Category: Tax

This post is written by Krishna Srinivasan, who is a personal finance blogger writes for Plan Your Investment. 

Have you ever received notice from income tax office?. If you have filed income tax returns with all the details about your income, deductions, etc. and these details are verified by income tax department on random basis. Income Tax department has all the transactions pertaining to your PAN card. Once you have filed income tax returns, they can verify if the details submitted are correct as per your PAN records. If the details are not matching and any discrepancy found, they will send you a notice with details about the discrepancy. There is no need to panic for getting the notice, it is normal for income tax officer to send notice for the clarifications. This article explores when income tax department would send you a notice.

Even if the notice is seeking the payment, there is no reason to panic. Find out why IT Department asking for the payment and under what section they have sent the notice. Because, the notice can be sent for many reasons and if the demand for the payment is not correct as per your data, you can appeal against the notice.

Section 143(1) – Letter of Intimation

The intimation under section 143(1) is sent by the IT Department in response for the tax return filed by the tax payer. The main reason for this notice is intimating the tax payer about the arithmetic mistake while filing the return or  claiming excessive deduction or wrong exemption found while processing the return. By receiving the notice u/s 143(1), one can not conclude that it is a demand notice. As the name suggests, it is a intimation notice to the tax payer about the refund from IT Department or tax payable. This intimation has to be sent before completion of   the assessment year.

If this intimation contains any liability of the tax payment, then assessee  may consider this as the demand notice and make the payment. It is clearly notified by the IT department that this intimation is acknowledgement for the return filing and if there is any calculation error while computing the tax. However, if it provide any pending payment,  assessee has to clear the payment or file the application u/s 154 for the rectification. Do not worry and never try to ignore this notice. It may lead to a fine.

If the net “NET AMOUNT REFUNDABLE” is less than Rs. 100 or “NET AMOUNT DEMAND” is less than Rs. 100, then assessee can ingnore this notice and he thereupon won’t receive the refund or no need to pay the pending due.

Section 143(3) & 147

Notice u/s 143(3) is issued only after the notice from the section 143(2). This section is popular for the income tax scrutiny for an assesse’s income. However, this notice is not sent to assesse immediately after filing the returns. If the evidence provided by an assesse u/s 143(2), then IT Department sends a notice seeking the further scrutiny.

If Assessing Officer (AO) finds any income is escaping from the returns, then they would send a notice u/s 147.

Section 206C – Tax Collected at Source (TCS)

We are aware of the Tax Deducted at Source (TDS) from our salaries and interest income. In the same way, for the certain goods seller has to collect the tax at the time of receiving the money. This is known as Tax Collected at Source (TCS). The specified list of goods are:

1. Alcoholic Liquor for human consumption (1%)
2. Tendu Leaves (5%)
3. Timber obtained under a forest lease (2.5%)
4. Timber obtained under any other mode (2.5%)
5. Any other forest products other than Timber. TCS is applicable for the forest products, not the agriculture products. (2.5%)

Note that, TCS also includes many other categories, but I have listed above is only related to the section 201C. TCS has to be collected at the time money received from the buyer in the form of cash or cheque or draft. The TCS rate is ranging from 1% to 5% for various product categories.

Collected tax has to be deposited within one week from the last date of the collection month. The seller has to file a return for every quarter for the income he earned from these transactions. If the seller is failed to pay the collected tax on time, he shall be liable to pay the interest at 15% per annul from the date he collected money and till when he has paid the tax. He would receive a notice from the income tax office under the section 201C for demanding the payment of TCS.

Other Sections

There are few other sections for sending the notice.

• Section 153A/153 – Related to search and seizure operations
• Section 201(1) 201(1A) – Failure to deduct tax or deposit deducted tax
• Section 210(3) – Tax officer believes that advance tax is payable.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

IDBI Mutual Fund has come up with a new fund offer (NFO) of its open-ended equity-linked savings scheme (ELSS), IDBI Tax Saving Fund, from August 20th. The scheme seeks to invest predominantly in a diversified portfolio of equity and equity related instruments with the objective to generate capital appreciation and income along with the benefit of income tax deduction u/s 80C of the I-T Act, 1961.

The fund plans to invest at least 80 per cent of its corpus in equity and equity-related instruments and a maximum of 20 per cent in debt and money market instruments. The scheme closes on September 3rd and will reopen for continuous sale from September 17th.

Lock-in period: As with all other tax saving mutual fund schemes (ELSS), this fund also carries a lock-in period of 3 years, after which an investor can redeem his/her investment back to IDBI Mutual Fund whenever he/she wants.

NAV of Rs. 10 Per Unit: The units will be available at Rs. 10 face value during the NFO period and at market-linked NAV thereafter. Even after years of investor education, if somebody still feels Rs. 10 NAV is better than Rs. 100 NAV or Rs. 1000 NAV, then he/she can think of subscribing to this NFO. But, the fact would remain intact that a scheme with Rs. 10 NAV is in no way better than any other scheme with a higher NAV.

Benchmark: The performance of the scheme will be benchmarked against S&P BSE 200, which is an index of the top 200 companies listed on the Bombay Stock Exchange.

Profile of the Fund Manager: I think the fund manager is the most important factor to be considered while investing in any of the mutual fund schemes, especially an NFO. V. Balasubramanian, aged 54 years, is going to manage the corpus under this scheme. He is M.Com. and Certified Associate of the Indian Institute of Bankers (CAIIB). He has over 32 years of experience in the Finance field, with 14 years in the Mutual Fund industry and 16 years in Banking, out of which he worked for 8 years in treasury branch of Indian Bank.

He has been a fund manager with IDBI Mutual Fund since November 2011 and is already managing seven of its schemes, including IDBI Nifty Index Fund, IDBI Nifty Junior Index Fund and IDBI India Top 100 Equity Fund among others. Here is some relevant data for the schemes he is already managing:

As there are already so many tax saving schemes competing in the market with their long-term performance to be judged upon, I dont find any compelling reason for the investors to jump on to this new fund offer. Investors should check the performance of this fund before committing their hard earned money in a tough economic environment.

Any amount paid by an Individual or HUF to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D subject to certain limits. (Read: Details on Section 80D, 80DD and 80DDB)

I got the following question about this section the other day:

Sir,

I have some querries for above subject.
Right now I am claiming deduction of Rs 1,00,000 under the above section, since I have a severely handicapped son. Few years from now I will retire and will not have taxable income and I will not be able to claim the above tax deduction. I want the deduction to be claimed by my younger son who is now employed. The elder son who is handicapped will be dependent on him. What should  be done for such case. How to proceed?
Thanks in advance for clarifying the problem.

 

According to this section only the following people can claim exemption:

Taxpayer	Insured Person
Individual	On the health of taxpayer himself/herself, spouse, parents, dependent children of taxpayer
Hindu Undivided Family (HUF)	On the health of any of the member of the family

That then means you can’t claim exemption for any payment made towards siblings but you can create a HUF and then that HUF can claim exemption, and that may be one practical way of getting tax benefit if you are in this situation. Here is an older post that explains the details of creating a HUF. 

Sushila wrote the following last week:

Sushila June 27, 2013 at 4:33 pm [edit]

Harshit Shah posted the following comment a few days ago:

Harshit Shah April 17, 2013 at 1:42 pm [edit]

I got the following email yesterday and it got me wondering about the tax liability of pensions in India.

Please advice about taxability of 80CCC pension policy so as to pay minimum tax. My policy is maturing and it is about Rs. 3000/- per month. Thanks.

Section 80CCC deals with the deduction in your taxable income when you pay insurance premiums and is a sub-limit under Section 80C. This has nothing to do with how your pension will be taxed, and as far as the pension money itself is concerned, you can forget about 80CCC.

In fact, there is no pension that’s tax free at all. If you get a pension from the government, private sector or through an insurance policy, that should be included as part of your income, and will be taxed based on your slab.

Even if you moved to another country and draw a pension in India – that will be taxed in India based on your tax slab. 

The only exception to this is when you get some part of your pension commuted. Commuted pension means that instead of drawing a monthly amount, you get a lumpsum at the time of retirement. You may commute some or all of your pension and you will be taxed according to two different set of rules. The un-commuted amount will be taxed based on your slab, and then the commuted part will be taxed based on where you were working.

If you were a government employee, then all of your commuted pension is tax free, but if you were not then there are certain rules that tell you how much you will be taxed on them. The CA Club has an excellent post on the taxability of pensions in India, and you can refer to that if you’re looking for details.

In order to reduce your tax liability you will have to make some tax deductible investments, as pension itself is taxable, and other than commuting it – you can do nothing to avoid the tax liability on it.

I got a few great comments and emails on yesterday’s post about tax free and tax saving instruments, and although I have made those changes in the post, I think they merit a post of their own. So in this post I’m going to write about some corrections, clarifications and inclusions that various readers suggested.

Corrections

Income limit to avail RGESS benefit increased to Rs. 12 lakhs: Ashish Pandey wrote in pointing out that while the income limit to claim RGESS tax benefit was Rs. 10 lakh earlier, it has now been increased to Rs. 12 lakhs.

Post Office Monthly Income Scheme is not covered under 80C: Paresh pointed out that Post Office MIS is not covered u/s 80C. I have removed that from the list.

I apologize for these errors.

Clarifications

NPS: Sanmay pointed out that it will be more helpful to the readers if it were clarified that the NPS deduction was on your basic plus dearness allowance, actually over and above the limit of 80C, and was applicable to the amount contributed by the employers. To further explain, to calculate the upper limit on the deduction you should consider not only the basic salary, but the dearness allowance as well.

The money to be considered here is just the employer’s contribution to NPS, and that’s not limited by the Rs. 1 lakh upper limit of Section 80C.

Inclusions

Section 80TTA – Deduction on Savings Account: Krishna pointed out that a new section – 80TTA has been added since last year that makes interest on savings account deductible up to Rs. 10,000. This is only applicable for savings accounts and can’t be used for interest from fixed deposits. Sanmay added that you have to proactively get this deduction and get the bank to not deduct TDS on your interest.

Liquid Funds as Opposed to Savings Bank Account: Tushar brought this up and I am not sure if this will strictly qualify as a tax arbitrage option or not, but regardless, it is a useful thing to keep in mind, and in the existing high interest rate environment they become a viable alternate to savings account in some cases. Vidya Bala has a detailed post on liquid funds that I found quite instructive.

With the budget announced last month, we now know the status of new and existing tax free and tax rebate investments for 2013-14, and in this post I’m going to try and list down each and every investment opportunity in India that gives you a tax benefit of some kind. If you find any missing, please leave a comment and I’ll update the post.

Before going through the individual investments, let’s take a look at the broad categories where they fall.

Tax Free Investments: Tax free investments are those investments where the income earned from them is not taxable. For example, the interest that you earn from a tax free bond is not taxable. There aren’t many such investment options available in India.

Tax Rebate or Tax Saving Investments: These are investments that reduce your tax liability by subtracting the sum you invest in them from your taxable income. As a result, the total tax incidence on you is reduced as your income on which tax is calculated is lowered.

Tax Arbitrage: In this section I’m going to list down some investments that don’t have any specified tax rebate or aren’t tax free otherwise but they offer a tax advantage against comparable investments.

Tax Free Investments

Public Provident Fund (PPF): This is the first thing that comes to mind when you talk about tax free investments. PPF is perhaps the best type of tax free investment because it allows you to reduce your tax liability when you invest in it, and then the returns are tax free as well. PPF has a lock in period of 15 years but you can take a loan against your money at 2% interest between the third and the sixth year. They also allow partial withdrawal from the sixth year onwards. The current interest rate is 8.70% compounded annually. .

Tax Free Bonds: Tax free bonds are a good investment for people in the higher tax bracket as they are issued by companies backed by the government so the risk is quite low, and the returns are quite decent when you consider the post tax yield. In the last two years they have been issued towards the end of the financial year, but you can also buy them from the stock exchange if you missed that window.

The benefit of buying them directly from the issuer is that they usually have what’s called a step down feature, which means that if you buy this bond from the stock market then you get a slightly reduced interest rate. These bonds can’t be more than the corresponding 10 year G-Sec yield, and since interest rates have been going downwards since last year, you can expect tax free bonds that will be issued in 2013-14 to have a slightly lower interest rate than the ones issued this year. This year, the interest rate on tax free bonds has hovered around the 7.50% mark for 10 years.

Maturity Proceeds of Life Insurance Policies: According to Section 10(10D) of the Income Tax Act 1961,  life insurance policy  proceeds are tax free as long as the sum assured is 10 times or more the premium paid. I’m generally not in favor of these policies because I feel that there are better options elsewhere if you invest your money in pure term life policies and mutual funds but as far as tax liability is concerned, these policies are tax free. LIC comes up with a few of these policies every year in the tax season so you can look at these at that time to understand them in detail.

Tax Rebate and Tax Saving Investments

Tax rebate investments are generally covered by Section 80C and allow you to reduce your tax liability by investing in instruments that reduce your taxable income. Here is a list of investment options that allow you a tax rebate in some form or the other.

1. Life Insurance Covered Under 80C: Life insurance schemes are covered under 80C and you can invest in them to get a tax benefit up to the limit of Rs. 1 lakh within 80C. The limit is applicable on the combined investment under 80C and not just insurance premiums.

2. Pension Premiums: Section 80CCC governs exemptions on insurance premiums paid on pension plans. This section comes under 80C and has a limit of Rs. 1 lakh. This means that to calculate how much of a deduction you will get you have to consider other investments made under 80C as well.

3. Health Insurance: Section 80D talks gives deductions to premiums paid on health insurance and nny amount paid by an Individual or HUF to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D up to a limit of Rs. 15,000 for an individual (Rs. 20,000 for senior citizen). Though not an investment, I’m including it here because I feel it will come up in comments.

4. National Savings Certificate: Investment in NSC is also covered under Section 80C and they currently fetch a rate of interest of 8.60%.

5. ELSS Funds: ELSS (Equity Linked Savings Scheme) mutual funds are funds that invest in shares, and they also give you a tax rebate. These funds have a lock in period of only 3 years which is the lowest of any investment covered under 80C. I feel ELSS funds are a good way to get started in equities because you get the tax saving and that itself makes the investment relatively safer than other equity investments. However, if you are not comfortable with the volatility of equity then this option is not for you.

6. RGESS: A new section called 80CCG was introduced and RGESS funds are covered under that. They are funds that can invest in a specified set of companies in India, and investing in them also reduces your tax liability. They can only be used by first time equity investors, and your income should be less than Rs. 12 lakhs to be eligible under this scheme. The unfortunate part about them is that the way they have been structured, you can only get a maximum tax benefit of Rs. 5,000 and you have to go through a lot of trouble to do that. I think this is a good option for those people who were going to invest in these type of shares anyway, but just the tax benefit of this is not enough incentive for you to buy these.

 7. Tax Savings Fixed Deposits: These are just like regular fixed deposits but they come with a lock in period of 5 years, and are covered under section 80C. Investing in them saves taxes as well. They usually have comparable interest rate to other fixed deposits of similar time frame, and can be a good option if you are looking for a safe hassle free investment.

8. Deduction of up to Rs. 10,000 on Savings Account: In the last budget, section 80TTA was introduced which allows you to deduct up to Rs. 10,000 earned from your savings account. You can’t use this for income earned from fixed deposits so you may say that this is not strictly a tax saving investment option, but if you do have earnings from a savings account, use this section to claim tax benefit. As Sanmay points out below, an important thing to remember about this is that you have to proactively claim this deduction as the bank will deduct TDS on your interest unless you instruct them not to.

9. ULIPS: ULIPS are also tax saving instruments as they fall reduce your taxable income as well.

10. NPS: There is a new section called 80CCD(2) under which an employer can put up to 10% of the employee’s basic salary plus dearness allowance in NPS and that becomes tax deductible. This is over and above the amount available for deduction under 80C. Now, the key thing to remember here is that there are two parts to the contribution towards NPS, and what you contribute will still fall under the 80C limit, but what your employer contributes is outside of that.

All the uncertainty and changes around NPS has ensured that people aren’t very comfortable investing in it. The vast majority of people who currently invest in NPS are those who don’t have a way to opt out of it. I don’t feel comfortable recommending this to anyone right now but if you are invested in it then might as well take advantage of the tax benefit.

11. EPF (Employees Provident Fund): EPF is covered under 80C so you save tax there and then the interest is tax free as well. Most of you would already have certain contributions to EPF as a large majority of readers here are salaried individuals, and if you have made contributions to EPF then make sure you get the 80C tax benefit from these as well.

12. SCSS (Senior Citizen’s Savings Scheme): SCSS is run by the post office and is meant for people over 60 or over 55 if they have taken VRS. It currently gives you an interest rate of 9.30% and is covered under Section 80C as well.   

Tax Arbitrage Investments

1. FMPs: FMP (Fixed Maturity Plans) are close ended mutual funds which invest in debt instruments. You can invest in these for more than a year and be taxed according to long term capital gains rate. The benefit of these are that their returns are comparable to fixed deposits but the income from fixed deposits gets added to your other income and you are taxed at your regular income tax slab.  In this scenario, if you fall under the 30% slab then investing in FMPs can give you comparable returns but the tax is at a lower bracket.

2. Liquid Funds as Opposed to Savings Bank Account: Tushar brought this up and I am not sure if this will strictly qualify as a tax arbitrage option or not, but regardless, it is a useful thing to keep in mind, and in the existing high interest rate environment they become a viable alternate to savings account in some cases. Vidya Bala has a detailed post on liquid funds that I found quite instructive.

I can’t think of any other tax arbitrage investments but if you know one please do leave a comment and I’ll include it.

Looking at investments from a tax point of view is a double edged sword. You want to think about taxability and plan based on it so that you can maximize your returns but at the same time you don’t want taxability to become the driving force behind your investment decisions to such an extent that you ignore everything else.

Edits:

1. Ashish Pandey pointed out that the upper income limit to qualify for RGESS is now Rs. 12 lakhs instead of Rs. 10 lakhs. 
2. Paresh pointed out that Post Office MIS does not qualify for 80C deduction so I have removed that from the list.
3. Krishna pointed out that I had missed the newly added Section 80TTA so I have added that.
4. Sanmay pointed out clarifying NPS and a useful tip for claiming savings tax deduction.

This article is written by Aashish Ramchand, a Chartered Accountant by profession. Aashish is the co-founder of makemyreturns.com. He also has completed his CFA Level I (American) and is very passionate about writing articles on taxes and tax advisory. He can be reached at connect@makemyreturns.com

A new section has been introduced in the income tax act i.e. Section 80 EE. This section has been introduced to cater to the need for affordable housing. This section allows for a deduction up to Rs. 100000/- for the AY 2014-15 (i.e. FY 2013-14) to individual assesses for interest payable on their housing loan. Few conditions are required to be satisfied for this section to be applicable.

1)  The loan is sanctioned between the FY 1/4/2013-31/3/2014.

2)  The loan sanctioned does not exceed Rs. 25 Lakh.

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

4)  The assessee does not own any other residential house as on the date of sanction of the loan. In other words, this house is supposed to be his self occupied property.

5)  The assessee is a first time home buyer

Where the interest payable is less than Rs. 100000/- for AY 2014 – 15, then the balance amount shall be allowed in AY 2015-16. If a deduction under this section is allowed for any interest, no deduction shall be allowed in respect of such interest under any other provisions of the Act. The benefit under this section is mainly for one time primarily for AY 2014-15 and to a certain extent for AY 2015-16 for balance interest as mentioned above.

Also it is important to note that this deduction is in addition to the deduction of Rs. 150000/- in respect of interest on loans for self occupied property U/s 24(b). This is the current scenario as per the tax laws i.e. there is a maximum deduction of Rs. 150000/- on interest on housing loan for one’s self occupied property.

In my opinion, this new section would benefit the low to medium income section of assesses. It will greatly benefit such people who are first time house buyers as not only do they get a deduction up to Rs. 150000 for interest paid on housing loan but also an additional deduction of Rs. 100000/- from their gross total income as a result of introduction of this section.

It can be said that since the maximum cap of housing loan amount is Rs. 25 lakhs, on an average the yearly interest obligation on such loans amounts to Rs. 2.5 – 2.75 lakh. Thus as a result of this section, an individual can now effectively claim this entire interest expense as a deduction (i.e. 150000/- as per Section 24 (b) + Rs. 100000/- as per Section 80EE) from his gross total income and reduce his tax obligation accordingly.

A tax credit was announced in the latest budget where anyone making less than Rs. 5 lakhs would get a tax credit of Rs. 2,000. It wasn’t very clear to me what this means as a credit can imply that the government credits Rs. 2,000 in the bank accounts of all the assesses who are eligible for the credit, but that doesn’t make much sense because you can just collect Rs. 2,000 less to begin with and not go through all that hassle.

Rutvik posted the following comment about this a few days:

Rutvik March 5, 2013 at 10:00 pm [edit]