individual taxation private & confidential may 2015 1

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Individual Taxation

Private & ConfidentialMay 2015

2© 2015 Deloitte Haskins & Sells LLP

1. Residential Status

2. Taxation of Perquisites and allowances

3. Deductions available u/s 80C, 80D

4. New ITRs for AY 2015-16

Agenda


Residential Status


Scope of Income

R & OR R but NOR

Global Income

• Income received or deemed to be received in India; and

• Income accrues or arises or is deemed to accrue or arise in India

Taxability of employment income

Remuneration is taxable in India if services are rendered in India irrespective of the residential status.

NR


Determining factors

Stay in India in a tax year

Length of stay & Residency in India in the previous 7 &10

tax years

Citizenship / Person of Indian Origin

Intention of leaving India

Purpose of coming to India

As per Indian Income tax Act, 1961 (‘the Act’)


Residential Status

Stay 182 days in the tax year

Yes No

Stay 60** days in the tax yearandStay 365 days in the preceding 4 tax years

Yes

Non-resident for 9 out of 10 previous tax years

Resident & Ordinarily Resident (R&OR)

No

Yes

Resident but not Ordinarily Resident (R but NOR)

Non-resident (NR)

No

YesNo

Resident

Stay in India < 730 days in preceding 7 tax years

* Tax Year is from 1 April to 31 March.**The period of 60 days stands extended to 182 days in case of a: - citizen of India who leaves for the purposes of taking employment outside India; and - for person of Indian origin and citizen of India who comes on Visits to India


Judicial Rulings

Leaves India for “the purpose of employment”

Business trips outside India

Business trips outside India for 218 days is merely tours abroad in connection with one's employment in India and cannot attract the application of Explanation (a)

Second ITO Vs K.Y. Patel 33 ITD 714 Mumbai Tribunal

When an employee working in India goes abroad for a few days, he cannot be said to have an “employment outside India”Abbot Laboratories 31 ITD 1823 Mumbai Tribunal

The explanation provides that the benefit is available where the person leaves India for the “purposes of employment”. In order to meet this criteria, an individual need not be unemployed while he leaves India. British Gas AAR 725 of 2006


Judicial Rulings

In returning year – computing 60 days including Visits

For the purpose of computing the period of 60 days, the period of visit in India is to be excluded. Manoj Kumar Reddy Nare ITA 1020/Bang/08 Bangalore Tribunal

Applicant resigns from her employment in China, reason for return to India does not seem to be only for a visit and therefore Explanation (b) to section 6(1)(c) is also not applicable in applicant's case − Smita Anand (AAR 1091 of 2011)

Departure and Arrival

The date of check in at the airport for departure to be considered and not the date of immigration stamp. Hence, GB’s stay in India was 181 days and he would accordingly be considered a non-resident− Gautam Banerjee ITA No 2374/MUM/2004 Mumbai Tribunal

Arrival and deparure days both to be included to compute number of days in India− AAR 223 ITR 462

Only departure date to be included− Tribunal (No. 1230 dt. 22.8.1986) ( ITO Vs. Dr. R. K. Sharma)


Rule for Residency under Treaty


Residency under Article 4(1)

Under the treaty, residency is defined under Article 4(1).

The basis of residential status is different under different treaties:

India-USA DTAA India-UK DTAA India-Singapore DTAA

Criteria

Residency based on domicile, residence, citizenship, place of management etc. as under the laws of the contracting states

Residency based on domicile, residence, citizenship, place of management etc. as under the laws of the contracting states

Residency based on the local laws of the contracting states

Exclusion (if any)

Does not include any person who is liable to tax only because of source income

Does not include any person who is liable to tax only because of source income

No exclusions


Residency under Article 4(2) - Tie breaker rules for individuals

In some cases , an individual can be considered as a resident of both Contracting states, as a result of Article 4(1).

Article 4(2) contains tie breaker rules for the individuals, listed by sequential order of application.

The application of these tie breaker rules determines the State where the individual has to be considered as a resident.

Mutual Agreement

Nationality

Habitual Abode

Centre of Vital Interests

Permanent HomeS

E

Q

U

E

N

C

E

P

C

H

N

M


Taxation of Perquisites and Allowances


Typical Salary Components

Cash components: ♪ Basic salary ♪ Dearness

allowance

Perquisites:♪ Stock options♪ Car lease♪ Accommodation♪ Scholarship

Salary components

Collective incentives♪ Health club ♪ Rest and

recreation

Allowances/reimbursements:♪ House rent♪ Telephone, medical♪ Leave travel ♪ Conveyance♪ Child education

Bonus/Performance

incentiveSocial security and other retirement benefits♪ Provident funds♪ Pensions ♪ Superannuation♪ Gratuity


Salary Components

House Rent Allowance Rent free accommodation and concessional rent

Taxability

• Exempt in the hands of employee subject to limits

• Limits for exemption claim (least of):

– Actual HRA received;

– Rent paid in excess of 10% of salary; or

– 40%/ 50% of salary

Documents

• Lease agreements and rental receipts provided by employees

• Obtaining Permanent Account Number (PAN) of the landlord from the employee

Taxability

• Treated as a perquisite in the hands of the employee

• Valuation:

Company owned house: 15%* of salary

Company leased accomodation: 15% of salary or actual lease rent, whichever is lower

Hotel accomodation: 24% of salary or actual rent, whichever is lower

* Being the highest perquisite value rate. Rate could reduce depending on the population count in the city of residence

Judicial Precedents

Notional Interest on security deposit made by the employer to the landlord not to be taken into consideration while computing the perquisite value of a residential accommodation (Bombay HC in CIT Vs. Shankar Krishnan 349 ITR 645)


Salary Components

Conveyance Allowance Car lease and car maintenance expenses

Taxability

• Exempt up to INR 1,600 per month

Taxability

Situation 1 - Where motor car is owned or hired by the employer and used only for official purposes

No taxable value – provided the documentation is maintained.

Situation 2 – Where motor car is owned or hired by the employer and used partly for official purposes and partly personal expenses

For cars up to 1.6 litres cc engine - INR 1,800 p.m.

For cars exceeding 1.6 litres cc engine – INR 2,400 p.m.

The above amounts would be increased by INR 900 p.m. if chauffeur is also provided

No requirement for specific documentation in this situation.


Salary Components

Conveyance Allowance Car lease and car maintenance expenses

Documents

Suggested documentation to be maintained by the company in case of situation 1

• Details of date of journey, destination, mileage and the expenditure incurred has to be maintained

• Certificate from the employer to the effect that the additional expenditure has been incurred for the purposes of official expenditure is required.


Salary Components

Per Diem

Taxability

Exempt to the extent to which the expense is actually incurred provided the following conditions are fulfilled

Per diem allowance has been granted:

• to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit.

• to meet the ordinary daily expenses;

• while being away from normal place of duty.

• Expenses as reimbursement for money spend for his stay in India - not taxable - S. G. Pgnatale [1980] (Gujarat)

• Daily allowance (reimbursement) - incur expenditure, wholly, necessarily and exclusively for the purpose of duties, not taxable- Goslino Mario (SC) [2000]

• Living expenses, furnished house, airfare and per diem for rest period, home travel, car etc exempt - Hindustan Powerplus (AAR)

• Employees on tour sent on deputation by TCS Ltd to USA as they are not transferred to USA. Period of deputation (more than 12 months) or the fact that the family accompanies - Saptarshi Ghosh (2011) Kolkata

Judicial Precedents


Salary Components

Child education and hostel allowance

Free or concessional education facility

Taxability

• Child education allowance – Rs. 100 per month

• Child hostel allowance – Rs. 300 per month

• Allowance can be claimed for two children

Taxability• Treated as a perquisite in the hands of the employee

• Valuation of perquisites:

Company owned/maintained

Free education facility

Cost borne by the company: Actual expense incurred

Cost of education in a similar institution as reduced by recovery; Exempt upto INR 1,000 per child


Salary Components

Telephone expenses Medical expenses

Taxability

• Actual cost of telephone expenses reimbursed is exempt

• Claim could be for official and personal usages

Taxability

• Medical treatment in employer owned/maintained hospital : Not taxable

• Medical treatment in Government/ local/ approved hospital : Not taxable

• Regular medical expenses incurred: Exempt upto INR 15,000

• Medical treatment outside India: Exempt subject to conditions


Salary Components

Use of movable assets Food, meals and beverage

Taxability

• 10% of the cost of asset or the rent amount is taxable

• No tax on use of laptop and computers

Documents

• Company to maintain track of assets provided to various employees and include the amount in the salary computation

• Seperate asset register and supporting documents to be maintained

Taxability

• Amount reimbursed upto INR 50 per meal is exempt

• Food, snacks provided in office premises exempt

• Coupons can be issued in lieu of cash payment


Salary Components

Other components

The incentive

• Employer reimburses amenities such as gas, electricity, helper

Taxability

• Actual cost incurred/reimbursed by the employer is taxable as perquisites

The incentive

• Costs of business development

• Leisure for the employee

Taxability

• Inital fee for corporate membership exempt

• Expenses incurred for official purpose exempt

• Collective incentives which are provided to all employees exempt – eg. health club, sports clubs

Club facility Other amenities

The incentive

• Loan granted to the employee/family members at concessional/without interest

Taxability

• Perquisite value - SBI interest rate on the maximum monthly outstanding balance

• Perquisite value nil if the loan does not exceed Rs. 20,000

Interest fee/concessional loan


Tax borne by the employer

Principle:

• Employee should be neither better off nor worse off on employer-sourced income by taking an international assignment

• Employee pays substantially no more or no less tax on employer-sourced income than would otherwise have been paid had the employee stayed in his home country

Ruling on tax equalization and Grossing up - Yoshio Kubo vs. CIT (ITA No. 441 and other appeals)

• Tax paid directly by the employer, on behalf of its employee, would qualify as non-monetary perquisite and thus tax on the same would be eligible to be exempt in the hands of the employee under Section 10(10CC) of the Act

• The Delhi High Court has discussed this matter in detail along with illustration and held that single stage grossing up would apply i.e. the tax borne by the employer, being a non-monetary perquisite, would be taxed only for a single time in the hands of the employees, since tax on such non-monetary perquisite would be exempt under Section 10(10CC) of the Act.


Deductions available u/s 80C, 80D


Deductions – Health Care SchemesExisting Vs Proposed Limits

Existing limits

Section 80D (insurance premium)

‒ For individual – 15,000₹

‒ For senior citizen – 20,000₹

Section 80DD / section 80U (expense for medical treatment)

‒ For disability – 50,000₹

‒ For severe disability – 100,000₹

Section 80DDB (treatment of specified diseases)

‒ Senior and very senior citizens –

₹ 60,000

Proposed limits (effective FY 2015-16)

Section 80D (insurance premium)

‒ For individual – 25,000*₹

‒ For senior citizen – 30,000₹

Section 80DD / section 80U (expense for medical treatment)

‒ For disability – 75,000₹

‒ For severe disability – 125,000₹

Section 80DDB (treatment of specified diseases)

‒ Senior citizen – 60,000₹

‒ Very senior citizens – 80,000₹


Deductions – Section 80CSukanya Samriddhi Scheme made eligible

Deposit

Contributions up to 150,000 per year ₹

eligible for deduction under section 80C

Maturity

Maturity proceeds will not be subject to taxation

Interest

Interest earned on such deposits will be

exempt from tax under section

10(11A)


Deductions – Existing Vs Proposed Limits

Section 80CCC• Contributions made for

availing annuity increased from 100,000 to 150,000₹ ₹‒ Effective from FY 2015-16

Section 80CCD• Deduction on account of

contribution to New Pension Scheme is increased from ₹100,000 to 150,000 within overall ₹limit of 150,000 under section ₹80CCE

• Additional deduction of 50,000 for ₹contribution to NPS in addition to the limit specified under section 80CCE.

‒ Effective FY 2015-16

Contribution to Annuity / Pension


New ITRs for AY 2015-16


New ITRs for AY 2015-16

Some additional information now required in ITR Forms

Aadhaar number is required to be reported (if applied for) in the tax return form itself

Details such as (IFSC code, bank name, joint holder name, account number and balance as on 31 March) of all bank accounts in India at any time during FY 2014-15 even if such account is closed during the year

Details of foreign travel

Details of beneficial owner/ beneficiary in respect of foreign assets

Date of opening foreign bank account

Date of acquiring immovable property, any capital asset or financial interest in any entity outside India

Date since the person is holding the position in the foreign trust (i.e. either as a trustee or beneficiary) needs to be specified

Details of income taxable in taxpayer’s hands if derived from the foreign trust

Information as regards to the investments made in the Capital Gains Account Scheme and deduction/ exemption claimed thereon

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