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Tax Planning 2017-2018

Most people plan to save their taxes in fag end of the financial year. This leads to various mistakes due to lack of time.

It makes immense sense to plan your taxes in the beginning of the financial year.

If planned properly, the income earners up to Rs.5 Lacs can plan to pay minimal to zero tax in FY 2017-18. We at VRIDHI will be glad to do the Tax Planning for you. Call us today.

How to report F&O trading in your income tax return

Income from F&O deals is almost always treated as business income, irrespective of frequency or volume of transactions

by Archit Gupta, 5-9-2016, Mint, Source:

Taxpayers who deal in derivatives, describe their experience with the tax filing process as vague and confusing. Here are some basics that can help.

A derivative means an instrument whose value is derived. It has no value of its own. Its price is based on the underlying asset. Derivatives of stocks and indices can be traded on Indian stock exchanges. The most popular form of derivatives are futures & options (F&O). A futures contract means an agreement to buy or sell on a future date. This contract expires on a pre-set date. On expiry, futures are executed by delivery of the underlying asset or via payment. Options and futures are alike but when you do an options contract, you can choose to not make the transaction.

Income from F&O deals is almost always treated as business income. This treatment is irrespective of the frequency or volume of your transactions. That may come as a surprise if you are salaried and have never run a business. Taxpayers who have business income have to file ITR-4.

As per Indian tax laws, incomes are reported under five heads—salary, house property, capital gains, business and profession and other sources (any residual income that cannot be classified in other heads). F&O trade is reported under the head ‘business’ in your tax return.

Reporting F&O trade as a business means:

*You can claim expenses from your business income

*As a result you may earn a profit or incur a loss

*Losses must be reported and losses have tax benefits

*Your total income (from all five heads) continues to be taxed at slab rates.

Businesses may be speculative or non-speculative, and the tax treatment is different. The income tax Act says that F&O trade is considered as a non-speculative business. Intra-day stock trades are treated as a speculative business.

Remember that cost indexation and capital gains exemptions are only allowed on sale of capital assets such as equity shares, mutual funds, land, house, and others. Since F&O trades are considered a business, tax rules of capital gains rules do not apply.

The first hurdle is to prepare your business’s profit and loss details. To calculate gross income from F&O trades, take your transaction statement for the whole year. Look at your receipts; these may be a positive or a negative value. Sum these up for the whole year. Expenses can be deducted from your gross income. Some expenses that you can deduct include rent or maintenance expenses of premises used for the business; mobile or telephone; internet charges; demat account charges; broker commission; depreciation on laptop used for trading; and any other expense directly related to your work.

Business income is calculated for the financial year for which you are filing your return. You will also have to prepare a balance sheet which is reported in ITR-4. It is basically a statement of your assets and liabilities.

Many people get confused when they have more than one type of dealing in the stock market. Some do intra-day stock transactions along with F&O trades. Some may hold stocks as long-term investments and also invest in mutual funds. In such a situation, you should calculate your business income from all of these separately. F&O trade income and intra-day stock trading will have separate expenses. Don’t worry if you have consolidated expenses; for example, you use the same premises to trade in both, or use a single phone. Simply bifurcate these expenses on a reasonable basis. You can allocate them using a ratio based on time spent.

If you invest in stocks for the longer run, you can treat them as capital assets. These will not be reported as business if you don’t trade in them often. There is an element of judgement involved and the main criteria is your intent. So, choose carefully. If you have some stocks that you trade often and some that you hold for longer, you can separate them into business and capital assets. Remember to choose on a fair basis and apply your choice consistently. You have to report gains from capital assets under the head ‘capital gains’, which has different tax rules. Mutual funds, too, may be treated as investments and taxed separately.

You will end up paying higher tax if you do not report your losses since losses have tax benefits and reduce your total taxable income. Losses from F&O can be set off from income from other heads (except salary income). Say, your loss from F&O business is Rs.1 lakh, salary income is Rs.5 lakh, income from rent is Rs.2 lakh, and interest income isRs.50,000. Your total taxable income shall be Rs.6.5 lakh.

If losses are not fully set off in the same year, you can carry them forward for 8 years. However, in the following 8 years, it can only be set off from non-speculative business income.

If you have F&O loss, you must get your accounts audited. Audit is also mandatory if your turnover exceeds Rs.1 crore. If accounts are not audited, a minimum penalty of 0.5% of turnover may be levied (maximum Rs.1.5 lakh). The due date of filing of tax returns for financial year 2015-16, where audit is mandatory, is 30 September 2016.


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Taxpayer can classify gains from share sale

Tax department says determination whether a particular investment in shares or other securities is in the nature of a capital asset or stock-in-trade has led to a lot of uncertainty

By Remya Nair, Mint, 3/3/2016, source:

In a move that will bring down one of the most common tax disputes, the income tax (I-T) department has clarified that the taxpayer can decide how to classify the gains from sale of shares—as capital gains or as business income.

In a notification dated 29 February, the tax department said the determination whether a particular investment in shares or other securities is in the nature of a capital asset or stock-in-trade has led to a lot of uncertainty and litigation in the past, compounded by different interpretations of the law by courts.

Therefore, the tax department has decided to take the interpretation away from the assessing officer’s hands and leave it to the taxpayer to make the classification. This means that a taxpayer dealing in equities can decide if it is an investment or his business. However, a classification once made in an assessment year cannot be changed in subsequent years.

“Where the assesse itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assesse desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the assessing officer,” the notification said.

However, it will not be applicable in “cases where the genuineness of the transaction itself is questionable, such as bogus claims of long-term capital gain/short-term capital loss or any other sham transactions,” the notification said.


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Budget2016 Highlights

#Budget2016 Highlights:
* Din in Lok Sabha amid Budget presentation
* Finance Minister Jaitley begins speech in Lok Sabha
* Financial markets battered globally
* Indian econ has held ground firmly amid global turmoil
* Had inherited an economy of low growth
* Converted difficulty into opportunity
* We converted challenge into opportunity
* Our external situation is robust
* Confidence, hope continue to be held around India
* Global economy in serious crisis
* Global trade has contracted
* IMF has held India as bright spot
* World econ forum said India’s growth extraordinarily high
* Indian econ still bright spot despite challenges
* GDP grew notwithstanding global meltdown
* India GDP has accelerated to 7.6% now
* India’s external situation is robust
* Must carry out reforms
* Must have prudent fisc policy, up domestic demand
* Pay panel, defence pension to add to spending in FY17
* FY16, FY17 will be extremely challenging for govt spend
* Must continue with pace of reforms
* Must ensure growth does not slow down
* Must ensure macro-economic stability
* Strengthened firewalls against global risks
* Plan spend increased under FY16 revised estimates
* Risk of global slowdown is mounting
* Money with govt belongs to people
* We had to work in unsupported global environment
* Forex reserves highest ever at $350 bln
* Foreign exchange reserves are at highest ever level
* FY16 CAD projected at 1.4% of GDP
* To make significant changes in FDI policy
* To incentivise gas exploration
* Aim to work on passage of GST, Bankruptcy Code
* FY17 priority to give additional resources to rural areas
* Need to provide for bank recapitalisation
* Must prioritise spending in FY17
* Managed to improve FY16 fincl condition on revenue buoyancy
* Infra invest to enhance quality of life
* To have prudent mgmt of govt expenses for fiscal prudence
* To focus on tax reforms
* To undertake tax reform to improve compliance
* To focus on prudent mgmt of govt finance
* To focus on governance, ease of doing business
* To focus on infra investment
* To provide dispute resolution for PPP platform
* Allotted 90 bln rupees for Swachh Bharat mission
* Allotted 1.5 bln rupee for land record digitalisation FY17
* 7.5 mln households gave up LPG subsidy
* Jaitley sits down, continues Budget speech
* 1 bln rupees for birth anniversary of Guru Gobind Singh
* 1 bln rupees for birth anniversary of Deen Dayal Upadhyay
* Interim provision made for pay panel suggestions execution
* Committed to fincl requirements of announced econ packages
* Made interim provision for seventh pay panel
* To up MSME category turnover cap to 20 mln rupees
* To drive towards self-sufficiency in hydrocarbon sector
* Jaitley stands up, continues Budget speech
* To have fiscal deficit target range
* FY17 fiscal deficit target at 3.5% of GDP
* FY16 fiscal deficit pegged at 3.9% of GDP
* Prudence lies in adhering to fiscal targets
* FY16 revenue deficit 2.5% of GDP
* Ensured development agenda is not compromised
* FY17 total expenditure 19.78 trln rupee
* FY17 total spend at 19.78 trln rupees
* FY17 non-plan expenditure 14.3 trln rupees
* FY17 plan expenditure 5.5 trln rupee
* Total resources to states in FY17 at 996 bln rupees
* To scrap plan, non-plan expenditure distinction
* To do away with plan, non-plan classification of spending
* Plan allocation to stress on rural, infra, social sectors
* CPI inflation came down to 5.4% under our govt
* Fall in CPI inflation providing big relief to public
* Plan doubling farmers’ income in 5 yrs
* Plan to up spend on farm, rural, social sectors FY17
* Need to create new infrastructure for irrigation
* Need to address water resource utilisation
* To allocate 359.8 bln rupees for farm, farmers’ welfare
* Need to give income security to farmers
* Need to think beyond food security
* To allocate 4.12 bln rupees for organic farming
* Policy to convert city waste into compost
* 140 mln farms to be covered by soil health card by Mar 2017
* Fertiliser co to market city compost fertilisers
* 600 bln rupees for sustainable mgmt of water resources
* Soil health card plan being implemented with great vigour
* To form 200 bln rupee long-term irrigation fund in NABARD
* To allot 865 bln rupees in five yrs for irrigation schemes
* To bring 2.85 mln ha under PM irrigation plan
* To allocate 170 bln rupees for irrigation scheme FY17
* FY17 Crop insurance scheme allocation 55 bln rupees
* FY17 interest subvention for farmers seen 150 bln rupee
* Farm credit target for FY17 at 9 trln rupees
* 9.7 mln tn agri storage capacity added FY16
* 3.68 bln rupees provided for soil health scheme FY17
* 12 states have amended APMC Act to join e-market plan
* Unified agri market e-platform to be launched on Apr 14
* Plan e-market platform for agriculture wholesale markets
* To allot 5 bln rupees under food security plan for pulses
* 5 bln rupees for pulses production in 622 districts
* 86,000 tn honey produced in FY16; 90% exported
* Need to focus on drought-hit areas
* Food Corp of India to make online payment of farm goods
* To launch 4 new dairy programmes
* To take up allied activities to increase farm income
* To encourage states to take up decentralised procurement
* Made effective mgmt for pulses procurement
* MSP online procurement system through FCI
* To encourage states for decentralised procurement of crops
* Allocate 55 bln rupees for PM Fasal bima Yojna
* Price stabilisation fund for pulses has 9 bln rupee corpus
* To introduce direct benefit plan for fertiliser on pilot
* To focus on educational skills, job creation
* Plan law to give statutory backing to Aadhaar
* To announce health scheme covering 1/3rd of population
* Health insurance, BPL cooking gas scheme planned
* To focus on delivery of benefits to needy
* Infra, social sectors to have more govt spend
* BPL families to get LPG connection
* Aim to list public sector general insurance cos
* To undertake 3 major schemes for weaker sections of society
* Self-help groups’ set up hastened for livelihood generation
* FY17 aid to gram panchayat, municipality at 2.87 trln rupee
* Digital repository for educational certificates
* Digital depository for school-, college-leaving documents
* Education, skill development, jobs 4th pillar of Budget
* To allot 10 bln rupee for higher education financing agency
* 62 new Navodaya schools to focus on quality education
* 1.52 trln rupees allocated for social sector
* To form national scheduled caste, tribe hub in MSME min
* Stand-up India scheme allocation 5 bln rupees
* This must be year of empowering scheduled castes, tribes
* 5 bln rupees for scheduled caste, tribe entrepreneurs
* Aadhaar not to be proof of citizenship or domicile
* Social security platform to be used for Aadhaar
* Aadhaar bill to be introduced FY17
* To introduce targeted delivery of subsidies via Aadhaar
* Task force to rationalise human resources in ministries
* 17 bln rupees for skill development scheme FY17
* 1,500 multi-skill training institutes across country
* To interlink national, state employee bureaus
* Plan to set up 100 model career centres
* 10 bln rupees for new EPF scheme
* Govt to pay 8.33% EPF contribution for new staff 1st 3 yrs
* Allocated 877.65 bln rupees for rural development FY17
* Rural insurance scheme for farmers planned
* To provide more funds to vulnerable sections in rural areas
* Cluster facilitation under rural job plan to conserve water
* 385 bln rupees for rural job plan FY17
* See 228% jump in gram panchayat allotment
* To focus on rural employment, infrastructure
* National digital literacy mission to cover 60 mln houses
* Need to spread digital literacy in rural areas
* FY17 allocation for rural electrification 85 bln rupees
* All villages to be electrified by May 1, 2018
* 18,542 villages not electrified as of Apr 1, 2015
* To allot 190 bln rupees FY17 for PM Gram Sadak Yojana
* To spend 270 bln rupee with states FY17 on rural roads plan
* To launch new panchayat scheme at 6.5 bln rupees
* To allot 877.65 bln rupees for rural development schemes
* To allot 20 bln rupees for LPG connection to rural women
* To start National Dialysis Service under PPP mode
* To exempt certain dialysis equipment from basic custom duty
* Health protection scheme with 100,000 rupee/family cover
* 3000 drug stores to be opened under PM Aushadhi Yojana
* To provide 130,000 rupee/yr health cover to senior citizens
* To launch new health protection scheme
* Propose to circulate model shops and establishments bill
* To give choice to shops to remain open on 7 days/week
* 10,000 km of national highways to be added FY17
* Total outlay for infra 2.21 trln rupees FY17
* Total outlay for roads, railway 2.18 trln rupees FY17
* Total investment in road sector 970 bln rupees
* NHAI to raise 150 bln rupees via bonds FY17
* Allot 550 bln rupees for roads, highways FY17
* 85% of 70 stranded road projects back on track FY16
* To allot 550 bln rupees for roads, highways
* India’s highest ever kilometre of highways awarded in 2015
* 30 bln rupees/yr to augment nuclear power in 15-20 yrs
* Mkt freedom for gas from difficult blocks to have price cap
* Mull calibrated mkt freedom for gas from difficult blocks
* Need to diversify resources for power generation
* Drawing up comprehensive plan on nuclear power
* To incentivise ultra-deep sea gas exploration
* Achieved highest coal production growth
* To provide incentives for gas production from tough blocks
* 10 non-functional air strips to be redeveloped
* To partner with state govts to develop airports
* Started series of measures for modernising ports
* To partner with states to develop regional airports
* Medium-term goal is to abolish permit raj
* Plan new public transport policy to up pvt participation
* FY17 allocation for new port development 8 bln rupees
* Motor Vehicles Act to be amended to up passenger segment
* New greenfield ports to be developed on east, west coasts
* Govt to open up road transport sector
* Medium-term goal is to abolish permit raj
* 50,000 km state highways to be converted to national highways
* FY17 total infrastructure outlay 2.21 trln rupees
* To have new policy for mgmt of assets of PSUs
* NITI Aayog to identify PSUs for strategic sale
* To encourage PSUs to divest individual assets
* 100% FDI in marketing of food pdts produced in India
* To have more FDI reforms in asset restructuring companies
* To change FDI policy for asset reconstructions cos
* To modify FDI policy for bourses, asset recast cos
* Duty drawback schemes to be widened, deepened
* Have deepened, expanded duty drawback scheme
* More FDI reforms in insurance, stock exchanges, pension
* To modify FDI policy for insurance, pension sectors
* FDI policy to address requirements of farmers
* To allow mobilisation of 313 bln rupee by govt infra bodies
* Mulling gas production incentive from high temperature area
* May incentivise gas production from ultra deep water areas
* Mulling incentives for gas production from deep sea areas
* New credit rating system for infra to be developed
* To issue guidelines for renegotiation of PPP contracts
* Received conflicting suggestions on FRBM roadmap
* To amend Companies Act for ease of doing business
* Will amend companies act this Parliament session
* Registration of cos to be done in one day
* 300,000 fair price shops to be automated by Mar 2017
* Banking Board bureau to be operational in FY17
* To strengthen debt recovery tribunal
* Considering cutting stake in IDBI Bank to below 50%
* Stand solidly behind PSU banks
* To find resources if PSU banks need additional capital
* Allot 250 bln rupees for recapitalisation of PSU bks FY17
* Not interfering in lending activities of PSU bks
* To amend SEBI act to provide for more SAT benches
* To bring legislation FY17 on illicit deposit taking schemes
* Sponsor in asset recast cos can hold 100% stake
* Financial Data Management Centre to be established
* To allow 100% FDI in asset recast cos
* To make necessary amendments in SARFASI Act
* Bankruptcy code to help deepen corporate bond mkt
* SEBI to develop new commodity derivative pdts
* SEBI to introduce new derivative pdts in commodity mkts
* To adopt comprehensive approach for invest in central PSUs
* To introduce comprehensive Bankruptcy Code in Parliament
* To rename divest dept as Dept of Invest & Public Asset Mgmt
* To amend RBI Act to implement monetary policy framework
* Vibrant fincl sector critical for econ growth
* PM Mudra Yojana target to give 1.8 trln rupees loans FY17
* To draw road for consolidation of PSU banks
* Banking board bureau to be operationalized in FY17
* To draw roadmap for consolidation of PSU banks
* To take up massive rollout of micro-ATMs across nation
* Public money should reach poor without leakages
* Nationwide roll out of ATMs via post offices
* To list govt-owned general insurance cos on stock exchanges
* To list general insurance cos on stock exchanges
* To set up panel to review FRBM Act
* Time has come to review FRBM Act
* Propose to set up committee to review FRBM Act
* Govt open to reducing its stake in PSU banks below 50%
* Consolidation roadmap for PSU banks next year

* Propose changes in customs duty to push Make in India plan
* Exempt svc tax on general insurance plans in Nirmaya scheme
* Committed to implementing GAAR from Apr 1, 2017
* Asset recast cos’ income to be taxed at hands of investors
* Propose special patent regime to power innovation, research
* Services provided by EPFO exempted from service tax
* STT of 0.05% on options contracts
* Service tax waiver for houses of less than 60 sq mtr
* Service Tax exempt for svc under rural electrification plan
* To give excise duty exemption to ready-mix concrete
* Excise of 12.5% with input tax credit on jewellery
* To abolish 13 cesses by ministries
* To amend Central Value Added Tax credit rules
* To amend CENVAT credit rules
* Taxation panel to fix demand under retrospective tax cases
* Hope old cases on retrospective tax reach conclusion soon
* No retrospective taxation to be undertaken
* 1-time no-interest liability in retrospective tax cases
* To up excise duty on various tobacco products by 10-15%
* Cos incorporated post Mar 1 to be taxed at 25%+ surcharge
* Doubles clean energy cess on coal to 400 rupees/tn
* To up excise duty on some tobacco pdts by 10-15%
* Infra cess of 2% on diesel cars
* 4% infra cess on high capacity vehicles, SUVs
* To levy 1% infra cess on small petrol, LPG, CNG cars

* Plan simplification, rationalisation of taxes
* Tax rebate on rent paid upped to 60,000 rupees vs 24,000
* Tax changes to support Make in India, affordable housing
* To give relief to small taxpayers
* To launch steps to move towards pension society
* To give relief to small tax payers
* Withdrawal upto 40% from Natl Pension plan to be tax exempt
* To allow lower corporate tax for some cos from FY17
* Reduction in corporate tax has to be calibrated
* Faster depreciation rate under income tax act at 40% FY17
* Reduction in corporate tax has to be caliberated
* Detailing roadmap for phasing out corporate tax exemption
* Propose 0.5% Krishi Kalyan cess on all taxable svcs Jun 1
* Propose Krishi Kalyan cess
* To raise surcharge on income over 10 mln rupees to 15%
* 10% tax on recipient if got dividend over 1 mln rupees/yr
* Some home buyers to get extra exemption of 50,000 rupee/yr
* No changes in income tax slabs
* To rationalize tax deducted at source for small tax payers
* Penalty of 200% of tax for misreporting of income
* Penalty of 50% of tax for under-reporting of income
* Penalty to be 50% of tax in income under-reporting cases
* Modifying scheme of penalty under Income Tax Act
* Revenue secy to head committee on taxation
* Committed to stable, predictable taxation regime
* To focus on bringing to book people with black money
* Prosecution immunity for undisclosed income declaration
* 300,000 tax cases worth 5.5 trln rupees pending
* New dispute resolution scheme for taxation proposed total 45% Tax
* Compliance window for undisclosed income Jun 1-Sep 30
* 7.5% surcharge on undisclosed income in compliance window
* Govt committed to removing black money
* To move towards low tax regime with non litigious approach
* Limited period compliance window on undisclosed income
* To strongly counter tax evasion
* Moving towards a low tax regime

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PAN made mandatory for all transactions above Rs.2 lakhs

The move is seen as a way to curb black money; the new regulations come into effect from 1 January 2016

Mint, 16/12/15, Source:

The central government has made it a must to quote the permanent account number (PAN) for all transactions above Rs.2 lakh in a bid to curb black money.

This requirement will come into effect from January 2016 and will be applicable on all sale and purchase of goods and services and for all modes of payment, the tax department said in a statement on Tuesday.

Such a move will bring all high-value household purchases like high-end electronic gadgets, foreign holidays booked through tour packages, luxury items like expensive watches and gold jewellery purchases under the lens of the taxmen.

PAN is already a must for almost all financial sector transactions, car purchases and to buy immovable property above a certain limit.

Quoting PAN will help create an audit trail of all high-value transactions by one particular individual and help the tax department determine if it is in line with the declared income of that person.

This will help the government widen its tax base, curb the circulation of black money and move towards a cashless economy.

The government also made PAN mandatory for the purchase of cash or prepaid cards amounting to Rs.50,000 or more in year. Gold jewellery above Rs.2 lakh too would need PAN details. The current limit is Rs.5 lakh. All fixed deposits with post offices, cooperative banks, Nidhis, non-banking finance companies will also need PAN.

The government has also announced certain relaxations in monetary limits for quoting PAN in certain transactions to “bring a balance between the burden of compliance on legitimate transactions and the need to capture information relating to transactions of higher value”.

For instance, the monetary limit for quoting PAN for sale or purchase of immovable property has been raised to Rs.10 lakh from Rs.5 lakh.

Similarly, PAN needs to be quoted only for a cash payment for a hotel or restaurant bill of Rs.50,000 as against Rs.25,000 applicable at present for any mode of payment.

PAN will also be mandatory for the purchase or sale of shares of an unlisted company amounting to Rs.1 lakh. The limit earlier was Rs.50,000. No-frills bank accounts opened under the Pradhan Mantri Jan Dhan Yojana have been exempted from quoting PAN.

But all other bank accounts, including those opened with cooperative banks, will have to quote PAN. The government has also done away with the need to quote PAN while applying for a telephone or cell phone connection. Also cash payments of only Rs.50,000 and above related to foreign travel like for purchase of forex need PAN, as against the earlier limit of Rs.25,000.

This measure follows the recommendation of the special investigation team (SIT) on black money, which had recommended that PAN should be made mandatory for all transactions above Rs.1 lakh.

Subsequently, finance minister Arun Jaitley had announced this in his budget speech in February. However, after the industry expressed concern over the burden of compliance, the government decided to increase the limit to Rs.2 lakh.

Revenue secretary Hasmukh Adhia said it will ensure that transactions prone to black money usage like gold and bullion purchase as well as transactions related to luxury spends like hotels and foreign exchange purchase come under the tax department’s watch.

N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi, said the whole purpose of the move is to improve tax mobilization and check tax evasion.

“The government has no option but to increase the tax base. The Rs.2 lakh limit is still high. There is no reason why the purchase of luxury items should go unreported,” he said.


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Best ways to use the Capital Gains Scheme

The Capital Gains Account Scheme helps you save on long-term gains tax; reason enough to befriend it

Ashwini Kumar Sharma, Mint 23/2/15


Selling a house results in you suddenly having a large sum of money. And unless you have already decided how it’s going to be used, chances are that it will either be put in a savings account, or it gets spent. And, of course, there is tax to be paid on the gains. Some of this can be avoided. If you had the house for at least three years before you sold it, the gains are called long-term capital gains (LTCG); if you held it for a shorter period, your profit is called short-term capital gains (STCG).

Tax on long-term gains can be avoided if you utilize the amount within 2 years and 3 years to buy a new property or to construct one, respectively. You can also invest the money in specified bonds. But the amount on which you can get tax benefit is limited to Rs.50 lakh, and you must invest in the bonds within six months from the date of sale.

Another way to save on the taxes is to use the Capital Gains Account Scheme (CGAS). This scheme is meant for those who are not able to re-invest the gain in a new residential property before the due date of filing tax return (typically 31 July). Parizad Sirwalla, partner-tax, KPMG, India, said, “As per domestic tax laws, an individual can avail an exemption from LTCG tax resulting from sale of house or agricultural land (i.e. after holding the same for specified period from acquisition date) by reinvesting the LTCG into another residential house or plot of agricultural land, as the case may be, within specified timeframes of sections 54 and 54B, respectively.”

Let’s take a look at the scheme and how to get the most out of it:

What’s on offer?

An account under the capital gains scheme, which was introduced in 1988, can be opened only with specified banks or institutions. “The deposit can be made in lump sum or in instalments at any time on or before the due date for filing the return of income,” said Rahul Jain, partner, Nangia and Co. Say, you sold a property on 15 January 2015, and are not able to use the gains by 31 July 2015. In such a situation, you should open a CGAS account and deposit the money in it by 31 July. You can deposit in cash, by cheque or by draft.

There are two types of accounts—account A, similar to a savings account; and Account B, which is like a term deposit. You can put your money in any of the two. Account A offers flexible withdrawals, but interest rate offered is similar to what that bank offers on its regular savings account. Account B offers higher interest, which would be similar to what the bank offers on its other term deposits, but withdrawal is not flexible.

If you plan to, say, buy a property after a year, choose account B. But if you plan to build a house soon, and would need money periodically, choose account A. Money withdrawn has to be used within 2 months.

You can withdraw from account B also, but would need to first transfer the money into account A. For such premature transfers, the interest rate will get adjusted.

Do note that “the interest earned on money deposited in CGAS is taxable in the hands of the taxpayer as ‘Income from other sources’,” said Sirwalla.

How much you can deposit varies across banks. At IDBI Bank Ltd, for example, the range of deposit can be Rs.10,000-100 crore. But at State Bank of India, the lower limit is Rs.1,000, and there is no upper limit.

Any gains arising out of property transaction or transfer attracts tax. Short-term gains are taxed at the normal income slab rate of the assessee. Long-term gains are taxed at 20% with indexation. For instance, the acquisition cost of a Rs.60-lakh house purchased in 2010 and sold in 2013, based on the cost inflation index (CII) for 2010 (632) and 2013 (1024) would be about Rs.97 lakh. If this house is sold for, say, Rs.1 crore, the owner makes a gain of about Rs.12 lakh, and this is the amount that she can invest in a CGAS account.

How to use the money?

The scheme has been made for a special purpose, and therefore, money can only be withdrawn for specific purposes. Jain said, “Money deposited in a CGAS account can be utilized only to buy or construct a new asset.” Typically, small sums of, say, less than Rs.25,000 can be withdrawn in cash; for anything more, you will get a crossed demand draft. Initially, to withdraw money, you will have to give an application mentioning the purpose. For subsequent withdrawals, you can use a specified form, in which you will mention details of how the earlier withdrawal was used. Banks may reject further withdrawal if required details are not given. Therefore, keep the bills for materials purchased, payments to contractor, and so on.

“The money must be utilized within 60 days of withdrawal. Any unutilized sum has to be re-deposited in a savings account immediately,” said Jain.

When closing it, the account holder will have to give a specific authority letter or certificate from an income tax officer. Closure would be allowed on terms mentioned in the letter of authority, which could also be a completion certificate or occupation certificate from the authorized government authority. If you are unable to use the gains from the house sold to buy or construct a new house, the amount will be treated as capital gain for the year in which the period of three years from the date of sale of the original house expires. In the example use earlier, if you sold on 15 January 2015, you must deposit the LTCG in a CGAS account by 31 July 2015. The deposited money should be used either before 14 January 2017 to buy a new house, or to construct one before 14 January 2018. If you are not able to do either of these, you will have to pay tax on the balance amount while filing your tax returns for FY2017-18.

Mint Money take

Since property buying and constructing is a long-term process, a CGAS account is handy for those who have long-term gains from the sale. While the scheme is useful, opening an account under it is difficult as all bank branches do not offer these.

To buy a property you have two full years. But if you are planning to build a house, don’t delay for long because you can use this account for only up to three years, and construction takes a lot of time. Also, do remember that the house will not be considered as complete till you get its occupation certificate, and that your claim for tax exemption is based on the completion of your house.


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