my blog

Rahul: no

pls give me web add of ur blog

11:43 me:

Rahul: thnks

jst ckng

me: read it in ur free time

Rahul: ys

me: although it was an personal plan

but it may give guidelines to others too

Rahul: sure

11:44 me: after finishing ur reading

plz. don't forget to post ur views on the same in the blog itself

Rahul: sure

11:49 Rahul: do u think govt retain EEE for pf & ppf in new dtc?

11:50 bcoz i think so.

me: nope

11:51 after all my input in yesterdays chat I think u may judge urself why it's better on Govt.'s part to keep EET for all saving instruments

there is more to it

in post DTC era

11:52 the basic limit of zero tax of 1.6L or 1.9L or 2.4L (as the case may be)

'll be increased time to time as per the requirement

Rahul: ys ur right. but acrdng to me govt should exempt home loan, hra, elss. bcoz limiting the instrument to save tax is not good.

me: so over all the direction is right

11:53 regarding home loan

the benefit is continue

if the house in question is on rent

for self occupied house

Rahul: no hra is @ rented house

me: the rationale behind the withdraw of incentives

11:54 as there is no income

how can be a setoff

Rahul: what @ elss?

me: actually under DTC the govt. is trying to change our behaviour for saving from Tax saving orientation to our goal based saving

11:55 at present majority of public invest only with the intent of saving tax & not as per their requirement in the long term

11:56 Rahul: ys. but there r ppl who merely not jst invest to save tax

me: which creates unduly pressure on the economic system

Rahul: ys

ur 100% right.

me: as the saving rate in india is high but it's not that much productive

there is more to it

11:57 at present a majority of public is below the 10L income

under DTC it means a majority of tax payer 'll fall in the 10% tax slab

now interesting thing is

11:58 if u invest ur full quota of 3L Rs. to avail Tax benefit up to it's maximum

ur saving 'll be this 10% income tax only

but as & when these savings 'll mature

11:59 in all probaility ur income level 'll be either between 10-25 L or beyond 25L

so on maturity of ur savings u w'd have to pay more tax than what u have saved earlier

so in a sense there is no need to invest blindly

invest as per ur requirement

12:00 regarding ur HRA benefit

how many persons can actually calculate their HRA tax liability

that's why i said simplicity is the need of our

as & when DTC is impleneted

12:01 our pay package 'll also be simplified

a lot of clutter is there in the form of Tax free & taxable allowances

once all these garbage is out

the salary slip as well as computation of tax liability 'll be very easy

12:02 Rahul: no HRA calcn is different what i m saying is govt should allow HRA as a tax exempted

me: hey dear

12:03 once u start demanding a certain thing as tax exampted

another section of society 'll demand another thing & the demand list 'll go on endlessly

12:04 Rahul: thats key

me: as i said earlier

Rahul: before going to public govt should have come to CII and public as what they want

12:05 me: we the people who r in the transition phase r in trouble

Rahul: it should make thing simple and smoother in implement it

no i m not aganist dtc

me: hey dear u r at fault

12:06 by writing the draft of DTC & inviting the comments

Rahul: but govt would have done it then it wl be simple to implement

me: Govt. is doing the things u want to

till date DTC is not implented

Govt. is still inviting comments

12:07 just answer me the simple question

if the DTC was not written

on what grounds, basis I & u 'll argue

12:08 Rahul: thats also right.

12:09 but govt can ask what changes u want to do in the tax sys to make it simple?

12:10 me: arre bhai by inviting comments on DTC - Govt. yahi to kar rahi hai

12:12 Rahul: jst going thr ppf in olm fb

12:13 very informative topic

12:15 me: my pleasure

12:16 Rahul: jst askng what would u amend in the present draft dtc, if u give a chance?

12:17 me: some provisons on NRI public r very harsh

i want to make some changes there

Rahul: like

me: well as of now i can't comment

12:18 Rahul: ok

me: as i w'd have to recollect all those first

Rahul: and for us and corporate

me: these r mainly regarding the taxation of NRIs in India

12:33 i think the most effect of the dtc (if implemented) to the upper middle class ppl whose earning is 5-6 lac pa

12:34 me: nope

the effect of EET 'll be positive on the most wealthier persons in india

Rahul: jst one example

12:35 a person who is earning 50k pm

having 15k emi home loan, 20k total expenses, 15k savings & investment

12:36 he wl not get tax benefit for 15k. thats loss to him.

12:37 me: plz. read my reply above

12:38 the most beneficial ,EET 'll be for the wealthiest persons

Rahul ys

thats true

me: regarding ur example

Rahul: but what bout ppl like us

12:39 me: yes there is a loss of Tax saving partly for the person in question

ok let's calculate the exact impact

on this person

of 6L yly income in pre DTC & post DTC era

Rahul: ys

12:40 me: if u r the person, in the example above

plz. put the nos.

like income, EMi, saving, etc.

Rahul: salary 50k pm

home loan emi 15k pm

12:41 tax savings 1 lac pa

medical ins 8k pa

12:42 me: may i start?

Rahul: ys

me: in this case as on date

i assume the interest part is full 1.5L Rs.

Rahul: ys

me: but do remember

with each passing year

12:43 as u r also paying a part of princiapl amt. too in ur EMI

this interest part 'll also come down but on the other hand

ur salary income '

'll increase

Rahul: ys

me: so after 2-3 years

ur income may be around 7.5L Rs. or even more

but the interest part may 1.2L or even less

12:44 so there is double loss for u

salary is increasing & interest part is decreasing

ultimately it's increasing ur Tax liability in the higher slab

now for ur present situation

a. annual taxable income = 600000

12:45 B. loss on house property = 150000

C. net taxable income = 450000

12:46 D. Deduction under section 80 = 108000

E. Effective Taxable income = 342000

F. Tax on E above = 14000 @ 10% + 8400 @ 20%

= 22400

12:47 add cess @ 3% on it

G. total Tax liability = 23072

now as i said earlier

after 2-3 years

12:48 the above equation 'll change due to increse in salary & decrease in home loan interest

that calculation 'll be like this under current Tax rules

A. Gross Taxable income = 750000

B. loss on house property = 120000

12:49 C. net income = 630000

D. decutions under sec. 80 = 108000

E. Effective Tax. income = 522000

12:50 Tax on E = 14000+ 40000 + 6600 = 60600

12:51 Tax with cess = 62418

now consider the same 7.5L income under DTC

Rahul: ys

me: as by then DTC 'll be implented

12:52 A. Taxable income = 75000

12:53 B. Saving under section 66 (replaced section for 80) = 108000 (due to increase in ur salary u may increase a part here but for calculating on mathcing parameters i'm not increasing ur saving rate under DTC)

C. Effective Taxable income = 642000

12:54 D. Tax on C above @ 10% = 48200

12:55 E. with cess @ 3% = 49646

here the zero tax limit is constant @ 1.6L Rs. for all the 3 cases as discussed above

12:56 now i already knew ur answer after reading all these calculation regarding DTC

Rahul: what

me: finally u r happy that DTC is to be implented

12:57 bcoz

u r not able to save tax on ur home loan

still ur tax libaility is down by some 13K Rs.

12:58 Rahul: in 2nd case i don't understand the calc part

me: & in the future as & when ur income level increases the effective saving under DTC 'll be higher

plz. tell i'll try to elaborate

12:59 Rahul: taxable income 522000 then u have to deduct 160000 from it

13:00 me: ok i got it what u want to know

sample this

zero tax = 160000

13:01 Tax @ 10% from 1.6L to 3L = 14000 (on next 140000)

Tax from 3L to 5L = 40000 (on next 2L)

Tax from 5L to 5.22L = 6600 (on next 22000 Rs.)

got it

13:02 as per the next slab rate

20% & 30%


14:43 me: i'm back

14:44 so after all the calculation for ur future income under pre DTC & post DTC, what's ur take

14:45 Rahul: yes

14:46 me: i'm sure

after going thru all these nos. u w'd n't complain much now for DTC

14:47 in continuation to our calculation

Rahul: its definitely good but then also i have my own views on home loan, elss, a little bit on EET

bcoz i m not fully convinced

14:48 me: let's assume ur case to ur income level around 10.5L Rs. after say 7 years from now onwards

by then ur interest portion of home loan 'll come down to around 80K level

so ur calculation 'll be like this

14:49 A. Income = 1050000

B. loss on house property = 80000

C. Net income = 970000

Saving under section 80 = 108000

14:50 D. Efective Taxable income = 970000-108000 = 862000

14:51 Tax on 8.62L = 54000 for 5L Rs. + 108600 (@ 30%)

total Tax = 162600

With cess = 167478

14:52 this is ur calc. for pre DTC

now we calculate for post DTC

A. income = 1050000

B. Saving = 108000

C. Taxabler income = 942000

14:53 D. Tax on C = 78200

(10% of 942000-160000 = 782000)

14:54 E. With Cess Tax = 80546

now u can see urself

14:55 the higher u r moving into ur income level the more beneficial DTC is for u

Rahul: now thats the point. as i said in my earlier post this dtc is more beneficial to the ppl wid more income

me: whaich i told u earlier

Rahul: but what about the ppl with lower income like 5 lac

14:56 i have gone through ur example


me: hey dear i already calculate for ur case of lower income

Rahul: i have gone through ur example

me: even for their too DTc is going to benfit

14:58 the reason is simple

The people in the lower incopme level

14:59 Rahul: but if a person having other benefits like LTC, medical reimbursement, children education etc

me: r already around the minimum Tax slab due to various incentives so for them it doesn't prove a major benefit in the DTC

Rahul: then what happens

me: but as i said

the same person 'll not remain in the same income level for long & due to this income rise that the real benefit of DTC 'll start poring on him

15:00 regarding LTC - plz. check carefully

to avail taxfree status

u w'd have to spend actually

15:01 & even there, the exemption is only for the journey part & not for the hotel or fodding etc.

so in effect

Rahul: also leave encashment,

me: if u opt to avail tax free LTC & that too only 2 times in a block of 4 years

Rahul: gratuity

me: ur actual expenses 'll be very high

15:02 Rahul: vrs

me: leave encashment at present is tax free upto a max. limit of 300 days

beyond that it's taxable as usual

Rahul: ys

i know

me: for gratuity

the limit is 3.5L only

15:03 beyond that the same is taxable even at present

so in a sense

these r not the isolation cases

& there is mnore to it

15:04 Leave encashment as well as Grt. r received as part of ret. benefit & as per DTC if the same r invested in a Ret. saving product the same 'll remain tax free

15:05 of course the income received from such ret. product 'll be taxable

i mean pension

15:07 Rahul: an example

15:09 Suppose a middle class person earning monthly salary of Rs 40,000 (4.8 lax pa) currently manages to maintain a zero tax status by availing tax-free LTC & medical perks of Rs 70,000, deduction of interest on housing loan of Rs 1,50,000 and repayment of such loan of Rs 1,00,000 eligible for deduction u/s.80C. What wl happen to him after implementation of dtc?

15:10 me: well ur calculation is not true

it's not a practical one

Rahul: y

15:11 me: as i sadi earlier LTC is available for only 2Y in a blocl of 4 y or for simplification of tyhe matter

every alternate year only

15:12 at the same time

as i said

earlier to avail tax free statsu of ur LTC

this person w'd have to travel actually with his family

& my dear friend

15:13 due to other expenses on account of accomodation & fodding as well as purchasing

there is no merit in this Tax free perks

regarding other tax free perks

15:14 it's a technical jargon & it's only help to the CAs or Tax consultants tyo deal with such numerous Tax incentives which r otherwise non understandable easily to a common man like u & me

15:15 Rahul: so here is my view about dtc

it's good but need some amendments in it

15:16 me: & plz. do remember that same person 'll not remain in the so called zero Tax pay structure for long

Rahul: bcoz it has several loop holes in it

me: due to pay hike he 'll come into Tax slab

Rahul: ys

15:17 me: actually the most touching prt for me of the DTC is - It's so simple that even a common man can calculate her Tax liability with out any problem & with out any help of any Tax consultant or CAs etc.

15:18 can u do so right now for ur current income

Rahul: ye

me: another good part

Rahul: i m doing my tax related work myself

me: of DTC

Rahul: without any CA

me: the children tuition fee benfit is intact

15:19 & there r several person who have actual saving in the form of tuition fee & normal 80C - more than 1L but can't avail the same beyonf the 1L limit

15:20 but under DTC without much effort they can do so

u can handle ur case on ur own is good

but how many persons r there who can handle on their own

15:21 Rahul: tuition fees are tax exempted under new dtc?

me: at present tuition fee r part of section 80C

in DTC

Tuition fee r part of section 66 within the overall limit of 3L Rs.

15:22 i know slowly & slowly u r relizing the benefits of DTC :)

15:24 Rahul: i have changed my mindset up to some extent regarding dtc but still i feel some clause has to change

15:25 me: well that's why i said

slowly u r realizing the benefits

also there is more to it

the human nature aklways resists any change

15:26 the same reflects in case of DTC too

it's not the case of u or me any individual

i'm tlaking in general

15:27 Rahul: it's human nature like a book called "Who moved my cheese" by spencer johnson

15:29 me: so i'm not complaining u

in fact i;m happy wityh u that

after so much discussion between U & me

at least now u r open to have a clear view on DTC & not a biased one

15:30 now onwards if somebody asks u for ur comments on DTC

now onwards

U can certainly show the +ives & -ives of DTC

15:31 but finally i know U 'll put more weight on -ives of the DTC


Rahul: :)

15:32 me: the more u 'll interact on all these financial matters

the more u 'll gain in terms of knowledge & info