HUF (HINDU UNDIVIDED FAMILY) is an Important aspect in Income Tax India

blog

Post on 11th Dec 2016 by Pradeep Jain, Director, Paperpink. 

huf

Since last couple of months, I have come across to various families who are paying very high rate of income tax on their investments. These taxes are being paid by the earning member of the family at the rate of income tax applicable to him. This led me to write this blog.

HUF can play a very important role in tax saving, especially on investments. However most of the people are not doing it even if they know about it. People hesitate to form HUF, somewhat due to lack of knowledge about the process of forming HUF and somewhat due to misconceptions.

When investments are being done for the better future of the family then why shall the return on investment be taxed in the hand of high earner of the family (This attract higher rate of income tax)

I have covered most of the points related to HUF in only 5 bucket as below:

WHO CAN FORM HUF:

A married couple can form HUF even if they do not have any kid. I belief this is very simple statement and does not require any further explanation.

There are some facts and laws on the basis of which we can say that HUF can be formed by Even Jain, Sikh and Buddhist families.

  1. Article 25 of the constitution of india

wherein Explanation II provides as under:

In sub-clause (b) of clause (2), the reference to Hindus shall be construed as including a reference to persons professing the Sikh, Jaina or Buddhist religion, and the reference to Hindu religious institutions shall be construed accordingly

  1. B) Hindu Succession Act 1956, This Act applies

(a) to any person, who is a Hindu by religion in any of its forms or developments including a Virashaiva, a Lingayat or a follower of the Brahmo, Parathana or Arya Samaj.

(b) to any person who is Buddhist, Jaina or Sikh by religion

  1. C) A case law in Supreme Court – Champa Kumari Singhi83 ITR 720 SC

HOW TO FORM HUF:

1. Make an affidavit, by paying stamp duty as per Stamp Act of the state, containing the information of Karta, Member and Coparceners of HUF

a) Karta – Senior Male Member of the family. In case of widow, senior female can also be the Karta of HUF.

b)Coparceners – Male or Female child by birth become the Coparceners in HUF.

c) Member – Adopted male child or wife is called member of the HUF

2. Apply for PAN card on the basis of above affidavit.

3. Open a Bank account for Transactions.

 

HOW TO MAKE CAPITAL OR CORPUS OF HUF:

There are various ways of making capital in the HUF as mentioned below:

  • Take Loans – It is not recommended to take interest free loan to avoid clubbing provisions;
  • Take Gifts – Aggregate amount of gift shall not be greater than INR 50,000/- else it will be taxable. However, if HUF have income below taxable limit in a financial year then it can take loan up to income tax exemption limit (INR 250,000/- for FY 2016-17) as it will not require to pay tax even if gift are treated as income in the hand of HUF. If any higher amount is taken as gift then tax shall be paid under the head “Income from other Sources”.
  • Inheritance – Property can be received by way of inheritance also in HUF.
  • Income – Capital can be created by receiving income from business, Commission or Investment.

ADVANTAGE AND DISADVANTAGE OF MAKING HUF:

A. ADVANTAGE: 

  1. As HUF is treated a separate entity in the Income Tax, It can save a huge amount of tax due to additional slab of income tax.
  2. Various expenditures like family Medical Insurance, Life Insurance, Common household expenditure can be incurred in HUF which will save capital in the hand of individuals who are in higher bracket of tax.
  3. Various Investments can be made in the name of HUF which can help in enhancing tax free rate eg. Investment in Mutual Funds etc.

B. DISADVANTAGE:

  1. It is very easy to form an HUF, but it is very difficult to break it.
  2. Asset of HUF cannot be the part of any will. All the members and coparceners of the HUF have equal rights on the assets and corpus of HUF.

 

 

It is a very important tool of tax saving under income tax act. Somehow people use it for tax evasion also but we are not discussing here unethical ways.

It is recommended to make HUF and investments shall be made in the name of HUF to save tax.

I believe this article will help you guys in understanding the importance of HUF.

Team paperpink is continuously working on covering important topics in simple ways which can be of immense use.

 

CA Pradeep Jain – Pradeep@paperpink.in

CA Kanchan Jain – kanchan@paperpink.in

www.paperpink.in

HUF can hold one self occupied property and claim benefit of Section 24(b)

Post on 16th Nov 2016 by Pradeep Jain,  Director, Paperpink

 

Under Income Tax Act, an individual can keep one residential premises as a self occupied property but if he purchases another residential premises then even though that premises is not rented and he is not receiving any rent from that, an amount equal to notional rent will be calculated and added in his income under the head income from other sources. For example if Mr.A possesses two houses in his own name and none of them is rented. Any one house at his choice can be treated self occupies and for other house a value equal to notional rent will be calculated and added in his total income.  Here Mr.A can plan his affairs in such a way that another house can be bought in the name of Mrs. A from her own income and in such case she can also posses one more self occupied property. So even through husband and wife both are living in same house, for income tax purpose they can posses two different houses as self occupied for income tax purpose and nothing will be taxed as notional rent . But one step ahead from this situation, if they want to possess third house then in that case notional rent will be calculated and added in the income of owner.

Now if in above case if Mr.A and Mrs.A plan their financial affairs in such a manner that they buy third house in the ownership of Mr.A (HUF), then in such case third property will also become self occupied property and notional rent will not be added in the income of Mr.A, Mrs.A or Mr.A (HUF) if it is actually not given on rent. In this case the third house is also considered self occupied even though it is vacant and family is not living in that house because HUF can also hold one self occupied property under the income tax act.

In above case HUF can also take a home loan for property and claim benefit of deduction of interest paid on home loan up to Rs. 2 Lakhs form income of HUF under section 24(b) of the income tax act.

Gift Tax in India – Everything you wanted to know about rules and exemptions

unnamed

Gift Tax in India – Everything you wanted to know about rules and exemptions

Post on 15th Nov 2016 by Pradeep Jain,  Director, Paperpink 

Do you know that, when someone deposits some money in your bank account, what is its taxation angle ? A lot of people take some loan from their friends for few months and then return it back, but never think twice about it from taxation angle? Your parents deposit some money to your bank account because you want to pay the down payment of your house. While it’s a help from your parents, have you ever thought if you have to pay tax on that amount or not?

In this article lets see all the aspects about these kind of transactions, when money comes and goes out of your bank account and what are the rules for income tax on gifts received from relatives or other people in India .

Taxation on Gifts

Let us first see what kind of situations we are talking about ?

  • You swiped your credit card for your friend Rs 20,000 purchase and then your friend paid back money to you by transferring it to your bank account.
  • You asked Rs 50,000 from your friend as loan and paid him back after 1 month.
  • You got Rs 50,000 cheque from your relative on your wedding.
  • Your father transferred some money you your bank account as help for some purpose.

These are few instances, which happens in our lives. But its very important for you to understand the tax implications in various scenarios and the possible issues which can come up in the future, if income tax department decides to scrutinize your income tax return for example. By understanding the gift tax rules and precautions to take, you will be safe. So now, let’s look at 5 points which will help you understand rules about incomes tax on gifts in a better way.

By virtue of Section 56(2), any sum of money exceeding Rs. 50000 received without consideration by an individual or an HUF from any person is chargeable to tax as income under “other sources” subject to some exclusions . Below we are going to see all those exclusions and gift tax rules.

1. Upto Rs 50,000/year is not taxable

The first major rule which every person should know is that there is no tax to be paid on gifts received (cash or kind), if the amount of the gift is upto Rs 50,000 in a year. However if the total amount crosses Rs 50,000 . Then you will have to pay the tax on the total amount received (not additional). For example – If a friend of yours gifts you Rs 30,000 in a given year, you don’t have to pay any tax on that amount, as its below the limit of Rs 50,000 .

Now suppose you also get Rs 20,000 after that, still you don’t have to pay the tax as the total worth of the gift you got in the year was Rs 50,000 till now (less than the limit of Rs 50,000) . But now, if someone gifts you another Rs 10,000 . Your total gifts in a year is Rs 60,000, so you will have to pay tax on the total amount of Rs 60,000 , not just on additional Rs 10,000 . This Rs 60,000 will be included in your income and you will have to pay tax on this Rs 60,000, as per your tax slab. Note that this is exactly how the written law is.

Since 1/10/2009, Section 56(2) has been amended and the scope of ‘’gifts’’ will include even immovable properties or any other property besides sums of money under its ambit.

2. Any amount received by relatives is not taxable at all

Another rule for income tax on gifts, is that any amount received from specified relatives is totally tax free in the hands of recipient. So if a relative gives you gift in form of cash/cheque or in consideration, you will not have to pay any tax on the amount received.

Following is the list of relations which are considered as “relatives” for this

  • Your spouse
  • Your brother or sister
  • Brother or sister of your spouse
  • Brother or sister of either of your parents
  • Any of your lineal ascendants or descendants
  • Any lineal ascendant or descendant of your spouse
  • Spouse of the persons referred  in above points

Example – So if you want to buy a house and your father/mother/sister/brother etc transfer Rs 20 lacs to your bank account. You don’t need to worry about the taxation part, because its a gift from your relatives and you will not have to pay any tax on this amount. However its a good practice to do the documentation for this, if the amount if pretty big like in this example. All you need to do is document this transaction on a paper which clearly states that who transferred the money and the reason for it, along with the signatures of both parties. In future, if there is any income tax scrutiny, this small piece of proof will be handy and will help you a lot.

Important – Note that, there is no income tax to be paid on the money received from relatives, however at times income clubbing provisions may apply, for example, if a husband gifts Rs 10,00,000 to wife, there is no ta to be paid by wife on Rs 10 lacs received, however when she invests that money and if any interest income is generated, it will be clubbed with husband income.

3. Any amount received as Wedding Gift is not taxable

One of the few advantages of getting married is that any amount you get, as wedding gift is not taxable in your hands, either from relative or non-relative 🙂 . So even if you get Rs 1 crore as wedding gift from someone in your wedding, it’s not taxable in your hands.

Lets see some examples –

Suppose if your spouse parents give you some gift worth Rs 10 lacs on marriage, it will be treated as a wedding gift and will not be taxed. However, it is not clear by provision, whether the gifts should have been on the exact date of marriage, or a few days before or later. Normally, it should be sufficient if the gift is given just on the occasion of the marriage, means either on the day of the marriage itself or a day or two before or after. Practical common sense view would prevail in such cases.

4. Gift Tax on Movable/ Immovable properties

There is a valuation aspect involved in gifting of immovable properties

  • If the property is gifted without any consideration then if the stamp duty value exceeds Rs. 50000/-, stamp duty value will be taken
  • If the property is gifted for a consideration, then the actual value of the property will be taken

In case of other properties:

  • If gifted without consideration and fair market value exceeds 50,000, then the fair market value will be taken as the final value
  • If gifted for a consideration and the Fair Market Value (FMV) less consideration is greater than 50000, then the FMV less consideration amount will be taken as the value of the gift.

5. No tax on the amount received through WILL or Inheritance

When any sum of money or any property is received under a will or by way of inheritance, it is totally exempt from Gift Tax. So if you get a real estate worth Rs 50,00,000 and some other things worth Rs 30,00,000 through inheritance , you will not have to pay any tax on that amount received.

Be cautious about the take and give transactions

At times, we ask for money from our friends for some purpose and then give it back. One of the examples I can give is what I heard from one of the readers in comments section. He swiped his credit card for a friend for Rs 50,000 and then asked his friend to pay him back through online banking. Here if you see, the amount came to his account, however it was a reverse transaction and not actually a gift, so ideally this transaction should not be considered at all.

If its a small amount and can be justified with proofs, there is not much to worry about this. But in this case, lets say there is a income tax scrutiny, and tax inspector asks you about this “Rs 50,000” coming to your account. Now – You can clearly say that the money you got from your  friend was a amount which you got back because you paid Rs 50,000 to him through your credit card. But just saying this will not be enough, He will ask you to prove it. Then you will have to bring your credit card statement, and prove to him that this was done by you for your friend and no one else.

gift tax rules in give and take

The point here is – no matters how truthful you are, there should be something you can show to income tax officers in case this is questioned. So for any transaction like this, which involves a big amount, its always a good idea to have a proof, like in the example I just gave, the credit card statement will be handy along with a small note, where you friend signs saying that you swiped your credit card for him and he will pay back the money through net banking.

In this same case, If you ccan’tprove that this money was just a “reverse entry” , you can imagine the situation. Even if you were clean, the whole amount would be added to your income and you need to pay income tax based on your tax slabs on the ground of unaccounted income.

Another point, worth noting is that just because you have a reverse transaction, the other party can get into trouble. For example, suppose you give Rs 20 lacs to your friend, who wanted the money for buying a house and then your friend gives back those Rs 20 lacs in 3 months. Note that now there is a clear entry that you gave your friend Rs 20 lacs, so in future income tax department can reach you through your friend and ask you about this Rs 20 lacs and from where you got so much of money. They can ask you to justify the source of this money. So always keep these points in your mind.

How to document Gift transactions, Registered Deed or plain paper?

A gift deed is a deed, that is executed and delivered in which the donor transfers title to the receiver without any payment or considerations. It a document which transfer the legal title of the property to the donor, where the consideration is not monetary but is made in return for love and affection. There is indistinctness with respect to compliance of the gift deed at times, Whether a gift deed is required to be made in every circumstance

When it is required to be stamped OR get registered?

Gift made by way of cash or cheque does not mandatory requires to be executed through a gift deed. Writing a plain typed note on a paper will generally suffice. It is not required to be stamped and registration is also not needed. You may simply mention the names of persons, their relation and that the gift is being given out of love and affection.

Gift made by way of movable property is required to be made in stamp paper and stamped by the notary or court, and registration of gift deed is not required in this case. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor. Gift of immovable property which is not registered is not valid as per law and cannot pass any title to the receiver.

Conclusion on Income Tax on Gifts received

As far as you make the transactions which can be justified, there is not much to worry, however its always a good and safe practice to document things on a paper with proper signatures. This will help you because income tax scrutiny can go back to many years of your life. The stronger your documentation and proof, the smoother will the situation be.

Income Tax – A Brief

Post on 11th Nov 2016 by  
Pradeep Jain, Director,  Paperpink

Overview:

Income tax is that percentage of your income that you pay to the government to fund infrastructural development, pay the salaries of those employed by the state or central governments, etc. All taxes are levied based on the passing of a law, and the law that governs the provisions for our income tax is the Income Tax Act, 1961.

Income tax is only of the direct means of taxation like capital gains tax, securities transaction tax, etc., and there are many other indirect taxes that we pay like sales tax, VAT, Octroi, service tax, etc.

The income tax you pay every month or upon every contractual earning is what forms a large part of the revenue for the Government of India. These revenue functions are managed by the Ministry of Finance, which has delegated the responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).

Income Tax – In Detail:

Income tax has to be paid by every individual person, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), corporate firms, companies, local authorities and all other artificial juridical persons that generate income.

Taxes are calculated on the annual income of a person, and an annual cycle (year) in the eyes of the Income Tax law starts on the 1st of April and ends on the 31st of March of the next calendar year. The law recognizes and classifies the year as “Previous Year” and “Assessment Year”.

The year in which income is earned is called theprevious year and the year in which it is charged to tax is called the assessment year.

For example: Income earned between April 1st 2014 and March 31st 2015 is called the income of the previous year and will be charged to tax in the next year, or the assessment year that starts on April 1st2015.

Taxes are collected by the government in three primary ways:
  1. Voluntary payment by taxpayers into designated banks, like advance tax and self-assessment tax.
  2. Taxes Deducted at Source (TDS) which is deducted from your monthly salary, before you receive it.
  3. Taxes Collected (TCS).

Income Tax Slab Rates:

Income tax slab rates are for different categories of taxpayers, who are taxed progressively higher based on their earning. The income tax slab rates can be broadly classified into the following categories:

  1. Individuals and Hindu Undivided Families (HUF):These are the slab rates as of financial year 2014-2015, i.e. assessment year 2015-2016 and FY 2015-2016 and assessment year 2016-2017.

    On all the tables listed below, Education Cess of 2% and SHEC of 1% will be levied on the tax computed using the rates given below.

    Under Section 87(A), an Income Tax Rebate of Rs.2,000 is provided for all individuals earning an income that’s less than Rs.5,00,000 per annum.

  • For male individuals below the age of 60 and HUF:
Income Tax Slabs Income Tax Rates
Total income less than Rs.2,50,000. -NIL-
Total income greater than Rs.2,50,000 but less than Rs.5,00,000. 10% of the amount by which it exceeds Rs.2,50,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000. 20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000. 30% of the amount by which it exceeds Rs.10,00,000.
  • For female individuals below the age of 60:
Income Tax Slabs Income Tax Rates
Total income less than Rs.2,50,000. -NIL-
Total income greater than Rs.2,50,000 but less than Rs.5,00,000. 10% of the amount by which it exceeds Rs.2,50,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000. 20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000. 30% of the amount by which it exceeds Rs.10,00,000.
  • For all individuals above the age of 60 – Senior Citizens:
Income Tax Slabs Income Tax Rates
Total income less than Rs.3,00,000. -NIL-
Total income greater than Rs.3,00,000 but less than Rs.5,00,000. 10% of the amount by which it exceeds Rs.3,00,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000. 20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000. 30% of the amount by which it exceeds Rs.10,00,000.
  • For all individuals above the age of 80 – Super Senior Citizens:
Income Tax Slabs Income Tax Rates
Total income less than Rs.5,00,000. -NIL-
Total income greater than Rs.5,00,000 but less than Rs.10,00,000. 20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000. 30% of the amount by which it exceeds Rs.10,00,000.
  1. Businesses:

The following tables indicate the tax slabs for businesses.

  • Co-operative societies:
Income Tax Slabs Income Tax Rates
Total income less than Rs.10,000. 10% of the income.
Total income greater than Rs.10,000 but less than Rs.20,000. 20% of the amount by which it exceeds Rs.10,000.
Total income greater than Rs.20,000. 30% of the amount by which it exceeds Rs.20,000.
  • Firms, Local Authorities, Corporates and Domestic Companies:Income tax slab rates do not apply for these, as they are taxed at a flat rate of 30% on the total income declared.A surcharge of 5% is levied on the total income tax of domestic companies if their income exceeds Rs.1 crore. This surcharge does not apply to firms and local authorities.

Income Tax Return (ITR):

There is a prescribed form through which the particulars of income earned by a person, and the taxes paid thereon, are communicated to the Income Tax Department. There are different forms for the filing of returns based on different status and heads of income. This is called the return of income.

It’s basically just you telling the government how much you’ve earned, from where you’ve earned it, and how much tax you’ve paid on it.

Tax Forms:

The different forms which have been prescribed for different classes of taxpayers are as follows:

ITR Form Name Description of Taxpayer
ITR – 1 This is applicable to all individuals having salary or pension income or income from one house property, or income from other sources (which aren’t income from lottery winnings and income from race horses). This is also known SAHAJ.
ITR – 2 This is for Hindu Undivided Families that have income from sources other than “Profits and Gains of Business or Profession”.
ITR – 3 This is for Hindu Undivided Families or individuals who are partnered in a firm. The income here is either by the way of interest, salary, bonus, commission or remuneration that’s due or received from the partnered firm. The head of income should be “Profits and Gains of Business or Profession”.
ITS – 4S This is for individuals and Hindu Undivided Families who’ve opted for the presumptive taxation scheme of Section 44AD / 44AE. This is also called SUGAM.
ITR – 4 This is for individuals or Hindu Undivided Families who carry on a proprietary business or profession.
ITR – 5 This is for firms, LLPs, AOPs, BOIs, artificial judiciary persons, co-operative societies and local authorities. This does not apply to trusts, political parties, colleges, etc. who are required to instead file return of income under Sections 139(4A), 139(4B), 139(4C) and 139(4D) and do not use this form.
ITR – 6 This for companies that don’t claim exemptions under Section 11. Charitable and religious trusts can claim exemptions under Section 11.
ITR – 7

This is for persons and companies who are required to furnish returns under Sections 139(4A), 139(4B), 139(4C) and 139(4D).

ITR – V This is the acknowledgement of filing of return of income.

One can acquire these forms from http://www.incometaxindia.gov.in.

You can also file your return electronically through a free software that the Income Tax Department has provided on www.incometaxindiaefiling.gov.in.

Income Types or Taxable Heads of Income:

Income from different sources is taxed differently. These sources are called heads of income and are as follows:

  1. Income From Salaries:All income received from an employer by an employee is taxed under this heading. Employers are bound to withhold tax compulsorily under Section 192 if the income of their employees falls under a taxable bracket. Employers must also provide a Form 16, which contains details of tax deductions and net paid income.
  2. Income from House Property:Income here is taxable if the assesse is the owner of a property that’s been given out on rent. The property should not be used for business or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means you and your family live there, and do not have to pay taxes on this. (Learn more about calculating income from house property)Income from house property is calculated as under:

    Gross Annual Value (GAV) = x

    Less: Municipal Taxes Paid = (y)

    Net Annual Value = x-y

    Less: Deductions under Section 24 = z

    Income from House Property = (x-y) – z

  3. Profits and Gains Of Business or Profession:These are the taxes that will be applicable for income from business or professional services rendered. The provisions for computing the tax on this type of income is in accordance with Sections 30 to 43D.
  4. Income from Capital Gains:This is for the taxes applicable on income that arises when capital assets are transferred. Capital assets are property of any value that’s held by the assesse like land, buildings, equity shares, bonds, debentures, jewellery, art, assets, etc. (Learn more about calculating capital gains)
  5. Income from Other Sources:Basically, any source of income that cannot be classified under the above heads of income falls under this heading. There are also some specific and pre-determined incomes which fall under this heading, like:
    • Income by way of dividends.
    • Winnings from horse races / lotteries.
    • Employee’s contribution towards staff welfare schemes, any fund set up under the ESIC Act that’s received by the employer from the employees.
    • Interest on securities like debentures, government securities and bonds.
    • Gifts.
    • Interest on compensation.
    • Rental income other than house property.
    • Family pension received after the death of the pensioner.
    • Interest income that is earned other than by way of securities.

(Learn more about calculating income tax on income from other sources)

Income Tax E-Filing:

You can e-file your Income Tax Return, TDS return, AIR return and Wealth Tax Return online through this link https://incometaxindiaefiling.gov.in/. E-filing your return has obvious advantages like the fact that you won’t have to deal with the hassle of paperwork and waste time sorting through it all. You can simply log on to the secure website and e-file your return. (Learn more about e-file your IT returns in Online)

This government website also has provisions for you to submit returns, view forms 26AS, outstanding tax demand, CPC refund status, rectification status, ITR – V receipt status, online application tools for PAN and TAN, e-pay your tax and even has a tax calculator.

Deductions:

Deductions for your taxable amount are available under various sections of the Income Tax Act , 1961.

  1. Section 80C:Deductions under this section are only available to individuals and HUF. This section allows for certain investments like NSC, etc. and expenditures to be exempt from taxation up to the amount of Rs. 1,50,000.
  2. Section 80CCC:Deductions under this section are on payments made to LIC or any other approved insurance company under an approved pension plan. The pension policy must be up to Rs.1,50,000 and be taken for the individual himself out of the taxable income.
  3. Section 80CCD:Deductions under this section are for contributions to the New Pension Scheme by the assesse and the employer. The deduction is equal to the contribution, not exceeding 10% of his salary.The total deduction available under Section 80C , 80CCC and 80CCD is Rs.1,50,000. However, contributions to the Notified Pension Scheme under Section 80CCD are not considered in the Rs.1,50,000 limit.
  4. Section 80D:This is the section that deals with income tax deductions on health insurance premiums paid. In the case of individuals, the insurance policy can be taken to cover himself, spouse, dependent children – for up to Rs.15,000 and parents (whether dependent or not) – for up to Rs.15,000. An additional deduction of Rs.5,000 is applicable if the insured is a senior citizen. In the case of HUF, any member can be insured and the general deduction will be for up to Rs.15,000 and an additional deduction of Rs.5,000.A total of Rs.2,00,000 can be claimed as deductions whether the assesse is an individual or a HUF.
  5. Section 80DDB:This section is for deductions on medical expenses that arise for treatment of a disease or ailment as specified in the rules (11DD) for the assesse, a family member or any member of a HUF.
  6. Section 80E:This section deals with the deductions that are applicable on the interest paid on education loans for an education in India.
  7. Section 80EE:This section deals with tax savings applicable to first time home-owners. Applies for individuals whose first home purchased has a value less than Rs.40 lakh and the loan taken for which is Rs.25 lakh or less.
  8. Section 80RRB:Deductions with respect to income by way of royalties or patents can be claimed under this section. Income tax can be saved on an amount up to Rs.3,00,000 for patents registered under the Patents Act, 1970.
  9. Section 80TTA:This section deals with the tax savings that are applicable on interest earned in savings bank accounts, post office or co-operative societies. Individuals and HUFs can claim a deduction on an interest income of up to Rs.10,000.
  10. Section 80U:This section deals with the flat deduction on income tax that applies to disabled people, when they produce their disability certificate. Up to Rs.1,00,000 can be non-taxed, depending on the severity of the disability.
  11. Section 24:This section deals with the interest paid on housing loans that is exempt from taxation. An amount of up to Rs.2,00,000 can be claimed as deductions per year, and is in addition to the deductions under Sections 80C, 80CCF and 80D. This is only for self occupied properties. Properties that have been rented out, 30% of rent received and municipal taxes paid are eligible for tax exemption.Learn more about Income Tax deductions from under Section 80C to 80U.

TDS:

TDS or Taxes Deducted at Source – is a system incorporated by the Income Tax Law to deduct taxes before the income has been disbursed to the person earning it. It is charged depending on your income tax slab, at its point of origin. You do not get a full amount from which to deduct an income tax amount and pay it back, but get charged even before you’ve earned your income.

The income tax here is deducted by the payer and remitted to the government on your behalf.

TDS on income will not apply if your net taxable income is below Rs.2,50,000 for individuals, Rs.3,00,000 for senior citizens and Rs.5,00,000 for super senior citizens.

It’s important to know which tax bracket one falls under and the investments that can be made to exempt a portion of the income from taxation. A lot of money can be saved through investments, and this helps the flow of funds through investible channels in the economy, thus helping the country develop. Health insurance policies, investments and other deductions can be used to your benefit, if you balance them out well.

Making relevant investments can help save a lot on tax, and earn a lot in eventual interest income. Most tax-saving investments have lock-in periods where the funds cannot be accessed, and in this time compound interest at a rate higher than most savings bank accounts.

Scrutiny assessment under the Income Tax Act 1961

 

When a case is selected for scrutiny: Where a return has been filed u/s 139 or in response to a notice u/s 142(1), the case can be selected for scrutiny Assessment if the assessing officer considers it necessary or expedient to ensure that:

– the assessee has not understated the income or has not computed excessive loss, or
-has not underpaid the tax in any manner.

Usually the amount of turnover, rate of gross profit, total income, quantum of loans taken, investments during the year etc are considered for selecting a case for scrutiny. However the selection is done on the basis of the instructions of the CBDT issued every year wherein some predetermined criteria’s are decided on the basis of which a case is selected for scrutiny Assessment.

The Honourable Supreme Court in (1999) 237 ITR 889 and (2004) ITR 272 has held that the assessing officer is bound by the instructions of the CBDT. The Delhi High Court giving reference of the above decision of the S.C.  has held in (2008) 169 Taxmann 4 / (2007) 295 ITR 256 that the A.O. cannot make Assessment of  any case in scrutiny outside the guidelines issued by the CBDT for selection of cases for scrutiny and if such Assessment is made then it will be illegal.

Time limit for issuing of Notice u/s 143(2): As per section 143(2) as amended by the finance act 2008 with effect from 01-04-2008 the notice under section 143(2) must be served upon the assessee within 6 months from the end of relevant Assessment year. Earlier the notice was required to be served within 12 months from the end of the month in which the return was furnished.

The notice u/s 143(2) must be received by the assessee now up to 30th September for the preceding Assessment year. If the notice u/s 143(2) is received within the prescribed time then no Assessment can be framed u/s 143(3).

Where the assessee affirms by way of an affidavit that notice u/s 143(2) was not received by him within the prescribed time, the onus lies with the department to conclusively prove that the notice was served upon the assessee within the prescribed time. Failure to do so shall lead to set aside of the Assessment as it was held in CIT v Lunar Diamonds Ltd.[2006] 281 ITR 1(Del.).

Section 292BB: A section 292BB has been added w.e.f.  01-04-2008 which provides that if the assessee has cooperated in the Assessment or re-assessment proceedings then it will be treated that the notice u/s 143(2) has been duly served upon the assessee and the assessee will not be able to object to the late or irregular service of notice.

The proviso to section 292BB makes it further clear that if the assessee has before the Assessment or re-assessment proceedings objected to the no service or late or irregular service of notice u/s 143(2) then section 292BB shall be not applicable.

Therefore if an assessee does not receive the notice or receives the notice u/s 143(2) after the 30th September and he cooperates in the Assessment proceedings and doesn’t object to the non receiving or late or irregular receiving of the notice then the Assessment proceedings and the assessment order shall be considered as valid and will not be quashed in the appeal.

 

What to do when notice U/s 143(2) is received: When a case is selected for scrutiny Assessment the A.O usually ask for the following

-Books of Accounts

-Bank Statements

-Confirmation certificates of Loans if any

-Name and Addresses of Sundry Creditors, Debtors

-The account statements of Sundry Creditors and Debtors for verification of transactions

In case the A.O. finds any discrepancy the assessee may be asked to explain the same.

Mere filling of confirmatory letters and producing the loan creditors do not discharge the onus that lies on the assessee. The assessee has to prove the disputed transaction prima facie appearing in his books of accounts. The assessee needs to prove the following things:

-Proof of Identity of creditor

-Credibility or capacity of a loan creditor to pay or advance the money

– the genuineness of the transaction

If the assessee prima facie proves a transaction then the onus shifts on the department to rebut the same. The A.O can only ask for the evidence of the cash credit or the loans which have been taken or given in the relevant previous year and not about those appearing from preceding years.

The opportunity of being heard must be provided to the assessee: The assessee must be provide a fair opportunity of being heard during the Assessment proceedings as it is a basic rule of Natural Justice. If the A.O makes any addition on the basis of evidence procured from other sources about which the assessee is not aware then the assessee must be given fair opportunity to rebut or cross examine such evidence.

In CIT vs Eastern Commercial Enterprises 210 ITR 103(CAL) it has been held that an addition made without allowing opportunity of cross examination to the assessee, cannot be sustained.

Cases where amount deposited with the firm by the partners are not proved: If the partners in a firm have deposited some money with the firm and the same is not proved as income of the firm by the A.O then such amount cannot be treated as income of the Firm but it will be treated as the income of the partners as held in (2001) 126 Taxman 533/252 ITR 344 P& H HC.

Amounts Received as gifts: Where receiving of any gift by the assessee is in question in the Assessment proceedings then affidavit of the donor or the gift deed along with the PAN No of the donor, the source of the gift and the relationship of the donee with the donor should be produced to prove such gift.

Additions cannot be made merely on suspicion: Any addition to the income of the assessee cannot be made only on the base of suspicion. If the assessee has proved the transaction in question then merely on the suspicion the addition cannot be made.

For Example if the assessee has sufficiently proved a deposit transaction from a person then the A.O cannot make addition merely on the ground that the assessee already had enough money on the day of deposit and there was no need for such deposit.

Request for summons to the non- cooperating loan creditor or depositors :Sometimes it happens that the depositors or loan creditors do not cooperate with the assessee in the Assessment proceedings then in such cases the assessee should request  the A.O in writing to issue summons u/s 131 to such persons along with their books of accounts or bank statement or any other relevant documents.

Where a Deposit or loan transaction is not proved: Sometimes due to non availability of proof regarding a deposit or loan transaction the assessee has to agree for surrendering such amount as his income. In my view while surrendering such transactions as income, the assessee should get it written in his statement that he is making surrender for mental peace and on the condition of non-levying of penalty. In my view in such case the penalty will not be imposed u/s 271(1)(c).

Additions on the base of inadequate withdrawals: The assessing officer usually during the Assessment proceedings ask the information from the assessee about his household expenses including the number of family members, the children, the school in which they are studying, the expense on their studies, electricity bills, telephone bills, house rents if any, the salary given to any employee or the car scooter etc owned by them.

After considering all the above things the A.O estimates the household expenses of the assessee and after matching the same with the withdrawals shown, the assessing officer tends to make additions to the income of the assessee if the withdrawals are found to be inadequate.

The assessee should tell the A.O in detail about his household expenses and if any other family member of the assessee has also contributed towards the household expenses, the fact should be brought to the notice of the A.O.

Sometimes it is seen that the assesses show their withdrawals for household expenses collectively at the end of the year in which case the assessee has to face many difficulties during the Assessment proceedings. The withdrawals for household expenses should be shown in every month.

Inadequate withdrawals of partner shown in the books of accounts of firm: Addition to the income of a firm cannot be made merely on the ground that the withdrawals for household expenses made by the partner from the firm is inadequate or very less. It’s not the firm’s responsibility to explain or prove that how the partners have managed their household expenses as it was held in (1997) 90 Taxman 330(magazine) Jaipur Tribunal.

Additions on the basis of inadequate expenses shown on the house or shop: Generally additions are made during the Assessment proceedings on the basis of the less expenditure shown in building a house or shop of the assessee. If the A.O is not satisfied by the expenditure shown on building house or shop by the assessee and also from the valuation of Registered valuer then the A.O refers the valuation to the valuer of the Department and if the valuer of the department declares the value more, then the additions is made by the A.O on the basis of such valuation and proceedings u/s 271(1)(c) are also initiated.

It has been held in many cases that the A.O cannot refer the valuation to the department’s valuer without showing any mistake in the valuation of the registered valuer or the bills and records maintained by the assessee. Although it is not necessary for the assessee to keep the record of all the expenses incurred on building his house or shop. But at the appellate level the bills and records maintained by the assessee are given very much importance. Therefore it is advisable to keep such records.

Annual Information Return (AIR) of high value financial transactions

annual-informtion-return

Post on 9th Nov 2016 by Pradeep Jain, Director, Paperpink. 

ANNUAL INFORMATION RETURN: Annual Information Return (AIR) of high value financial transactions is required to be furnished under section 285BA of the Income-tax Act, 1961 by specified persons in respect of specified transactions registered or recorded by them during the financial year (read with Rule 114E of the Income Tax Rules, 1962).

Motive of this discussion is to educate people about the benefit of online/Cheque transaction and avoiding cash transactions.

Tabular Summary of AIR Transaction to be reported to Income Tax

Sr. No. Person responsible
to file AIR
Nature of Financial transaction Value Transaction Code
1 Banking company/institution Total cash deposits in a savings bank account in a year Rs. 10 lakhs or more 001
2 Banking company/ institution or any other company / institution issuing credit card Payments received in the year in respect of a credit card issued. Rs. 2 lakhs or more 002
3 Trustee or authorized person of a Mutual Fund Receipt from any person for acquiring units of that Fund Rs. 2 lakhs or more 003
4 Company or institution issuing bonds or debentures Receipt from any person for acquiring bonds or debentures issued by the company or institution. Rs. 5 lakhs or more 004
5 Company issuing shares through a public or rights issue Receipt from any person for acquiring shares issued by the company. Rs. 1 lakh or more 005
6 Registrar or Sub-Registrar Purchase or sale by any person of immovable property Rs. 30 lakhs or more 006/007
7 Authorised Officer of Reserve Bank of India Aggregate receipts from any person for bonds issued by RBI Rs. 5 lakhs or more 008

With respect to the AIR by Banking companies, If you are having sufficient cash in your balance sheet or you have any cash income during the year then you can explain the same to the assessing officer else same shall be treated as Tax Evasion and Tax shall be paid on it along with 200% penalty u/s 270(A).

Further, The government on Wednesday warned that cash deposits above Rs 2.5 lakh threshold under the 50-day window could attract tax plus a 200 per cent penalty in case of income mismatch.

Statement by Government
“We would be getting reports of all cash deposited during the period of November 10 to December 30, 2016, above a threshold of Rs 2.5 lakh in every account.

“The (tax) department would do matching of this with income returns filed by the depositors. And suitable action may follow,” revenue secretary Hashmukh Adhia said tonight.

All about withdrawal of OHD currency 500/1000

Ban on Rs. 500 & 1000 Notes: Advantages, 15 Impact Points, How to Return Notes