Category: Tax

I’ve fielded a lot of questions on the Section 80CCF Infrastructure bonds, and while I’ve written individual posts on the infrastructure bonds that have so far come out under this section, there is nothing on this section itself, so I’m going to address some common questions about  Section 80CCF with this post.

It goes without saying that all these questions have popped up in the comments section at one time or the other (well, not the first one).

Is 80CCF a new Space Shuttle?

I wish it were, but it’s not even remotely as cool as that. In fact, it’s just a new section that allows Non Banking Financial Companies (NBFCs) to issue infrastructure bonds, and investors who invest money in these bonds can get an additional tax benefit.

What is the additional tax benefit under 80CCF?

All of you know that you can reduce your taxable income by investing in certain instruments like tax saving fixed deposits, or tax saving mutual funds, but the limit on the deduction from your taxable income is Rs. 100,000.

So, if you invest Rs. 150,000 in tax saving mutual funds – the tax benefit will be capped at Rs. 100,000.

Section 80CCF allows you to invest an additional Rs. 20,000 in infrastructure bonds, and have that reduced from your taxable income in addition to the Rs. 100,000 deduction you get from the other instruments.

Will I get the tax benefit every year, or just one year?

You will get the tax benefit only in the first year, which means that if you buy bonds worth Rs. 20,000 in this year – Rs. 20,000 will be deducted from your taxable income while calculating tax this year

There is no tax benefit from next year onwards.

I have  a tax liability of Rs. 12,000 – will that become zero if I buy bonds worth Rs. 12,000?

No, that’s not how they work. Buying the bonds will not lead to a reduction in the tax paid by reducing that amount from your tax burden.

The benefit comes from reducing your taxable salary by the amount of your investment, so that the final tax burden is reduced.

Is there TDS on the interest?

For bonds that are issued only in electronic format there is no TDS, however that doesn’t mean that there is no tax on them.

Is the interest from these bonds tax free?

While there may be no TDS on the interest on these bonds, they are taxable, and the interest will be added to your income, and it will be taxable.

Do I need a Demat Account to invest in these infrastructure bonds?

Every bond issuer has different terms, and it depends on what their terms of issue are, but the IFCI issue is open only for Demat account holders, while the IDFC and L&T issues were available to people who wanted to subscribe via physical form as well.

Will these 80CCF bonds be listed on a stock exchange?

Yes, the bonds will be listed on a stock exchange, however they come with a lock in period, and you can’t sell them before the lock in period. For example, the IDFC bond had a lock in period of 5 years, so you can’t sell these bonds within 5 years, but once they list you will be able to sell them.

I missed the existing issues, will there be new infrastructure bond issues?

Yes, there are going to be more 80CCF infrastructure bond issues in the future, and if you missed the earlier ones, there is still a chance to get these bonds.

What tax proof will I get if I applied for the infrastructure bond in dematerialized form?

You will get allotment advice in the mail that you can use for tax proof, and if you haven’t received the proof then some people have been advised that they can use the copy of their Demat holdings to show that you own the bonds.

Can NRIs invest in Section 80CCF bonds?

The bonds that have been issued so far haven’t allowed investments from NRIs, and I think there might be some clause which limits NRIs from investing in these bonds.

Since I need a Demat account to buy these bonds, will I need a broker to exercise the buyback option?

You won’t need a stock broker to exercise the buyback option. In the case of IFCI you can write to them and ask them to exercise the buyback, and in the case of IDFC and L&T they can exercise it by buying it back from you and crediting your bank account, so you don’t need a broker.

You will need a broker if you decide to sell it on the exchange though.

When will I receive the physical allotment advice letter, and when will I start seeing them in my Demat account?

This is a question that has been tormenting a lot of people because the companies issuing these bonds don’t bother to communicate when the bonds will be allotted or when they will send the allotment advice letter.

No one can say for sure if the company doesn’t communicate this, but I’ve seen that the past couple of issues have taken about 3 – 4 weeks from closing of the issue to credit the bonds, and then an addition 2 or 3 weeks for the letter to arrive.

How are the yields for these bonds calculated?

This question is a bit more involved, and I have done full posts on how yields for tax saving bonds are calculated, as well as the limitations of the method used to calculate them and you can go through these posts to understand this better.

How can I keep track of these 80CCF infrastructure bond issues?

I have created this post with the calendar of 80CCF bond issues, and you can check that periodically to see if there are any new issues. This will also be widely reported in news articles, so it’s quite likely that you come across them in your daily reading.

Any other questions?

I’ve tried to cover all questions that I see pop up frequently, but if you have any other questions feel free to leave a comment, and I will try to answer them.

What tax proof can I use If I invested electronically through a Demat account in the infrastructure bond?

I got an email about this yesterday, and there have been several comments on it as well. People are interested in knowing what they can use as tax proof when they apply for the infrastructure bonds in the dematerialized form since there is no clear communication on this.

Here is my response, which is really drawn from the knowledge of our commenters like Loney, Ajay, Briney among others:

There is a fair bit of confusion on this as some people have actually received IDFC Allotment Advice letters that can be used for tax proof.

I’m not sure why others have not received it – but it could be a matter of time when you receive it too, or your address is incorrect so you might want to check that. If you get that, then you can obviously use that.

If not, then some brokerages have advised that you can use the NSDL Holding Report from your account as proof of investment, so in the absence of anything else you’ll have to use that.

Edit: Reworded slightly

The Indian budget was positively received by most people today, and it has got a bit of good news for people who pay income tax.

The tax slabs have changed, and it translates into a Rs.50,000 savings for incomes up to Rs. 8 lakhs. Any amount over that will continue to be taxed at the earlier rate.

The new slab is as follows:

Income up to 1.6 lakhs: 0

From 1.6 to 5 lakhs: 10%

5 to 8 lakhs: 20%

Above 8 lakhs: 30%

This is a welcome change and if you compare it with the earlier slab – someone earning 8 lakhs will save Rs.50,000. This is of course a simplification, as it does not take into account the deductions you get from investments, EMI payments or other things like the LTA tax or HRA tax for example.

I feel happy to be able to write about this good news especially because I recently had a post an another bit of good news for Indian savers.

The bad news is that fuel prices will go up a bit, but in the larger scheme of things deregulation of fuel prices is a good thing for the Indian economy.

Equity oriented mutual funds are those mutual funds which invest more than 65% of their funds in equities. Dividend income received from such mutual funds is exempt from tax for domestic investors. If an investor sells their equity oriented mutual funds then any capital gains on those is also not taxable. But to qualify for this exemption the investor should have sold the mutual funds one year after its purchase.  However Securities Transaction Tax (STT) should be paid on equity oriented mutual funds at 0.25% when the units are sold back to the mutual fund.
For funds other than equity oriented funds the tax of dividend is zero, but long term capital gains i.e. gains on mutual funds sold after a period of one year are taxed at either 10 or 20% depending on whether indexation has been used or not. 

 

For the income generated in the year 2007-08 In India there are two ways in which the profits on listed shares in registered stock exchanges are taxed based on whether the shares are long term or short term. 

Short term shares are those which are bought and sold within a period of less than an year. Which means a if you buy a stock at Nov 08 2007 and sell it within a one year period whatever profit you make would be taxable as short term capital gains. The tax on such profit would be 10%. 

On the other hand if your share is a long term one then there is no tax at all. So if you buy a share on Nov 08 2007 and sell it after Nov 08 2008 and make a profit on your sale there is no tax that has to be paid on your profit. 

You may also be interested in: 

How is my LTA Taxed? 

How is my HRA Taxed? 

Surya Food and Agro Limited IPO 

Jhaveri Flexo India Ltd. IPO  When is the right time to sell?

EMI’s consist of 2 parts: The principal amount of loan & the second one being the interest on that.   

A. Treatment of Principal Amount    

According to the provisions of Income tax Act repayment of principal amount of loan can be claimed as exemption from total income of the assessee under section 80C. This means that total amount of EMI’s paid during the year will be bifurcated into these 2 parts i.e. principal amount & interest. The total of principal amount can be claimed as exemption. One thing to be noted here is that since the section 80C also covers other exemptions relating to LIC premiums, PPF, NSC’s etc & the maximum amount of  exemption that one can claim is upto Rs.1,00,000/-. However there is no limit on amount of principal amount of loan, however the total of exemptions to be claimed under this section should not exceed Rs. 1 lakh. Assessee can claim any of the expenditure as exemption i.e. repayment of principal amount / LIC premium / PPF etc. 

In other words, the assessee can claim either full amount of Rs.1 lakh from only investments in LIC / PPF etc or can claim full amount of Rs. 1 lakh from repayment of housing loan or can make any combination of investments & repayment of principal amount of loan but it is to be kept in mind that total should not exceed Rs. 1 lakh.   

B. Treatment of Interest   

As regards the interest part of EMI it is allowed as a deduction from a different head of income i.e. House property. Here again we will first calculate the total amount of interest paid in an year from the EMI’s paid. If the house property in respect of which loan is taken & EMI is paid is self occupied then maximum amount of deduction that one can claim (under section 24) is Rs.30,000/-.  However if the assessee fulfills the following conditions then the maximum amount of deduction is Rs.1,50,000/- 

1. Loan is taken on or after 01/04/1999 for acquisition / construction of property. 

2. Property is completely acquired / constructed within 3 years of taking the loan. 

   It may be construed that 

1. Deduction in case of amount borrowed for reconstruction / repairs / renewals of house property will be Rs.30,000/-. 

2. Deduction in case of amount borrowed before 01/04/1999 for construction / reconstruction / repairs / renewals / purchase of house property will be Rs.30,000/-. 

   Note: It is to be kept in mind that above provisions will ONLY apply when the property in respect of which loan is taken or EMI is paid is SELF – OCCUPIED by the assessee & not let – out. 

Note : EMI paid in respect of that house whose construction has not been commenced will still be taken for computing exemption of interest & principal amount. The amount of exemption in respect of interest will be limited to maximum of Rs.30,000/- only. In order to claim maximum deduction of Rs.1,50,000/- the house should be constructed within 3 years from the end of year in which loan was taken & such loan is taken after 01/04/1999.

 Gurpreet Singh, CA 

Taxability of HRA depends on following two of factors : –      
 

1. Rented house i.e. the assessee MUST be living in a rented house. Deduction of HRA cannot be claimed when one is residing in his own house or is not paying rent at all.
      

 

2. Place of residence i.e. in metro cities (Delhi, Bombay, Calcutta & Madras) or other cities.
      

  CALCULATE THE FOLLOWING      
 

1. 50% of Salary* (if assessee is living in metro cities) OR 40% of Salary (if assessee is living in other cities)
      

 

2. Deduct 10% of salary* from rent paid by the assessee.
      

  Now take the least of the above calculated amounts & compare it with the amount of HRA received by the assessee.   CASE 1   if calculated amount > HRA received then whole of HRA is exempt from tax   CASE 2   if calculated amount < HRA received then the amount chargeable to tax is (HRA   Calculated Amount).      Note - * means that salary includes the following   1.       Basic Salary  2.       Dearness Allowance 3.       Commission based on a fixed percentage of turnover (Sales) achieved by the employee as per terms of contract of employment. Gurpreet Singh, CA       

Say there is a case where you have purchased a house on 1-1-2005 and then purchased another one, 1 year before the purchase of the original one or two years after the purchase of the original one, in this case from 1-1-2004 to 1-1-2007 and have also sold off the original house.
In this case the capital gains that arise from the sale of your original property will not be charged directly but rather dealt with in a different manner which is as follows:

1. Say the capital gains are greater than the cost of the new house. In this case the capital gains will only be computed on the difference. So if the profit from the sale of your original house is 20 lakhs and the new house is just for 10 lakhs then the tax that you have to pay will be on 10 lakhs. However if you buy a third house then the cost of the second house for the purpose of capital gains calculation will be 0.

2. If the capital gain or profit that accrues from selling the original house is less than the cost of the new house then there will be no capital gains chargeable to tax at all.

3. Now say you do not use the entire amount of capital gains towards building or buying a new house, in this case you will need to deposit the money in a specified account for getting exemption. There are rules applicable on when and how much you can withdraw from this account and these are to be followed after seeking legal counsel.

The above explanation is found from Section 54 of the Income Tax Act however this is just an indicative explanation of the act and serves to act as guidance when you are thinking about making such a transaction. Please seek legal counsel to get exact details on how the tax liability would be in your specific case from legal experts before engaging in any transaction of the above nature.