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
Actual interest payable subject to
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
Actual interest payable subject to
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