Tag: income tax

Will equalisation levy spur growth of crypto exchanges in India?, BFSI News, ET BFSI

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Cryptocurrencies are likely to become slightly expensive for Indian investors buying the token from exchanges outside the country. The Income-Tax department is likely to levy an additional tax of 2% in the form of equalisation levy.

The tax department is now looking into whether the 2% levy is applicable on crypto assets bought online by Indians from overseas exchanges.

The government had expanded the scope of the equalisation levy from this year to include any purchase by an Indian or India-based entity through an overseas platform.

The levy is on the selling price and companies may be required to add this to the cost of the crypto assets.

Experts said there is no clarity as to whether cryptocurrencies can be categorised as goods, services or commodities.

Payback time

Since most cryptocurrency exchanges have not paid this levy, the taxman’s scrutiny now means that customers may have to pay up.

Unlike other taxes, equalisation levy is on the selling price, which would mean that the cost of buying the crypto assets will jump by 2% for Indians.

However, many crypto exchanges in the last few years have created structures where they do not have a presence or permanent establishment in India and the Indian entity only takes care of marketing functions.

Many companies have moved to Singapore or Dubai in a bid to safeguard themselves from some of the Indian laws in the last few years.

Permanent establishment is a concept in tax laws that determines which country has the first right to tax a company and to what extent.

Many companies have moved to Singapore or Dubai in a bid to safeguard themselves from some of the Indian laws in the last few years.
Many companies have moved to Singapore or Dubai in a bid to safeguard themselves from some of the Indian laws in the last few years.

Global interest

Global digital currency exchanges are exploring ways to set up in India, following in the footsteps of market leader Binance.

U.S.-based Kraken, British Virgin Islands-based Bitfinex and rival KuCoin are actively scouting the market,

The interest in cryptocurrency has exploded in India over the last 15 months as a bull run began in bitcoin and other virtual currencies.

India’s biggest crypto exchange WazirX along with other exchanges including CoinSwitch Kuber, Zebpay, CoinDCX has seen expotential growth in the last few months. In April, WazirX claimed it hit $5.4 billion in transaction volumes, which is a tenfold rise from $500 million in December 2020. Its user base shot up by 50% to 3 million in April, and in May, it saw crypto trades worth over $380 million on its platform on a single day. CoinSwitch Kuber raised $25 million at a $500 million valuation in April 2021.

ZebPay, India’s oldest exchange for trading cryptocurrencies, aims to double monthly transactions after an explosion in demand.

ZebPay, a platform with about 4 million customers, expects to churn $2 billion worth of trades per month, which is still less than one-fifth of trades handled by top US-based exchange Coinbase Global Inc.

While there is no exact number of cryptocurrency firms operating in India, estimated that at least 50 are actively onboarding customers and collectively processing transactions worth over Rs 15,000 crore annually.



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All you wanted to know about advance tax

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A coffee time conversation between two colleagues leads to an interesting explainer on the rules of taxation.

Vina: Last week, I saw you juggling with tax calculations. What have you been up to?

Tina: Yeah! I was in a rush to make the tax payment for FY21, within the deadline.

Vina: But why? Didn’t you notice the due dates for filing returns for FY21 have been pushed to September 30, 2021 from July 31st?

Tina: I am well aware of that, Vina. But I guess you missed the crux here.

Vina: Oh! I see the grin and know what it means. Please don’t get started on how one should start filing returns early to avoid last-minute rush.

Tina: While that still stands true, I was trying to bring to your notice the fact that the due dates for advance tax installments have not been changed.

Vina: What’s advance tax now? Care to explain?

Tina: If your tax liability in any financial year works out to ₹10,000 or more, then you need to pay it in advance — in four installments.

This, however, does not apply to taxpayers aged 60 and above who do not earn any income under the head ‘profits and gains of business or profession’.

Vina: Oh lord. Then this definitely applies to me too.

Tina: For FY21, such taxpayers should have paid at least 15 per cent of their tax liability on or before June 15, 2020.

And at least 45 and 75 per cent, should have been paid by September 15 and December 15 2020, respectively. The last day for paying the entire tax amount is March 15, 2021.

Vina: Then, I have clearly passed the deadline for all my tax installments. What happens now?

Tina: You will now be required to pay interest on any shortfall under section 234 B and 234C of the Income Tax Act, at the rate of one per cent per month (under each section), for every month of delay. So if you file your returns late due to extension of the deadline and decide to pay all the taxes due then only, the charges under 234 B and C will go up.

Vina: I better act fast then.

Tina: Rightly said. But do remember that taxes deducted or collected at the source of income (TDS/TCS) are also forms of paying taxes in advance.

Vina: That should save me some skin. But this seems very tricky to me.

How am I expected to assess my yearly income, with such accuracy so much in advance?

Tina: Valid point, Vina. The taxman does allow room for such miscalculations.

For the first two installments (i.e. June and September 15), no interest shall have to be paid, if at least 12 per cent (instead of the required 15 per cent) and 36 per cent (instead of 45 per cent), of the advance tax is paid by the respective due dates.

Vina: Ok. Though I have again missed the June 15 deadline for this year, I will remember to be prompt with the rest of the instalments at least.

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Tax Query: Does a mother pay tax on money received from NRI son?

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My son is working in the Netherlands and sends me €300 every month. My son pays income tax on his salary there. I used to send him €2,400 from India every month during his higher education in the Netherlands for almost two years. Is the money I receive from my son every month taxable in India? My existing income falls under 20 per cent tax bracket.

Manjula

As per provisions of section 56 (2)(x) of the Income-tax Act, 1961 (‘the Act’), income tax is payable on any sum of money (if aggregate value exceeds ₹50,000) received by an individual without consideration. However, any receipts from specified relatives (includes lineal ascendant or descendant of the individual), would not be considered as taxable. Hence, a gift of money from your son (who is your lineal descendant) will not be subject to tax in your hands in India.

I got only one folio with Sundaram MF i.e. Diversified Equity Fund. The fund had declared a dividend of ₹725 and deducted tax at the rate of 20.8 per cent. On taking up the matter with them they stated that timings and frequency and amount of dividend declared is not known in advance. They also said that the investment horizon of the investor is unknown and actual dividend income accrued for such TDS cannot be assessed. The fund-house also said the threshold limit of ₹5,000 has been aggregated at PAN level across all AMCs and Sundaram MF does not have investor level data of dividends being declared for each PAN during a year. So, they will deduct TDS from each dividend declared even without reaching the ₹5,000 threshold. In case of total TDS exceeding the actual tax liability of any investor, he/she can claim refund while filing income tax returns. I feel the explanation given by Sundaram is patently absurd. If all MFs take this stand, and deduct tax irrespective of the amount of dividend, what is the sanctity of the threshold limit of ₹5,000. In my view, they should aggregate the dividend under their schemes alone and deduct tax if it exceeds ₹5,000 and not otherwise. Please give your considered opinion on this subject.

Cyril Dsouza

As per provisions of section 194K of the Income-tax Act, 1961 (‘the Act’), payers (MF house in this case) are required to deduct tax at source (TDS) at 10 per cent for payments made to resident individuals. However, if the amount of such income paid during financial year (FY) to the payee does not exceed ₹5000, tax is not required to be deducted at source. Literal reading of the section suggests that no TDS is to be deducted by the payer if amount paid by them during a FY does not exceed ₹5,000. However, practically some payers take a view that the threshold limit of ₹5,000 is to be considered qua the individual (i.e. at PAN level) and necessary TDS to be done. In such a scenario, individual would have to claim credit of such TDS in the return of income. Also it is important to note that, as per provisions of section 206AA of the Act, in case you do not provide your PAN to the payor, then tax is required to be deducted at a rate of 20.8 per cent (including applicable cess). If this holds true for your case, this may be reason for the MF house to deduct tax at the rate of 20.8 per cent.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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Tax Query: How to close HUF account with the I-T Department

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My friend is having an HUF account. Till 2016 he had business income in HUF. He has two sons and a spouse. Both sons are not interested in continuing the business, hence he wants to close his HUF account with the bank as well as the income tax department. Request your advice on how to close HUF account with the income tax department.

Pravin Shah

Hindu Undivided Family (‘HUF’) is dissolved only on the partition of property between the members. It is important to note that as per the provisions of section 171(9) of the Income-tax Act, 1961 (‘the Act’), partial partition of HUF is not recognised. Under the provisions of Act, partition means ‘full partition’.

For the purpose of dissolution of the HUF, your friend will need to draw up a deed of full partition and get the same registered. Once the partition of HUF is complete, it will cease to exist.

Till the date of such dissolution, the HUF shall be assessed in its capacity as a HUF and the return of income for such period should be filed by your friend. Also, your friend may make an application for surrender of PAN of HUF with the jurisdictional assessing officer by submitting a request in this regard after the partition of the HUF and related compliances (like filing of return) are complete.

In one of answers to a query earlier, you had stated that in view of the amendment to Sec. 55 of the Income tax Act, where the property is purchased before April 1, 2001, the fair market valuation as per the valuation by a registered valuer as at April 1, 2001 would be considered the cost of acquisition, which has been capped from April 1, 2021 at the stamp duty value, wherever available. A search on the site of the Inspector General of Valuation of Registration, Tamil Nadu reveals that fair valuation as revised from 9.6.2017 is available only from April 1, 2002. The site states that the information provided online is updated and no physical visit is required for services provided online. Do we then assume that since the stamp duty value is not available as on April 1, 2021, the fair market valuation by the valuer could be considered as the cost of acquisition for property sale in Chennai ?

Murli Krishnamurthy

As per the provisions of section 55(2)(b)(i) of the Income-tax Act, 1961 (‘the Act’), in case of a property purchased before April 1, 2001, the cost of acquisition shall be considered as any of the following at the option of the assessee:

– the fair market value (‘FMV’) of the property as on April 1, 2001; or

– the actual cost of acquisition of the property.

As per amendment made vide Finance Act, 2020, in case of a capital asset being land or building or both, the FMV of such asset (as on April 1, 2001) for the purpose of section 55, shall not exceed the stamp duty value (‘SDV’), wherever available, as on April 1, 2001.

In the instant case, I understand that SDV as on April 1, 2001 is not available for the subject property. In such scenario, you may consider FMV as on April 1, 2001 as the cost of acquisition of the property for the purpose of section 55 of the Act.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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How LTCG tax is calculated when the actual acquisition cost is not available

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In respect to some of the equity investments in listed companies made by me, both through primary and secondary markets, I am planning to exit from some of them via by market sale route. For LTCG tax calculation purpose, the original or actual cost of acquisition of shares has to be taken into account. However, I do not have the record of the original price of these shares. Also, some companies have issued bonus shares in between.

Will you please clarify how to source the original prices of the shares and what value is to be taken in respect of bonus shares for this purpose?

Sitaram Popuri

As per Section 48 of the Income Tax Act, 1961 (‘The Act’); the income chargeable under the head “Capital gains” shall be computed, by deducting the expenses incurred on transfer and & the cost of acquisition and cost of improvement thereto, from the full value of the consideration received or accruing as a result of the transfer of the capital asset.

As per section 112A of the Act, Long term capital gain (LTCG) in excess of ₹100,000 earned from sale of listed shares are chargeable to tax at the rate of 10 per cent. Surcharge (if applicable) and health & education cess at 4 per cent shall apply additionally.

Where the shares are purchased before January 31, 2018, the cost of acquisition shall be higher of the following: actual cost of acquisition; or lower of (i) fair market value (FMV) of such share on January 31, 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

We understand that the shares are listed on a recognised stock exchange in India. You can request your stock broker to provide the cost of acquisition of these shares and the traded value of your listed shares as on January 31, 2018 to determine the cost of acquisition for LTCG workings.

Where the actual acquisition cost of these shares is not available, you may consider the FMV as on January 31, 2018. Further, the actual cost of acquisition for bonus shares shall be NIL for the purpose of computing LTCG.

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Tax query: Does inheritance attract income tax?

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My wife has received some money being the second holder in an FD with her mother (now deceased). The FD maturity amount is to be shared with all her brothers and sisters, as per the legal heir certificate (there is no will). As of now, the bank has deleted the name of the first holder on submitting the death certificate. How does she account for these amounts? Already a portion was shared but the entire TDS isn’t being shown in her name.

HH BernardAs per the provisions of Section 56(2)(x) of the Income-tax Act, 1961 (‘the Act’), a sum of money received by way of inheritance should not be considered as taxable in the hands of the recipient. Thus, money received by your wife as legal heir of her mother shall not be taxable in her hands. Her share of such receipt will be required to be considered by her as an exempt income and accordingly reported while filing her tax return for the subject year. Regarding claim of TDS, your wife will be required to claim credit of her share of proportionate TDS in her hands along with proportionate share of interest income, and the balance TDS (for siblings’ share) will be required to be passed on to respective siblings. Such bifurcation must be appropriately reported in your wife’s income-tax return form (under TDS schedule) for the financial year in which tax has been deducted.

My father-in-law (78 years) is a retired government official earning a monthly pension from Central Government. Is he eligible to invest under PMVVYor SCSS? What are the tax benefits/liabilities, if any, subject to his eligibility?

Ashim Sanyal

The primary eligibility criteria for both the schemes mentioned by you i.e. Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS), is that the individual opening the account should be 60 years of age or more. The schemes do not have any restriction on the maximum entry age or for retired central government employees. NRIs/ HUFs are not eligible for SCSS. As your father-in-law is 78 years of age and assuming he is a resident in India (pre-requisite for SCSS), he shall be eligible to invest in both the scheme.

Both schemes do not provide any tax benefits at the time of making investments. The pension received from the scheme shall also be taxable in the recipient’s hand at applicable slab rates, as ‘Income from Other Sources’.

I have invested around ₹4 lakh in some mutual fund schemes, all being regular plans with dividend options. They have deducted tax on the dividend amounts paid during financial year 2020-2021. Will the mutual funds issue Form 16A and will the details of taxes deducted and remitted to the Government be reflected in Form 26AS of the tax department? Also, can I claim refund of the tax so deducted on filing my return of income? Please clarify.

J R Ravindranath

As per section 194K of the Income-tax Act, 1961, any person, making payment of dividend from mutual funds, shall at the time of credit of such income or at the time of making payment (exceeding ₹5,000), whichever is earlier, shall deduct tax at source (TDS) at 10 per cent. The deductor is required to file the details of such TDS in quarterly withholding tax statement (Form 26Q) and TDS certificate (in Form 16A) is required to be issued by the deductor within prescribed timelines. Details of such income and corresponding TDS shall reflect in your Form 26AS for FY 2020-21. You can file an income tax return and show your dividend income as also any other income which needs to be declared. Basis your taxable income and resultant tax payable, you can claim credit for TDS on dividend and claim a refund, if any.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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Here’s a ready reckoner on changes in new ITR forms

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Last week, the CBDT notified the new ITR forms for assessment year 2021-22. Tax payers can breathe easy this year, given the limited changes in the tax forms. The changes this year are only with respect to certain amendments in the tax law, proposed in the Budget of 2020.

Besides, certain schedules introduced last year to accommodate the relief given to taxpayers during the pandemic have now been removed. For instance, Schedule DI (Detail of Investments/deposit/payment for the purpose of claiming deduction) finds no place in the new ITRs.

Here is a low-down on a few important changes in the new ITR forms, that can come in handy while filing your returns for assessment year 2021-22.

Eligibility tweaks

The exclusion list of ITR-1, that is, persons who cannot file their returns using ITR-1 has got some new frills this year. Now, taxpayers for whom TDS has been deducted under section 194N can no longer file their returns in ITR-1. Per the section, banks (including co-operative societies and post office) are required to deduct TDS at the rate of 2 per cent on cash withdrawals exceeding Rs 1 crore (in aggregate) in the previous year. For non-filers of income tax returns (i.e. those who did not file returns in all of the last three assessment years), the deduction shall be 2 per cent for amounts exceeding ₹20 lakh or at the rate of 5 per cent if withdrawals exceed Rs 1 crore.

In addition, following the recent amendments to tax law, employees who can defer their tax liability on ESOPs cannot file returns in ITR 1 or 4. They have to file returns in forms 2 and 3 only.

ESOP taxation

The Budget of 2020 proposed deferring the tax on ESOPs allotted for employees of a narrow stream of eligible start-ups. ESOPs are taxed twice, in the hands of the recipient employees – once at the time of receipt as a perquisite and next upon subsequent sale of the shares (Capital gains).

Employees of eligible start-ups can now defer the tax on perquisite by 48 months from the end of the relevant assessment year in which the shares are allotted. The Schedule TTI (Computation of tax liability on total income) now requires clear bifurcation of such current and deferred tax amount on ESOPs.

Dividend income

Another Budget amendment was the abolition of DDT and the consequential taxation of the same in the hands of the shareholders. In the ITR forms, apart from withdrawing the redundant mentions of the DDT sections, the Schedule OS (Income from Other Sources) has also been accordingly tweaked to accommodate these amendments. For example, a new row has been inserted to provide deduction for interest expenditure which can be claimed as a deduction under section 57(1) if incurred in relation to dividend income. Further new rows have been added to incorporate dividends earned by non-resident taxpayers, that are chargeable at special rates, under section 115A.

ITR Forms 2, 3 and 4 required taxpayers to provide quarterly break up of dividend income, which helps in computing the interest liability according to advance tax provisions. This break up is now also required to be furnished by taxpayers filing returns using ITR-1.

Concessional tax rates

Starting AY 2021-22, taxpayers can opt for lower tax regime under section 115BAC, by foregoing certain exemptions and deductions. In Part A of all the ITR Forms, taxpayers are required to specify if they are opting for new tax regime under section 115BAC. Assessees with income from business or profession were required to exercise such option on or before the due date for furnishing the returns by filing Form 10-IE. ITR Form-3 hence requires such taxpayers, to furnish the date of filing form 10-IE and its acknowledgement number.

Besides, consequential amendments, with respect to exemptions and deductions foregone have also been made. For instance, in ITR 3, amendments have been made in Schedule DPM (Depreciation on Plant and Machinery) and Schedule UD (Unabsorbed Depreciation), to make one -time adjustment in the written down value of the plant and machinery, for the exemptions now foregone.

New utility

In a bid to ease the burden of taxpayers when filing the returns, the CBDT has launched a new offline utility called JASON for the assessment year 2021-22. The existing excel and java utility have been discontinued. The new JSON utility has currently been enabled for ITR 1and 4 only.

The utility will import and pre-fill the data from e-filing portal to the extent possible. It is enough if taxpayers fill the balance data. However, facility to upload ITR at the e-filing portal using the utility is not yet enabled. It is expected to be available sooner than later.

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Tax Query: How freelancing income received from abroad is accounted for

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I am a software engineer with a CTC of ₹17 lakh per annum. I have been filing ITR Form-1 for the last five years. I got an onsite travel opportunity to Ireland and travelled there on January 2020 on work permit visa. During my stay there, I got my Indian component of ₹17 lakh and in addition I got salary in Ireland for which taxes were deducted at source. Due to Covid-19, I lost my employment and returned to India on October 2, 2020. Thereafter, I worked as a freelancer in November and December with an Irish client and got my payments in euros to my Irish account. For financial year (FY2021), I was out of India for 184 days and hence qualified to be an NRI. Should I declare the freelancing payment received in my Irish account? Can I still file ITR-1 for the year 2020-21? Let me know if any exemptions could be claimed.

– Krishna Prasad R

We understand that you are an Indian citizen and have been primarily staying in India over the past 10 financial years (FY) preceding FY 2020-21. Taxability in India is primarily dependent on the residential status of an individual, which is based on the number of days of physical stay of the individual in India in the relevant FY and preceding FYs, and is defined under Section 6 of the Income-tax Act, 19619 (Act’).

As per the provisions in the above mentioned section, an individual is said to be a resident in India if he satisfies either of the following two basic conditions:

a. He is in India for 182 days or more in the relevant FY; or

b. He is in India for 60 days or more in the relevant FY and 365 days or more in the four years preceding the relevant FY.

An individual who does not satisfy any of the above conditions is considered as a Non-Resident (NR).

Also, from FY 2020-21, in case an Indian citizen or a person of Indian origin, who has been outside India, comes on a visit to India in any tax year, the condition of 60 days [discussed in Point (b) above] gets replaced by 120 days if his total incomes (other than incomes from foreign sources) exceeds ₹15 lakh for that tax year. However, if such income is up to ₹15 lakh, then the 182 days condition prevails.

In case where the physical stay exceeds 119 days but is up to 181 days, such individual shall qualify as Resident but Not Ordinarily Resident (NOR) and not Resident and Ordinarily Resident (ROR).

A resident individual is said to be a Resident and Ordinarily Resident (ROR), if he satisfies both the following conditions, viz.

i. He should be ‘Resident’ in India for 2 out of 10 FYs immediately preceding the relevant FY; and

ii. He should be in India for an aggregate period of 730 days or more in 7 FYs immediately preceding the relevant FY

In case, a resident individual does not satisfy either of the aforesaid additional conditions (i) or (ii), he is said to be a Resident but Not Ordinarily Resident (NOR) in the relevant FY.

From the above provisions, your analysis that you would be qualifying as an NR since you stayed outside India for 184 days during FY 2020-21, may not hold correct and would require you to redetermine your residential status in the light of the above provisions basis of your physical stay in current FY as well as past 10 FYs.

Since you came back to India for good during FY 2020-21 and considering that you satisfy the aforesaid conditions [condition b and (i) and (ii) above], you would qualify as ROR in India and be subject to tax on your worldwide incomes.

Since you qualify as ROR in India for the said year, in addition to taxing your global incomes, you will also have the requirement to report any assets held by you outside India (including bank accounts) and any incomes you might have outside India.

In case of double taxation of your Ireland income, recourse to the India-Ireland Double Taxation Avoidance Agreement (DTAA) shall be required to be considered to mitigate the impact of double taxation in India.

For filing of your tax return, the applicable tax return form would have to be selected appropriately, once such forms have been notified by tax authorities for FY 2020-21. As per the forms notified for FY 2019-20, considering you earned salary income while being on overseas assignment during some part of the year and also incomes from a profession (freelancing income), Form ITR – 3 is applicable.

You also mentioned that you started your overseas assignment in Jan 2020, i.e.,during FY 2019-20. You also mention that you have been filing ITR -1 for the five 5 years.

Considering the assignment-related income and the foreign asset and income disclosure requirements as mentioned above, ITR -1 is not the correct form to be filed for FY 2019-20.

You should have filed return of income in Form ITR – 2 for FY 2019-20, provided you did not have any income from business/profession for the subject year. The statutory due date for filing of revised return for FY 2019-20 is 31 March 31, 2021. You may revisit and file a revised return in form ITR – 2 with appropriate disclosures and amendments.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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Is tax-harvesting that good an idea?

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With the equity markets soaring to new highs, a new term is hogging limelight– tax harvesting. This is particularly for investors in equity mutual funds.

For the uninitiated, this refers to the attempts of equity mutual fund investors to harvest the exemption on long-term gains (up to ₹1 lakh), every financial year on their investments. This is done by selling their long-term equity investments till their aggregate gains total to ₹ 1 lakh (in a year), and subsequently repurchasing the investments at the same price (or NAV). Since the sale price now becomes your cost of acquisition, you can repeat this set of sale and repurchase transactions againafter a year (when these equity investments qualify for long- term capital gains). Doing this year after year lowers your overall tax liability, to an extent, when you finally sell the equity fund investments.

But the game is not worth the candle, considering that the savings every year are only limited to ₹10,000 (long-term capital gain at 10 per cent on ₹1 lakh). Besides, this seemingly good ideahas many practical hurdles. Let’s discuss some of them.

General caveats

Before discussing the technical hurdles faced, one must understand the rules of taxation clearly. The exemption of up to ₹1 lakh on long-term capital gains (LTCG) is only applicable on the aggregate LTCG on equity investments — listed stocks and/or equity-oriented mutual funds — in a financial year. The gains shall be taxed as long term only when such equity investments are held for more than 12 months. Besides, the Income Tax Act defines equity-oriented mutual funds as only those where at least 65 per cent of the fund’s proceeds are invested in equity shares of listed domestic companies. If it is a fund of funds (FoF), the underlying fund should invest at least 90 per cent of total proceeds in listed domestic companies for FoF to be classified as equity-oriented funds.

This clearly excludes funds that invest predominantly in international equities, debt securities and unlisted Indian equities etc. for whom rules of taxation differ.

Besides if you have made your investments through Systematic Investment Plans (SIP), then the cost of acquisition will be based on the units purchased initially– First-In First-Out method. Also, remember that 12 months should have lapsed since the purchase date of each instalment of the SIP for the capital gains to be taxed as long term. Else, you will have to end up paying tax at the rate of 15 per cent on your short term capital gains.

Penny-wise and pound-foolish

Tax-harvesting differs from plain profit-booking, in that the investor continues to stay invested in the fund in the former. To be able to stay invested, you would have to repurchase your equity mutual funds, preferably at the same NAV, so as to avoid any losses due to the difference in daily NAVs. For this, investors need to be mindful of many factors.

One, the investor should be mindful of the cut-off timings for the transactions. The cut-off timing for equity schemes is stipulated at 3 pm — certain third party websites (/ apps) and brokers can have a cut off time earlier than the one stipulated by fund houses. That is, subject to availability of funds, if both the transactions are executed within the cut-off time, the same day’s NAV shall apply for the sale and repurchase transaction. Any delay in fund transfer (to the AMC’s account) or other technical glitch can subject the investors to the volatility in the equity markets – that is a difference in NAV in the sale and repurchase transaction. Your purchase transaction can also get delayed due to the time lag between debit of funds from your bank account and credit to the AMC’s account– mostly prevelant in the case of transactions done using NACH mandate, NEFT and RTGS. The resultant change in NAV can disrupt your investments made for long term goals.

Two, since sale proceeds are not immediately credited to your account, you should be maintaining a fat balance in your bank account to be able to purchase the units at the same NAV. While SEBI stipulates a maximum of 10 days to credit the sale proceeds to your accounts, fund houses generally take up to three days. However, funds for the repurchase transaction must be credited to the fund house, before 3 pm on the same day, to avail the same NAV.

Three, do note that a few funds have ceased accepting lump sum purchases. For example, in September 2020, following the over-valuation in the small- cap space, SBI’s small cap fund, closed itself to lump sum investments after September 7, 2020. Further, on its SIP investments too the fund has a cap of up to ₹5,000 per month (per investor).

Four, be mindful of other incidental charges such as brokerage charges (applicable in the case of Exchange Traded Funds) on multiple transactions.

Five, the concept of tax harvesting assumes a market situation wherein gains on long-term equity funds are spread evenly over the years. But the equity markets do not always exhibit a linear growth. For instance, while the Sensex inched up by 11 and 17 per cent in FY18 and FY19, respectively, it crashed by 23 per cent in FY20. Thereafter in FY21 (thus far), the index rallied by 71 per cent. This volatility can end up distorting your tax harvesting plans.

Net-net, the process is too tedious for a maximum saving of ₹10,000 at the end of every financial year. Investors need to see if these marginal savings are worth the pain.

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Stuck in India due to Covid ? Know your tax liability

Personal Finance

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Doubts regarding the residency status of those who are stuck in India during FY21 were expected to be clarified in the Budget. But the Budget was silent on the issue. The Central Board of Direct Taxes (CBDT) has now come out with a circular on this. The long-awaited circular has not changed conditions for determining the residential status, but it has reiterated that the possibility of double taxation is low. If you have been stranded in India and working out of home, here’s what you need to know:

What are the existing rules applicable to determine the residential status as per the Income Tax Act?

As per the current income tax provisions, an Indian citizen or a person of Indian origin (PIO) whose Indian income does not exceed ₹15 lakh per annum becomes a resident of India if she/he stays at least 182 days in the country in a financial year. If the Indian income of such a person exceeds ₹15 lakh, she/he attains residency in India if a) stays in India for 182 days or more in a financial year, or b) stays for 120 days or more in the relevant financial year and also stays for 365 days or more in preceding four previous years.

If the person is a not a citizen of India or a PIO, then the 120 days in the second scenario above will be replaced with 60 days.

Note that these rules are applicable from FY21. The residential status rules applicable for FY20 were tweaked to provide some relief to taxpayers by excluding the period of stay in India from March 22, 2020 to March 31, 2020 for the purposes of determining the residential status if the taxpayer was not able to leave India during that period.

What are the instances wherein one may become the resident of India for the reason of being stranded in the country due to Covid-19?

There could be two main instances wherein an individual may become a resident in India in FY21 (on the back of exceptional situations) due to which income earned may become taxable both in India and abroad.

One, a person of Indian origin working abroad who acquired residence status there but temporarily returned to India because of Covid-19 situation. He may become a resident in India while retaining the residency status of the other country in which she/he is working.

Two, a non-resident visitor to India (perhaps on a holiday or to work for a few weeks) gets stranded here due to the pandemic and attains the resident status here. It is also relevant to note that even in cases wherein an individual became resident in India, he would most likely become not ordinarily resident in India and hence his foreign sourced income shall not be taxable in India unless it is derived from a business controlled in or a profession set up in India.

Does the CBDT circular provide relief on the residency conditions for FY21 to those stranded in the country?

There is no relief provided in terms of period of stay for FY21 for the purpose of residential status. The circular just states that NRIs and foreign nationals stuck in India due to Covid-19 pandemic and facing double taxation in FY21 can submit the details to the income-tax department by March 31.

The circular tries to allay the fear of double taxation — taxability both in abroad and in India – of an income. It says the possibility of double taxation doesn’t exist as per the provisions of Income Tax Act, read with the DTAA (Double Taxation Avoidance Agreement) with each country.

In spite of that, if a particular tax payer suffers from double taxation due to forced stay in India despite complying with the rules in DTAA, he/she shall provide such information online to the Income Tax Department in Form NR annexed with CBDT circular by March 31, 2021 (https://tinyurl.com/taxres21). After examining the case, the tax department decides if any relaxation is required to be given in that case.

Does it mean that you have to worry about taxes if you have worked from India in FY21 for a company incorporated outside the country ?

There is no a straight forward answer. It is possible that a person is stranded in India due to Covid-19 but continued to earn income from the employer abroad by working from home. According to Mukesh Kumar, Director at M2K Advisors, salary earned by an employee for services rendered in India is taxable in India, irrespective of whether the employee is a resident or non-resident.

However, in case of foreign citizens, remuneration received from a foreign entity is exempt if the foreign entity is not engaged in any business in India, the stay of the employee does not exceed certain number of days (say, 183 days as per the India-USA DTAA) in the financial year and such remuneration is not claimed as deduction in India. However, to claim the tax treaty benefit, the employee should obtain tax residency certificate from the other country. However, experts say that obtaining a tax certificate from other country, sometimes, could be a time-consuming and a costly affair.

So, if your income becomes taxable in India, will you get the tax credit if the taxes are already paid on that income abroad?

A resident person in India is entitled to claim credit of the taxes paid in any other country in accordance with the rule 128 of the Income Tax Rules, 1962. This can be done by submitting the withholding tax certificate from the other country or any other supporting document evidencing payment of tax in the other country along with the return of income in India in Form 67. Having said that, if the tax rates in the country in which taxes are already paid are lower than the applicable tax rates in India, the assessee will be liable to pay the balance amount.

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