Revised ZProposals of Direct Tax code

Dear Friends, here is a quick view of the new proposals of Direct Tax code.

1. PF, PPF, GPF, EPF, NPS & Annuity Plans as well as proceeds from Term plans (Pure Life insurance) 'll be Tax free as per E - E - E. So no Tax at withdraw from these instruments.

2. Home loan Interest benefit on 1.5L Rs. for self occupied property, is retained.

3. The list of permitted savings intermediaries now includes most of the current saving instruments lile - apart from the instruments listed in point 1 above, NSC, ULIPs & Traditional Plans,  ELSS, Bnak Tax saver FDs, Bonds (Possibly Infrastruture bonds)  etc.

4. Long Term capital Gains from shares & Eq. MFs 'll become taxable.

5. No clarity as of now for the earlier proposed Tax slab rates.

This Revised Discussion Paper is available on the following websites:
finmin.nic.in and incometaxindia.gov.in
Responses to the Revised Discussion Paper should be sent online through the link provided at these websites or at the following e-mail address: directtaxescode-rev@nic.in. Responses are solicited upto 30th June, 2010.

Thanks

Ashal

Tax rate on Long Term Capital Gains

Q. If my only income is property (NormalMale)L.T. Gain-3.5 lac for Ast. Y.09-10,what rate be taxed.Whole @20 or for 3.00-lac@10% & for Bal.50000/-@20%? - Mohit gupta

Ans. Dear Mohit, Here I assume the gain amount of 3.5L Rs. is indexed gain amount. If not calculated already plz. calculate the same. Now comes the question of tax rate on ur indexed LTC gains. Plz. note as ur only source of income is this LTCGain amt. U may set off ur basic exemption limit of 1.6L Rs. so u w'd have to pau Tax on remaining Gain amount = 350000-160000 = 190000 Rs.

As the Indexed LTCGs are taxed @ 20.6%, for ur LTCG the Tax = 190000 * 20.6% = 39140.

Thanks

Ashal

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

PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE.

(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).

Thanks

Ashal

Date of purchase?

Q. - Dear Ashal,

Thanks for the yeoman service you have been doing to help us with our taxes

Now i had one more query on behalf of my neighbor, can the sale of land that was actually paid for say 10 years back but registered only this month attract capital gains tax if sold today? Or its 3 years from the date of registration thats taken into consideration for capital gains tax.. She bought some plantation property 10 years back on instalment scheme and wants to sell it now though it was registered only last month...Thanks in advance. - Radhika Nandlal

Ans. - Dear RN, from the points mentioned by u, the date of allotment (i.e. some 10 years back) 'll be considered as the date of purchase.

The reason is - Installment scheme of pmt. of the price (as agreed upon at the time of allotment) is merely a mechanism to pay the price over a period of time.

The right on the property were created on the date of allotment itself. In between all these years never ever these rights were questioned & both the parties were following the agreement.

Hence for calculation of Capital gains, the date of allotment 'll be considered as the date of purchase.

There r several instances in court cases where the honorable courts have held the views as stated above.

The details of such court cases can be obtained from various sources - Tax advocates, Tax websites, Taxation experts.

Regarding date of registration I'll only say that it's merely a change of names for the property in question in the records of Registrar of Properties.

Thanks

Ashal

Long Term Capital Gains - Date calculation

Q. - Dear Sir, I had sold shares exactly after one year i.e. date of purchase 9.10.2008 and date of sale 9.10.2009. Capital gain earned on this is short term or long term? I am a NRI and my bank has deducted TDS on this capital gain stating that it is a short term gain and I should have hold the shares atleast for one more day. Your guidance shall be highly appreciated. Regards - Haresh Bilakhia...

Ans. - Dear Bilakhia, I`m not at all agree with the view taken by ur Bank. Sample this -

Purchase date - 9 oct 2008
12 months completes on - 8 oct 2009 (by the midnight of 8th oct 2009 i.e. 12AM for 9 oct 2009)

since the holding periods exceeds the 12 months period (no matter the period is few days or few Hrs.), in my opinion ut Gains r LTCG & as the STT was paid,u r eligible for Tax free LTCG.

Bank is not right to ask for completion of 1 more day to be eligible for tax free LTCG.

Thanks

Ashal...

Benefit of section 54F on LTCG

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)
Cost of improvements 1.00 lakh (approx) 1991.

Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?

Thanks - Subasu

Answer - Dear subasu, b4 I comment here I assume the following -

Purchase year is FY 1988-89.
1st improvement year is FY 1991-92.
2nd improvement year is FY 1996-97.
Year of sell is AY 2009-2010 or FY 2008-2009.

Here goes the LTCG calculation.

A. Purchase price = 2.42L Rs.
B. Cost Inflation index (CII) of FY 1988-89 = 161
C. CII for FY 2008-2009 = 582
D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.
E. 1st improvement price = 1.0L Rs.
F. 1st improvement FY CII = 199
G. Indexed 1st improvement price = E*C/F = 2.92L Rs.
H. 2nd improvement price = .16L Rs.
I. 2nd improvement CII = 305
J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.
K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.
L. Sell price = 82L Rs.

As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.

M. Hence LTCG = L - K = 70.03L Rs.
N. amount invested in LTCG Tax Saving bonds = 50L
O. amount invested in Res. property = 32L Rs.
P. Total invested amount = N + O = 82L Rs.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.

Thanks

Ashal

Dear Ashal!

Thanks for the prompt response and detailed calculations.

One more modification would be introduced to this calculation because I did not furnish you with that info.

I had financed this purchase in 1988 with the help of Loans from BHEL and Cement Corporation of India. I have not preserved the interest records. The amount was borrowed in 1984, 1985 and 1986 and repaid completely in 1991.

As I do not know the interest quantum, I do not know what to do with that.

Any suggestions would be welcome.
Thanks once again.

Subasu

Dear subasu, as the records of loans are not with u, also the applicable FYs r also date very back.

Hence I'm sorry to say that u can't do anything now.

thanks

Ashal

Calculation for Long Term Capital Gain for purchase as well as improvement of the property in subsequent years.

Dear Mr. Ashal!

Please clarify the following.

Cost of Purchase 2.42 lakhs (1988)

Cost of improvements 1.00 lakh (approx) 1991.

Cost of improvements 0.16 lakhs (1996).

Sold in 2009 2010 for Rs. 82 lakhs.

Invested in REC/NHAI Bonds 50 lakhs.

Bought another residential property Rs. 32 lakhs.

Taxable long term gains is NIL. Am I right?

-Subasu

Ans.

Dear subasu, b4 I comment here I assume the following -

Purchase year is FY 1988-89.

1st improvement year is FY 1991-92.

2nd improvement year is FY 1996-97.

Year of sell is AY 2009-2010 or FY 2008-2009.

Here goes the LTCG calculation.

A. Purchase price = 2.42L Rs.

B. Cost Inflation index (CII) of FY 1988-89 = 161

C. CII for FY 2008-2009 = 582

D. Indexed purchase price = A*C/B = 2.42*582/161 = 8.75L Rs.

E. 1st improvement price = 1.0L Rs.

F. 1st improvement FY CII = 199

G. Indexed 1st improvement price = E*C/F = 2.92L Rs.

H. 2nd improvement price = .16L Rs.

I. 2nd improvement CII = 305

J. Indexed 2nd improvement price = H*C/I = 0.30L Rs.

K. Total Indexed purchase & improvement price = D + G + J = 11.97L Rs.

L. Sell price = 82L Rs.

As more than 3 years r completed for purchase as well as each of improvement also, hence all r eligible for consideration of LTCG.

M. Hence LTCG = L - K = 70.03L Rs.

N. amount invested in LTCG Tax saving bonds = 50L

O. amount invested in Res. property = 32L Rs.

P. Total invested amount = N + O = 82L Rs.

As the amount in P above is more than M above, so no LTCG Tax liability is there.

Yes u r right.

Thanks

Ashal

Tax calculation for STCG on STP from Liquid fund to Equity fund

Q. - Dear Friend,

i have been reading ur post quite long time. please advise on this.

I would like to know the Tax treatment on STP transaction. My transaction are ::

Invested Rs. 49,999 in DSPBR MoneyManager fund on 10th of Dec 2008. Registered STP in DSPBR top 100 equity fund.

started STP from 7th of Jan 2009 for Rs. 4000 every month. so till date total 4 instalments totalin 16000 has been transfered to top 100 equity fund. i understand tax treatment for equity fund. but not for liquid fund. The profit i made each month is

7th jan = Rs. 43
7th Feb = Rs. 57
7th Mar = Rs. 60
7th April = Rs. 65

I would like to know the tax treatment on liquid fund. if there is any tax how it will be taxed(like i need to add in my salary income or some % i have to pay).

If i dont show these incomes to IT Department(i think very few Retail investor use to show these incomes) what will happen.

Waiting for ur reply.

Thanks
Amit

Dear amit, ur STP transactions from Liquid fund to Eq. fund r ok.

The tax treatment is as below.

For Transactions b4 31st of march 2009, the same `ll be treated at STCG & `ll be added to ur income from all other sources & `ll be taxed as per ur tax slab rate in the prev. FU i.e. 2008-2009.

So for total STCG = 43+57+60 = 160 Rs.

As per ur Tax slab the Tax `ll be =

@ 10.3% slab = 17Rs.
@ 20.6% slab = 33 Rs.
@ 30.9% slab = 50 Rs.
@ 33.99% slab = 56 Rs.

Ur April onwards STP `ll be taxable in the same manner for ur income in the current FY i.e 2009-2010.

I hope the message is clear to u now.

thanks

Ashal...

14.16% or 33.99%? Which Tax Rate is higher?

Strange isn’t it! With out doubt majority of U ‘ll declare 14.16% as lower Tax than 33.99%. Some of u may be thinking what I’m talking about? My dear friends my question is quite interesting & a valid one. Let me clear u what I’m asking?

All of us already aware that Div. Distribution Tax on Debt based MFs is 14.16% where as STCG Tax on debt funds for a person in the highest Tax slab is 33.99%. Now think again on my question & answer.

Now read below to find the truth –

I assume there r 2 investors Mr. Sharma & Mr. Kapoor. Both r in the highest Tax slab of 33.99%. Now both have a surplus saving of 10L Rs. Which both want to invest in secure debt funds. There is a debt fund available for investment @ NAV of 10 Rs. for both Growth as well as Div. payout option. Mr. Sharma opts to invest in Div. payout option. While Mr. Kapoor has some other plans & invest in Growth option. From 10L Rs. each has been allotted 1L Units. On 364th day, the NAV of the fund for both option is 12 Rs.

Div. pay out option – The fund announces a div. pay out of 10% per Unit i.e. 1 Rs. per unit.
A. Div. Amount = 1*No. of Units = 1*100000 = 100000 Rs.
B. Total amount withdrawn from fund including Div. Distribution Tax = 100000/0.8584 = 116496 Rs.
C. Hence DDT = B-A = 16496
D. Per Unit of fund, the impact of Div. = 116496/100000 = 1.165 Rs.
E. Post Div. NAV of fund = 12-1.165 = 10.835 Rs.
F. Value of investment after Div. distribution = E* 100000 = 1083500

Growth Option – In parallel to Div. amount of 1L Rs., Mr. Kapoor decides to book STCG. Here is his calculation

A. No. of UNITs redeemed for STCG = 8833.8
B. Redeemed amount = Per Unit NAV*A = 12*8833.8 = 106005.6
C. Per UNIT STCG = 12-10 = 2 Rs.
D. Tax on C @ 33.99% = 0.6798 Rs.
E. Total STCG Tax = A*D = 6005.6
F. Redeemed amount net of STCG Tax = B-E = 100000 (Equal to Div. Received under Div. pay out option)
G. Total No. of Units remain = 100000 – A = 91166.2
H. Value of investment post STCG = G*NAV of UNIT = 1093994.4

Now all of us can look, DDT (@ 14.16% ) is higher than STCG Tax (@ 33.99%) due to which the value of investment is higher for Mr. KAPOOR.
So it’s now for all of U guys to decide what to do in case of investment in Debt funds.
The above calculation once again proves that don’t look at the nos. for what they appear at first glance, just dig deep & u ‘ll see another truth.

Thanks

Ashal

To Gift or To Loan

Q. A & B are Brothers married and staying in joint family.Each of them are separately assessed for Income tax. B sales shares worth 1 cr paying STT which he had baught before more than 3 years. B invests this amount equally in 4 names i.e A Plus A`s wife, B & B`s Wife 25 Lakhs each in Mutual Funds.Can you please advise the tax Implecation and also we should make a Gift Deed for this or show as a loan to others.Please advise in detail.



Best Regards.



Answer :- Dear friend, From ur query, it seems u had directly invested the amount of 25L for each person as mentioned by U, from ur own bank account. This `ll be treated as cash gift.If u had first invested all the 75L Rs. (for other 3 members), under ur name & later gifted the alloted units to ur family members, then it w`d be a gift in kind.

U`ll ask, what`s the difference in this?

In case of gift - For ur Brother A & his wife, the income from such MF investments, `ll be taxable in their own hands, but in ur wife`s case, if the income from these MFs is taxable (if the gains r STCG from Eq. MFs or the MFs r debt oriented), it `ll be clubbed with ur income under the clubbing provisions of Section 64. For ur own 25L Rs. the income generated by MFs `ll be taxable in ur hands if it is taxable at all.In case u want to show the 25L rs. to all other 3 persons as loan, in this case, the interest received (if any) from these 3 `ll be taxable in ur hands & the income from these MFs `ll be taxable in the hands of the respective owners. In this case, even ur wife`s investment `ll be taxable in her hands & clubbing provisions of section 64, `ll not be applicable as it was not a cash gift. Instead it was a loan & u r paying Tax on ut interest income.

I hope the above info is useful for u. Plz. feel free to ask, if u need more help.

Thanks

Date for calculating Capital Gains

Dear Ashal, Kindly inform that from which date is the purchase of my flat considered valid. From the time of booking, from the time of registration or from the date of possession letter received. As this shall help me calculate whether it will be a short term or long term capital gain as the time from when I booked the flat to the time I will receive possession is spread on 3 yrs gap.Thanks....Jas

Dear jasper, Although i don`t have right now with me the exact details of some recent judgements of Honourable Supreme Court & various High courts (In terms of Case Nos., year of J`ment, respondents etc.), the moot point of all such j`ments was, The rights of ownership `ll be calculated from the date of making considerable & adequate payment to purchase the property (normally it relates with the date of registration of property). In such j`ments, the h`ble courts observed that, during prolonged delay of possession (for any reason), The rights over the property were with the purchaser & delay of actual possession was simply the delay in actual use of property not delay in its ownership.So u may consider ur date of registration for capital gains purpose.
Thanks

Ashal