While planning to save tax before March, one needs to take into considerations total income, including income from salary, house property, capital gains and income from other sources as well as deductions allowed under various sections like 80C and 80D. Understanding total income and deductions or benefits allowed under the Income Tax Act allows one to plan better for saving tax, says Nikhil Vadia, a practising Chartered Accountant (CA) and expert at Moneylife Foundation's Free Tax Helpline.
He was speaking at a seminar on 'Last minute tips to save tax and budget changes' organised by the Foundation in Mumbai.
According to Mr Vadia, before planning to save tax one needs to understand the concept of total income and tax already deducted in the form of tax deduction at source (TDS). He said, "The tax payer needs to check form 26AS from IncomeTaxefiling.gov.in website or through net banking with pay slips for tax deducted up to December 2016. Verify simulated tax computation provided by employer for entire year with total salary, various deductions allowed and investment declarations considered."
"If the taxpayer has received ESOPs received during the year, then she needs to check the perquisite valuation with market price and amount paid. For ESOPs of parent company, the employee working for Indian unit needs to verify calculations with market price in the host country. She also need to ensure to disclose in income tax return (ITR) all accounts abroad like demat, broking and bank account. Any dividend received abroad is required to be declared as income in India and is fully taxable. Dividend reinvested to buy shares is also taxable. If shares are sold, then capital gains in fully taxable in India subject to deduction for tax paid abroad."
Many times, people change jobs during the financial year and hence need to check certain things while planning for tax savings, Mr Vadia says. "Check whether your last employer has considered all salaries received during entire year and deducted tax accordingly. If not then calculate the total taxable salary received from all employers and pay advance tax along with interest. For example, if salary received from Employer 1 is Rs5 lakh and Employer 2 is Rs4.5 lakh, then you need to pay tax on Rs9.5 lakh. If both employers have deducted tax considering independent slab rates, then advance tax would be payable by the taxpayer," he added.
Sometimes, the employer may not have considered some investments or the employee misses the deadlines for submitting proofs of investments. However, nothing to worry as the taxpayer can claim benefits while filing ITR, Mr Vadia said. He, however, said, "If there is difference of more than 10% in taxable salary as per form 16 and income tax return, one may receive a notice asking to explain the difference."
As per the new provision, of the taxpayer is paying a rent of Rs50,000 or more per month, then she is mandated to deduct TDS at the rate of 5% from the rental payment. This is applicable from 1 June 2017 to all individuals and Hindu undivided family (HUF), which are not covered by Section 194-I of the I-T Act, Mr Vadia said.
He then explained various provisions on income from house property. "In case one owns more than one house, then tax is payable on deemed rent on second house onwards as per the choice of assessee and TDS is usually deducted at a rate of 10% on rent received. If there is some other income also, then advance tax for balance 20% needs to be paid. In case you are paying rent to a landlord who is non-resident Indian (NRI) and claiming house rent allowance (HRA) benefit, then you need to deduct tax at a rate of 30.9%."
He says, "In case of co-owners, the rent received is included in respective income based on determined share or contribution towards purchase of property. From 2016-17 onwards, one has five years to complete construction of house instead of three earlier to claim interest expenses. From 2016-17 onwards arrears of rent received or the unrealised rent realised subsequently, will be deemed to be income of the financial year in which such rent is received or realised and 30% deduction will be allowed from such rent as per new section 25A."
"From FY2017-18, loss on house property income is restricted to Rs2 lakh per year, even for let out property, which was unlimited earlier. Carry forward of excess loss is allowed for eight years. For builders and developers, from FY2017-18 onwards, income tax will have to be paid on deemed rent for completed house after one year," he added.
Mr Vadia then explained capital gains (CG). He says, "For asset sales during the year, the taxpayer (or seller) needs to calculate CG tax and pay advance tax accordingly. Interest for earlier instalments of advance tax is not payable if entire CG tax paid in next instalments as per Section 234C. The taxpayer needs to check from form 26AS, whether the buyer had deposited the 1% TDS and the same is reflecting in the form. The seller also needs to obtain form 16B from the buyer."
Several people want to save CG tax by investing the proceeds from asset sales in bonds. Mr Vadia said, "The time limit for claiming exemption under Section 54 (buying one new house) or section 54F (one new house on sale of any other asset) is one year prior, two years afterwards or construction within three years from the date of sale. The new house has to be in India. For exemption under Section 54, the capital gain needs to be invested while for Section 54F, the entire sale consideration is required to be invested. If exemption under Section 54F is claimed, then the taxpayer cannot purchase new house for one year or construct one within 3 years."
Some people buy house owned by a non-resident Indian (NRI). In such cases, they need to deduct TDS at a rate of 30.9% and not 1%. The buyer also needs to obtain a TAN number and deposit the tax and file TDS return in Form 27Q. Also when the house property is bought from an NRI, the buyer should not use for 26QB for paying TDS. The NRI can obtain a lower tax deduction certificate under Section 197, he added.
Mr Vadia then explained some new changes proposed in the Budget related with capital gains. He says, "From FY2017-18, holding period for land, building or both has been reduced to two years from three years. Long-term gain on sale of shares would be exempt only if STT is paid at the time of purchase from 1 April 2017. Holding period of mutual fund (MF), in case of scheme consolidation will be from the date of holding of original scheme, which is applicable from 1 April 2016 onwards. Also the original transfer from one scheme to other will also not be a taxable transfer as per Budget 2016."
Highlighting a new change in the Budget, Mr Vadia said, the base year for capital gains is now shifted to 2001 from 1981. "So, if you are planning to sell a house, it is better to do it after March 2017," he added.
Explaining the concept of income from other sources, the CA, who has over 20 years' experience in direct and indirect taxation, internal audit and management consultancy, says the taxpayer needs to do own calculations, especially for interest income and TDS. He says, "Interest on savings account above Rs10,000 is fully taxable. This is combined for all savings accounts held by a person including dormant or non-operative account, if any interest is credited. Irrespective of method of accounting, it is better to take fixed deposit interest based on banks' certificate and TDS reported in form 26AS."
"If fixed deposit or other interest is high as TDS is deducted @10%, then the taxpayer is required to pay advance tax. Similarly, for non-convertible debentures (NCDs) and bonds held in demat form, no TDS is deducted, and the taxpayer needs to calculate and pay advance tax," he added.
Mr Vadia also highlighted that interest earned on income tax refund is fully taxable.
He then explained several deductions that can be claimed under various sections like Section 80C, 80D (health insurance premium), Section 80DDB (deduction for medical treatment expenses), 80G (donations), 80CCD (1B-National Pension Scheme-NPS).
Sharing some tips on tax filing and other issues, Mr Vadia says, returns for FY2014-15 cannot be filed beyond March 2017. "From next year onwards if return is filed late then fees of Rs1,000, Rs5,000 and Rs10,000 will be applicable as per Section 234F. Even the time limit for filing revised return is now reduced by one year. So make sure that correct return is filed. Cash transactions of more than Rs3 lakh are not allowed and there is a penalty of amount equivalent to transaction value under Section 269ST for this violation," he added.
According to Mr Vadia, Bengaluru-based Central Processing Centre has been given additional powers under Section 143(1) to do a review of return before processing from this year onwards. He said, "The CPC can make adjustments in wrong carry forward of loss, disallowance of expenditure in audit report but not taken in computation of income, additional income appearing in form 26AS, which is not included while filing return, and disallowance of deductions made for business income. It will also provide an opportunity to the taxpayer of being heard before making these adjustments."