Tax Planning - By CA. Gopal Krishna Raju -- 03.03.14 (1)

8/12/2019 Tax Planning - By CA. Gopal Krishna Raju -- 03.03.14 (1)

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CA. GOPAL KRISHNA RAJU |FCA, AICWA, ACS, PGDOR, PGDFM, DISA, (ICA) M.Phil

Tax Partner: M/s. K. Gopal Rao & Co., Chartered Accountants, Chennai

MemberSouthern India Regional Council of The Institute of Chartered Accountants of India

Key to Tax PlanningEnabling the taxpayer for effectivewealth management

Monday, 3rdMarch 2014

Forenoon SessionSIRC of The Institute of Cost Accountants of India


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Financial Year 2013-2014Rates of Income tax a snapshot

Income Slab VSC 80 60 SC < 80 IND < 60

Upto 2,00,000 NIL NIL NIL

2,00,001 to 2,50,000 NIL NIL 10%

2,50,001 to 5,00,000 NIL 10% 10%

5,00,001 to 10,00,000 20% 20% 20%

10,00,001 & above 30% 30% 30%

Education Cess and Secondary & Higher Education Cess = 3% on Tax


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Change in SurchargeSuper Rich to pay extra

To Whom? Income SurchargeIndividuals, HUF, Firms, LLPs,

Co-operative Societies & Local

AuthoritiesMore than 1 Crore 10% (New)

Domestic Company More than 10 Crore 10% (New)

Domestic Company

More than 1 Crore to 10 Crore

5% (Existing)

Foreign Company More than 10 Crore 5% (New)Foreign Company More than 1 Crore to 10 Crore 2% (Existing)


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Section 87A - Tax Rebate for Resident Individuals

Rebate u/s. 87A

(I am back in new form)

Max Rebate

Rs: 2000

Applicable Slab is

below 5 Lakh

New


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Section 87A - Tax Rebate for Resident Individuals

Applicability: A tax relief of Rs.2,000/- to the individual tax payers

whose total income does not exceed Rs.5 Lakhs in a year.

Consequently any individual having income up to Rs.2,20,000 will not

be required to pay any tax and every individual having total income

Rs.2,20,000 to Rs.5,00,000shall get a tax relief of Rs.2,000

FMs Statistics: On account of this relief, 1.80 crore tax payers are

expected to benefit to the value of Rs.3,600 crore.


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ExampleWithout Tax PlanningAlas God only Save

him!

EntityAnnual

Income

Investment

u/s. 80C

Taxable

Income

Annual

TaxLiability

Raman (Individual) 13,00,000 1,00,000 12,00,000 1,95,700

Net Cash Inflow 10,04,300 + 100,000 (after redemption of investment)


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Example Tax Planning at its best for a businessmanor

professional

Entity Annual

Income

Investment

u/s. 80C

Taxable

Income

Tax

Liability

M/s. Raman (HUF) 3,00,000 1,00,000 2,00,000 NIL

Mr. Raman (IND) 3,00,000 1,00,000 2,00,000 NIL

Mrs. Raman (IND) 3,00,000 1,00,000 2,00,000 NIL

Master Shyam (Pvt Trust) 2,00,000 - 2,00,000 NIL

Baby Shruthi (Pvt Trust) 2,00,000 - 2,00,000 NIL

TOTAL 13,00,000 3,00,000 NIL

Net Cash Inflow 10,00,000 + 300,000 (after redemption of investment)


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FAQ on Private Trust?

Can only parents can create private trust? Not necessary

(relatives, guardians, family friends can create)

Is it necessary to register it? Not mandatory

Filing returns? Yes Compulsory

Tax Tip Create one trust for one child for maximum

benefit

Want to create a Private Trust? Kindly ask a Professional!


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Private Trust

Private Trust can be formed for a single member benefit or for a

group of members benefit.

For Tax Planning - Ideal for a minor child till he/she attains majority

or finishes his/her higher studies or until her marriage

Tip: For each child let there be one trust

Caution: Care should be taken while drafting the clauses of the

trust deed to include investment methods (take the help of a

professional in that case)

A trust can be unregistered (no mandatory provision for registration)

Using the trust deed PAN can be applied for.


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Private (Discretionary/Specified) Trust

Whether there will be any tax incidence in the hands of the

beneficiaries of the trust either at the time of creation of the trust or

when they receive any benefits under the trust either out of income

or corpus.

Where it is discretionary trust, definitely, the beneficiaries can

escape the rigour of section 56(2)(vii) since unless and until any

distribution, either of income or corpus, is made, there is no

certainty for the beneficiary as to what they will get from the trust.


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On distribution from Private trust

On the other hand, when any money/property is distributed from

the trust to the benficiaries either by way of distribution of income

or corpus and whether such distribution takes place during the

subsitence of the trust or at the time of its dissolution, even then,

the benficiaries cannot be subjected to tax on the amount/assets

recived on distribution since they are already entitled to the same as

per the trust deed.

This view was also upheld in [Ashok C. Pratap v Addl. CIT [2012]139 ITD 533 (Mum) : [2012] 150 TTJ 137 (Mum)]


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Tax Planning - HUF

Hindu Undivided Family can also claim basic tax exemption of Rs:2000,000. [plus Investment Planning eligible for further deduction u/s

80C]

HUF is not a created entity. Only its existence has to be proved.

Individual Minors (below the age of 18) can also claim basic tax

exemption of Rs: 2,00,000 (for boys and girls)

Caution:Minors income generally are clubbed into the hands of the

parent whose income is greater. Care should be taken to make theirincome to accrue in the name of a private trust (where the

beneficiary is the minor child).


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How to prove the existence of a HUF?

Family (Ration) Card is the starting point; or

HUF - Affidavit

Apply for a PAN

Open Bank Account and start doing the operations

Periodically file your returns


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Hindu Undivided Family(HUF)

HUF cannot be formed!

Yes. Only its existence has to be proved.

Date of Marriage is the Date of Incorporation of HUF

How? Family Card (Ration Card) is the key.

Using Family card We can apply for a PAN card

Then using PAN card we can open a Bank Account thenstart doing operations.


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Section 80EE - Deduction in respect of interest on loan

taken for residential House Property

New

Interest on Residential House

Property

Additional

deduction uptoRs:100,000

4 conditions tobe satisfied

Let-out or Self-

Occupied(is immaterial)


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Section 80EE - Interest on Housing Loan

Applicability:A new section 80EE is inserted in the IT Act, 1961 to provide anadditional deduction upto Rs. 1 lakh in respect of interest on loan taken for

residential house property to individuals.

The deduction shall be subject to the following conditions:-

1. The loan is sanctioned by the financial institution during the period beginning on 1stApril,2013 and ending on 31st March,2014.

2. The amount of loan sanctioned for acquisition of the residential house property does

not exceed Rs.25 lakhs.

3. The value of the residential house property does not exceed Rs.40 Lakhs.

4. The assesses does not own any residential house property on the date of sanction of

the loan.

The above deduction is over and above the deduction of Rs.1.50 lakhs allowed for self

occupied properties under Section 24 of the Income-tax Act.

If the limit is not exhausted, the balance may be claimed in AY 2015-16. (Carried

forward of un-exhausted claim)

New


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Section 24(b): Interest on Borrowed Capital (Loans)

Interest payable on loans borrowed for the purpose of acquisition,

construction, renovation, repairing or reconstruction(Hint: AC3R)

can be claimed as deduction.

Interest relating to the year of completion of construction can be fully

claimed in that year irrespective of the date of completion. Interest accrued during the construction period preceding the year of

completion of construction can be accumulated and claimed as deduction

over a period of 5 years in equal installments commencing from the year

of completion of construction.

When a person acquires a property and pays only part of the sale

consideration, interest payable on the unpaid purchase price qualifies for

deduction in the computation of income from such property.


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Interest on

Borrowed

Capital

Self Occupied

Property

Let Out

Property

Borrowing

before 1/4/1999

Borrowed on or

after 1/4/1999

Deduction

restricted to

30,000

Deduction

restricted to

150,000

Deduction

restricted to

30,000

Used for

P/C/R/R/R

Used for

R/R/R

Used for

P/C


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Where the property has been

acquired, constructed, repaired,

renewed or reconstructed with

borrowed capital before 1/4/1999

Actual interest payable subject to

the maximum of Rs: 30,000

Where the property is acquired or

constructedwith capital borrowed

on or after 1/4/1999 and suchacquisition or construction is

completed within 3 years of the end

of the financial year in which the

capital was borrowed


maximum of Rs: 150,000 if

certificate mentioned in point 2 isobtained

In any other case, i.e., money

borrowed after 31/3/1999 for

repairs or renewal


maximum of Rs: 30,000


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1. It may be noted that the deduction of interest of Rs: 30,000 are allowed

for purpose of acquisition or construction or repair or renewal or

reconstruction of house property where as the deduction to themaximum of Rs: 150,000 is allowed only for acquisition or construction

of house property.

2. For getting deduction of interest of maximum of Rs: 150,000, it is

necessary to obtain a certificatefrom the person to whom such interest

is payable specifying the amount of interest payable by the assessee for

the purpose of acquisition / construction of the property.

3. According to Explanation to section 24, when a fresh (subsequent) loan

has been raised to repay the original loan if the second borrowing has

really been used to repay the original loan and this fact is proved to the

satisfaction of the ITO, the interest paid on the second loan would also

be allowed as a deduction.


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4. Interest on interest is not deductible. The assessee is entitled to

deduct only the interest payable by him on the capital borrowed,and not the additional interest which because of his failure to pay

the interest on the due date is considered as a part of the loan.

5. Any amount paid for brokerage or commission for arrangement of

the loan will not be allowed as deduction.


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Planning to buy a Second House

You are required to pay tax on rental income from the second house even if it is lyingvacant.

If a person owns more than one house and it is vacant, its value is added while

calculating the ownerswealth. A 1% wealth tax is payable on the amount exceeding

Rs: 30 lakh.

Commercial property is not included while calculating the wealth of a person.

The interest paid on a loan taken to purchase commercial property is also eligible for

tax deduction. Commercial space usually fetches a high rent than residential property.

It is also possible to take a loan against this rental income. The rental income from

commercial property is eligible for 30% standard deduction as in the case of

residential property.

R li f d i ibl i t f lf ti f H


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Relief admissible in respect of self occupation of House

Property

Tax Planning:

Relief for self occupation of house is admissible under

section 23 to an HUF also.

There is nothing in the words used in section 23(2)

which may show that they cannot apply to HUF which is

nothing but a group of individuals related to each other.

[ITO vs. Tarlok Singh & Sons 29 ITD 139 (Del)]


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If you want to buy a house in your wifesname but dontwant the rent to be

taxed as your income, you can loan her the money. In exchange, she can give

you her jewellery.

One can also avoid clubbing of income by opting for tax exempt investments.

(PPF, LTCG on MF & Equity)

Incidentally, a wife can help her husband save tax even before they get

married. If a couple is engaged, and the girl does not have any taxable

income or pays tax at a lower rate, her fianc can transfer money to her. The

income from those assets wont be included in his income because the

transaction took place before they got married.


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Gifts


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Tax Tip: Non -Taxable Gifts

Up to Rs: 50,000 in cash & Gifts in Kind

Cash Gifts from any relative [Relative means:

(1) spouse of the individual; (2) brother or sister

of the individual; (3) brother or sister of the

spouse of the individual; (4) brother or sister of

either of the parents of the individual; (5) anylineal ascendant of the individual; (6) any lineal

ascendant or descendent of the spouse of the

individual; and (7) spouse of the person referred in

(2) to (6)]

On the occasion of marriage of the individual

Under a will or by inheritance

In contemplation of death of the payer


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Gift When taxable & to whom?

What:Gifts would be subject to income-tax in the hands of thedonee(recipient).

Limit:As per section 56(2)(vi), receipts of movable property, fair

market value of which exceeds 50,000(Fifty thousand rupees),

without consideration or without adequate consideration is

taxable.

Who:as income in the hands of Individuals / HUFs.

Year:In the year of receipt


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Exempted.gifts

Section 56(2)(vii) shall not apply to any sum of money or any property received by

the donee

1. from any relative; or

2. on the occasion of the marriageof the individual; or

3. under a willor by way of inheritance; or

4. in contemplation of death of the payer or donor, as the case may be;

or

5. from any local authority; or6. from any fund or foundation or university or other educational

institution or hospital or other medical institution; or

7. from any trustregistered under IT Act.


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Section 56(2)(vii)Gift of Immovable Property

Amendment

Situation Taxable Income

Without consideration the stamp duty value of which exceeds Rs: 50,000,the stamp duty value of such property;

For consideration > Rs: 50,000

but < stamp duty valuethe stamp duty value of such property as exceeds

such consideration: The date of the agreement and

the date of registration are not

the same,

the stamp duty value on the date of the agreement

may be taken


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Present:The existing provisions of 56(2)(vii) sub clause (b) of the

Income-tax Act, inter alia, provide that where any immovable

property is received by an individual or HUF without consideration,

the stamp duty value of which exceeds Rs: 50,000, the stamp duty

value of such property would be charged to tax in the hands of the

individual or HUF as income from other sources.

Catch me if you can: The existing provision does not cover a

situation where the immovable property has been received by an

individual or HUF for inadequate consideration.


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Proposal:It is proposed to amend the provisions of 56(2)(vii) so

as to provide that where any immovable property is received for a

consideration which is less than the stamp duty value of the

property by an amount exceeding Rs: 50,000, the stamp duty

value of such property as exceeds such consideration, shall be

chargeable to tax in the hands of the individual or HUFas

income from other sources.


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Differing Dates: Considering the fact that there may be a time

gap between the date of agreement and the date of registration, it

is proposed to provide that where the date of the agreement

fixing the amount of consideration for the transfer of the

immovable property and the date of registration are not the

same, the stamp duty value may be taken as on the date of the

agreement, instead of that on the date of registration.

Caution:This exception shall, however, apply only in a casewhere

the amount of consideration, or a part thereof, has been paid by

any mode other than cash on or before the date of the agreement

fixing the amount of consideration for the transfer of such

immovable property.


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This amendment will take effect from 1st April, 2014 and

will, accordingly, apply in relation to the assessment year

2014-15 and subsequent assessment years.

May Overrule the case reported in (2012) 6 TaxCorp (DT)

53279 (DELHI), Section 50C enabling the revenue to treat the

value declared by an assessee for payment of stamp duty, ipso

facto, cannot be a legitimate ground for concluding that there was

undervaluation, in the acquisition of immovable property.


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Section 43CASpecial provision for full value of consideration

for transfer of assets other than capital assets in certain cases

New


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Section 43CA

Background: The provisions of Section 50C do not apply to transfer ofimmovable property, held by the transferor as stock-in-trade.

Younger Brother of Section 50C:A new Section 43CA is inserted in the

Act, that where the consideration for transfer of an asset (other than capital

asset), being land or building or both, is less than the stamp duty value, the

value so adopted or assessed or assessable shall be deemed to be full value

of consideration for the purposes of computing income under the head

Profitsand Gains of Business or Profession.

Stamp duty value may be taken as on the date of agreement of transfer and

not as on the date of registration of such transfer where consideration is

received by any mode other than cash.

New


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Section 43CANew

Situation Taxable Income

For consideration paid

Tax Planning - By CA. Gopal Krishna Raju -- 03.03.14 (1)

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