Tag: income tax

Know how the rent collected is accounted for I-T purpose

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Request response on the following questions on tax pertaining to undivided property and tax applicable to rent:

1. Can the rent allotted from undivided properties located in urban neighbourhood be considered separately under Hindu undivided family account for income tax purpose? If this rent is less than minimum slab, is it necessary to file an undivided family account?

2.A Father occupies a house with the name of his son, he pays a nominal rent as a relief to his son. Whether this can be considered as a gift and gets relief for the son from paying income tax?

3. When an individual owns only one house in an urban neighbourhood and collects a rent. He however, stays in another town for living. How is the rent accounted for IT purpose?

4. An individual has purchased a house using a housing loan — EMI basis in a city– and has a house in an urban neighbourhood and collects a nominal rent. Which I-T form needs to be used? The first house has not yet been transferred to his name. How is this rent accounted for I-T purpose?

— Raman

1) Pursuant to section 22 of Income Tax Act, 1961 (the Act), rental income derived from the undivided property owned by the Hindu undivided family (HUF) shall be assessed in the hands of HUF. Further, if the total income derived by the HUF in a financial year (FY) is less than the basic exemption limit (₹250,000 for the FY 2019-20) HUF is not required to file the Income tax return (ITR). However, if the HUF had deposited amounts exceeding one crore rupees in one or more current accounts during the FY or incurred foreign travel expenditure exceeding two lakh rupees or electricity expenditure in excess of one lakh rupees then tax return has to be filed even if the total income is below the basic exemption limit.

2) We understand that the house property is owned by son and his father pays nominal rent for occupying the house. As the underlying transaction is occupation of the house and payment of rent therefore, such payments by father to son ought not be regarded as ‘Gift’ under section 56 (2) (X) of the Act. Accordingly, such rental income earned by the son need to be offered to tax under the head ‘House Property’.

3) Rental income earned by the individual from the property located in urban neighbourhood is liable to tax under the head ‘House property’. Standard deduction of 30 per cent on such rental income earned and actual municipal taxes paid could be claimed as deduction under the Act. Further, interest on housing loan (if any), without any deduction limit can be claimed under section 24 of the Act.

Further, where the individual stays in a rented accommodation in another town for his living, he may claim, either of : Exemption of house rent allowance (HRA) u/s 10(13A) of the Act, if he is a salaried person, or Deduction u/s 80GG of the Act, subject to fulfilment of specified conditions.

4) Based on the details provided, a house property is owned by the individual and the same is currently let out. He earns a nominal rental income from that property. As per section 23 of the Act, the annual value of the property let out during the year shall be higher of the actual rent received/ receivable or fair rental value for which the property is expected to let out.

For let out property, rental income shall be offered to tax while filing the tax return and specified deductions (30 per cent standard deduction, municipal taxes paid and interest on housing loan) can be claimed. With respect to the other house property which is not transferred to the name of the individual, it may tantamount to not having a legal ownership in that property and the eligible deductions with respect to interest/principal payment may not be claimed under the Act. It needs to be further analysed based on the documents in place. For property under-construction, any interest paid before possession is tax deductible in five instalments beginning from the year in which construction was completed under the Act. Deduction for interest on housing loan is capped at ₹200,000 for a self- occupied property and the amount of principal payment can be claimed up to ₹150,000 u/s 80 C of the Act, subject to conditions.

Use of IT form: ITR 1 could be used if the income is less than ₹ 50 lakhs in a FY and the individual has salary income, one house property, further subject to specified conditions.

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What tax deductions are allowed on pension income

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I would like to know whether a senior citizen is eligible for the following I-T deductions from his/her pension income: i) deduction under Section 80C – ₹ 1.50 lakh ii) deduction of FD interest– ₹ 50,000 iii) deduction of NPS contribution– ₹ 50,000; total deduction– ₹ 2.50 lakh. A senior citizen having a pension of ₹7.5 lakh per annum will not be required to pay any income tax after deduction of ₹.2.5 lakh mentioned above. Can you please clarify whether the above understanding is correct or not?

Subramanian

As per the provisions of Section 80A under Chapter VIA of the Income-tax Act, while computing total income, an assessee is eligible to claim deductions under Section 80C to 80U of the Act (subject to the conditions and eligibility of the respective sections). Accordingly, you shall be eligible to claim eligible deductions under Sections 80C, 80TTB (against interest earned on deposits, up to maximum of ₹50,000) and 80CCD(1B) for NPS contribution (up to maximum of ₹ 50,000).

Further, for FY2020-21, though the minimum amount not chargeable to tax is ₹2.5 lakh, a resident individual is eligible to claim rebate under Section 87A of the I-T Act if his/her total income (after deductions) does not exceed ₹ 5 lakh. Hence, a resident individual having total income after eligible deductions up to ₹5 lakh need not pay any tax.

However, in your case, the income earned is pension income of ₹7.5 lakh. Total deductions of ₹2.5 lakh as mentioned in your query, includes a deduction of ₹50,000 which is available only on interest on deposits (Section 80TTB) and not against pension income. Hence, deduction under 80C and 80CCD(1B) shall only be eligible against the pension income subject to the fact that you have made eligible contributions / payments for various schemes for such a claim.

However, on the presumption that your pension income is received pursuant to your employment (and is not a family pension/from a pension investment plan), the same shall be taxable as ‘Salary’ income and you shall be eligible for a standard deduction of ₹ 50,000 against such pension income.

I have applied for home improvement loan from Indian Bank for painting, damp prevention masonry work, etc. I was told that I can claim deduction under Section 24 and others of the Income tax Act for interest up to ₹1.5 lakh for self-occupied property. Please advise on the amount of deduction allowed for renovation of self-occupied property of senior citizens under current tax laws

Sushovan Sen

I understand that you own and occupy the house property. As per Section 24(b) where a self-occupied property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the taxpayer may claim a deduction of the interest payable on such borrowed capital/loan of up to ₹30,000.

Considering the painting, damp prevention, masonry work type as repairs, renewal, you shall be eligible to claim deduction of up to ₹30,000 on account of interest payment on such loan.

Please note that for loans taken on or after April 1, 1999 for acquisition or construction of a property and where such acquisition or construction is completed within five years from the end of the financial year in which loan is taken, total amount of ₹2 lakh is allowed as deduction.

Since this is a self-occupied property, any deduction claimed would result into loss under the ‘House Property’, which shall be eligible to be set-off against any head of income in the same year. Any excess, shall be allowed to be carried forward and set off only against house property incomes for next 8 assessment years following the AY in which the loss had occurred.

The writer is a practising chartered accountant.

Send your queries to taxtalk@thehindu.co.in

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How dividend and buyback are taxed

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Of late, many Indian companies have chosen to reward shareholders either through dividend or buyback. The tax treatment of dividend income as well as capital gains on tendering shares in a buyback offer has undergone significant changes in the last two Union Budgets.

Here’s a low-down on the tax implication of buyback and dividend in the hands of investors.

Buyback is tax exempt

A buyback offer essentially is a scheme by which a company repurchases a certain amount of its outstanding shares.

If you tender your listed shares in a buyback offer that is announced — either through the tender offer route or via open market purchases — on or after August 1, 2019, then the capital gains on sale of shares are exempt from tax in your hands.

The Union Budget 2019 shifted the tax burden on buybacks from taxpayers to companies, which are liable to pay buyback tax at the rate of 20 per cent on the difference between the issue price and the buyback price of the share.

Meanwhile, capital gains accounted in the buyback offer of unlisted companies have already been tax exempt for investors since 2013, when the Finance Act introduced buyback tax on unlisted companies.

Since the capital gain from buyback is an exempt income, any loss incurred from buyback is also not available for set-off/carry-forward purposes. For instance, earlier when capital gains from sale of equity shares were fully exempt from tax, any loss from the same could not be set off. Usually, the set-off feature is useful as it reduces the overall tax outgo.

Generally, under the Income-tax Act, a short-term capital loss can be set off against both short-term and long-term capital gain; and the long-term capital loss can be set off only against long-term capital gain. And any unabsorbed capital losses can be carried forward to eight assessment years, including the assessment year in which the loss was incurred.

In such situations (of incurring losses in the buyback process), one can consider selling shares in the open market instead (if the market price is almost close to the buyback price) to enjoy the benefit of set-off/carry-forward, which are not available in the case of buyback.

Note that since there is no tax implication on buyback in the hands of the shareholder, TDS (tax deducted at source) does not come into picture in respect of companies distributing the buyback proceeds to shareholders.

Dividend — taxable at slab rates

Until March 31, 2020, companies distributing dividends were liable to pay dividend distribution tax at an effective rate of 20.56 per cent to the government from their surplus. And the dividend income in the hands of shareholders was exempt. The only exception was in the case where a resident individual received dividend income from a domestic company/companies of over ₹10 lakh. Here, the excess dividend income was liable to tax at a special rate of 10 per cent. When mutual funds paid dividend, tax at the rate of 10 per cent and 25 per cent on equity and non-equity schemes, respectively, had to be paid by the fund houses and the balance was distributed to investors.

But Budget 2020 abolished the dividend distribution tax on dividends announced by corporates and mutual funds.

Effective April 1, 2020, the dividend distributed by a company (domestic or foreign), or a mutual fund, is taxable in the hands of the investor. Dividend receipts must be disclosed as income and taxes have to be paid as per the taxpayers’ applicable slab rates, both under the old or the new tax regime.

Thank the taxman for some mercy . A deduction is allowed for interest expense incurred on money borrowed to invest in shares or mutual funds paying the dividend. However, the deduction should not exceed 20 per cent of the dividend income received.

The Budget 2020 also imposes TDS on dividend income distribution by companies or mutual funds. If the dividend amount exceeds ₹5,000 annually per resident investor, a TDS of 10 per cent has to be deducted from the dividend proceeds before crediting it to the investor. In order to provide some relief to the tax payers amid Covid-19, the government lowered the TDS rate on dividends to 7.5 per cent for FY 20-21 alone, that is, for dividends paid till March 31, 2021. Note that if the PAN (Permanent Account Number) is not updated or erroneously registered with the depository/ registrar and transfer agent/mutual fund, the applicable TDS rate would be 20 per cent.

Meanwhile, if the resident individual’s estimated annual income is below the exemption limit of tax, she/he can submit form 15G/15H to the company or mutual fund so that no TDS is deducted on paying the dividend.

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Know these tax deductions beyond Section 80C

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The financial year end is just about four months away, and it’s time to get going on your tax-saving investments if you haven’t done so yet. Now, besides the usual Section 80C instruments (up to ₹1.5 lakh a year), there are other ways to deploy money and save tax. Use these too to good effect.

But note that like Section 80C of the Income-Tax Act, other tax breaks are also only for those in the existing tax regime (that has higher tax rates along with benefit of tax deductions and exemptions).

Here are some key tax breaks beyond Section 80C.

NPS plus

Not only are investments in NPS – Tier 1 allowed under Section 80C – you can also put an additional ₹50,000 and claim tax deduction under Section 80CCD. This can translate into annual savings of ₹2,600 for those in the 5 per cent tax slab, going up to ₹15,600 for those in the 30 per cent tax slab. While the tax break is a sweetener, the NPS is a cost-effective pension plan to help you provide for post-retirement income.

Health cover

Given the high cost of medical treatment, it’s always good to have adequate health insurance cover for yourself and the family.

It helps that Section 80D gives a deduction of up to ₹25,000 a year for the premium you pay to get health insurance for yourself, your spouse and your dependent children; this goes up to ₹50,000 if any of you is a senior citizen. If you pay the premium to cover your parents, you get an additional deduction of up to ₹25,000 a year (₹50,000 if either of your parents is a senior citizen).

Expense on preventive health check-ups are also eligible for deduction up to ₹5,000 a year. This is part of the overall limit.

Donations

Donate to institutions and funds approved by the Government — these get you deduction under Section 80G of the Income-Tax Act. Give money; you won’t get the benefit if you give in kind such as food items, clothes and utensils. Also, cash donation is eligible only up to ₹2,000 a year. So, if you want to give a larger sum, give via non-cash modes such as cheques or online transfers.

Donations to many Government-run entities are fully deductible from taxable income, but the deduction is limited to 50 per cent of the donation to most non-Government entities. This tax break may be further limited to 10 per cent of your adjusted gross total income.

Interest on loans

Interest paid on education loans and home loans also help save taxes.

Section 80E allows deduction of the interest paid on loans to fund your education or that of your spouse, children or someone you take care of as a legal guardian. The loans must fund a Government-recognised course of study.

The deduction is allowed if the loan is taken from an approved financial institution or an approved charitable institution. You can claim the tax break for a maximum of eight years — starting from the year you start paying the interest on the loan.

Servicing your home loan gets you two tax benefits. One, repayment of principal is eligible for tax deduction under Section 80C up to the overall limit of ₹1.5 lakh a year.

Next, the interest payable on a loan taken to buy, construct, repair, renew or reconstruct your house is allowed as deduction under Section 24. The interest deduction for self-occupied homes is restricted to ₹2 lakh a year. For let-out and deemed let-out properties, there is no restriction on the annual interest amount. But the overall loss from house property cannot exceed ₹2 lakh a year; the balance loss can be carried forward for set-off for up to eight assessment years.

Besides, interest payable on the loan till the house is acquired or constructed is also allowed as deduction. This can be claimed in equal instalments for five years from the year in which the property is acquired or constructed. This deduction though is subject to the ₹2 lakh overall limit.

Interest on loans on let-out property is allowed even in the new tax regime, but subject to certain restrictions.

Interest on bank/PO accounts

Interest on savings deposits with banks, post office or co-operative societies have to be declared as income. But Section 80TTA allows deduction of such interest up to ₹10,000 a year. This benefit is not available on interest from other deposits such as fixed deposits.

Senior citizens get a higher benefit. Under Section 80TTB, their interest income on deposits (including fixed deposits and savings account deposits) is eligible for deduction up to ₹50,000. But with this, the ₹10,000 deduction under Section 80TTA will not be allowed.

Other breaks

Besides, there are other deductions such as contribution to political parties under Section 80GGC, medical expenses incurred to treat specified illnesses under Section 80DDB, and medical expenditure incurred on disabled dependents under Section 80DD; these are subject to certain conditions and limits.

Also, subject to conditions and limits, salaried employees are eligible for tax breaks on incomes such as HRA (house rent allowance), leave travel allowance and leave encashment on quitting the job. Salaried employees also get standard deduction of up to ₹50,000 a year. Read more on these tax breaks in the link below https://tinyurl.com/y6rg3ccc

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Your taxes – The Hindu BusinessLine

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I bought Nippon India Tax Saver Fund (ELSS)- dividend payout– on January 13, 2015 at the NAV of ₹24.0624 and redeemed on October 10, 2020 at the NAV of ₹15.3412. The NAV of the scheme on January 31, 2018 was ₹24.9089. How to calculate LTCG/LTCL in this case.

– C.Visalakshi

As per Section 112A of the Income Tax Act,1961 (the Act), long-term capital gain (LTCG) in excess of ₹1,00,000 earned from sale of listed equity shares/equity-oriented fund /unit of business trust (qualifying assets) on which securities transaction tax has been paid shall be subject to income tax at the rate of 10 per cent. Surcharge (if any) and health and education cesses at 4 per cent shall apply additionally.

Where the qualifying assets are purchased before January 31, 2018, the cost of acquisition shall be the higher of the following:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on 31 January 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

Based on the above as actual cost of acquisition is higher, cost of acquisition for the purpose of computing LTCG shall be ₹ 24.0624. Accordingly, there shall be Long term capital loss (LTCL) of ₹ 8.7212 per unit.

I am an employee of a State government PSU and am retiring in seven months. My employer is deducting TDS on terminal earned leave surrender (ELS). It is understood that Central government PSU employees have complete exemption on terminal ELS. Can I claim refund of this TDS?

–Anil Thekkutt

As per section 17(1) of Income-Tax Act,1961 (the Act), salary includes any payment received by an employee in respect of any period of leave not availed of by him. Further, as per Section 10(10AA)(i) of the Act, any payment received by a Central Government or State Government employee as the cash equivalent of the leave salary in respect of the earned leave at the time of his retirement or separation (whether on superannuation or otherwise) shall be exempt from income tax.

In view of the above provision, as the terminal earned leave is surrendered during your service period, i.e., before retirement, the same shall be taxed under the head ‘Salaries’ under the Act and TDS refund cannot be claimed while filing your tax return in India.

The writer is Partner, Deloitte India

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Buy home below circle rate without tax burden

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On November 12, the Finance Minister announced some income-tax relief for home developers and buyers. The differential between the circle rate and the agreement value – to sidestep tax under Section 43CA and Section 56(2)(x) of the Income -Tax Act – was increased from 10 per cent to 20 per cent. The benefit of this increased differential is available for primary sale of residential units of value up to ₹2 crore from November 12, 2020 to June 30, 2021.

What and how?

In general, the government frowns upon property transactions happening at rates below the circle rates (stamp duty value) fixed by it because this could be a way to evade income taxes.

So, it taxes the differential amount, in the hands of both the developer who sells the property at below the circle rate and the buyer who purchases it. Say, the circle rate of a property is ₹100 while the property transaction happens at ₹70. Here, ₹30 will be taxed in the hands of the developer as business income under Section 43CA, and ₹30 will also be taxed in the hands of the property buyer as income from other sources under Section 56(2)(x).

Now, over the years, the government has provided some concessions on this tax – acknowledging that sometimes property transactions do happen below circle rates due to fall in market rates or delay in reducing circle rates. So, in Budget 2018, a safe harbour threshold of 5 per cent was given. That is, if the transaction value was, say ₹100, while the circle rate was up to ₹105, tax would not be applied on the difference.

Then, in Budget 2020, the threshold was increased to 10 per cent. This has now been increased further to 20 per cent. So, if the transaction value is ₹100 while the circle rate is up to ₹120, tax would not be applied on the difference as it is within the 20 per cent of the transaction value.

Here’s another example, if the circle rate of a house is ₹50 lakh and a developer sells it to a buyer at ₹ 40 lakh, the safe harbour threshold of 20 per cent will not be available, as the difference (₹10 lakh) is 25 per cent of the transaction value (₹ 40 lakh). In this case, both the developer and buyer will have to pay tax on the difference of ₹10 lakh.

Had the transaction value been ₹42 lakh and the circle rate ₹50 lakh, the safe harbour threshold of 20 per cent would have been available since the difference (₹8 lakh) – 19 per cent – is within the limit of 20 per cent of transaction value (₹42 lakh). In this case, both the developer and the buyer will not have to pay tax on the difference of ₹8 lakh.

The economic slowdown has pulled down property prices. The increase in threshold from 10 per cent to 20 per cent eases a tax disincentive that could have prevented transactions at market rates much lower than circle rates.

Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says, “With the increase in circle rate in a few States such as Maharashtra despite zero or negative movement in the market rates, it was challenging for the developers to sell the properties below the circle rates as income-tax rules tax such transactions both in the hands of the buyers and the developers. The threshold increase relief will provide a breather to developers and buyers for the time being.”

If and buts

Note that the increase in differential threshold is only for some property transactions. One, it is only on sale of residential units. It is not available on sale of commercial property or land. Two, it is only on primary sale – that is, from a developer to a buyer. It is not available on re-sale of houses. Three, it is only on sale of houses with value up to ₹2 crore. Four, it is a limited period offer – up to June 30, 2021. After this date, it’s back to the original threshold of 10 per cent.

For the others – sellers and buyers of land, commercial property, costly homes, resale homes, etc –the threshold of 10 per cent continues.

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Your Taxes – The Hindu BusinessLine

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It was mentioned in Business Line dated September 21, 2020 that if an individual transfers an amount (or gives interest- free loan) to his wife, the income earned on the same will be added to the income of the individual. What if a karta of an HUF transfers an amount (or gives interest-free loan) to his wife or parents? How is the income earned on that amount treated?

MG Suraj

As per Section 56(2)(x) of the Income Tax Act, any sum of money received in excess of ₹ 50,000 (without consideration/for inadequate consideration) is taxable, except where the donor is a relative or where the money is received in specified circumstances.

Under the I-T Act, as the term ‘relative’ does not include ‘HUF’ (Hindu Undivided Family), it appears that the gift received by individual HUF members (in excess of specified limits) from the HUF shall be chargeable to tax in the hands of individual members.

However, there are Tribunal rulings pronounced in the past, wherein such gifts have been treated as tax-free in the hands of the members on the premise that HUF is a group of relatives and, therefore, any amount received is a gift from the relative and is not taxable

There ought not be any tax implications on providing interest- free loan by karta (HUF) to his spouse, provided it can be established as a genuine transaction supported by adequate documentation.

The interest income earned on the money transferred to your wife’s account from the HUF shall be taxed in the hands of your wife only as the clubbing provisions are not applicable in case of HUF.

Further, if your parents are not members of your HUF, transfer of amount by way of gift from your HUF to your parents shall be covered under 56(2)(x) of the I-T Act and, accordingly, the whole aggregate sum of money received by your parents in a financial year (FY) shall be taxable in their hands as income from other sources, if the aggregate sum of money received exceeds ₹50,000 in a financial year. Further, the interest earned on such sum of money is taxable in their hands.

You may note that as per Section 10(2) of the I-T Act, any sum paid out from the income of the HUF to its members is exempt from tax. For the purpose of the above, we have assumed that payment is out of corpus of the HUF and not from its income.

I had invested in an FD in a Bengaluru-based cooperative bank and earned interest of ₹3.5 lakh in FY2019-20. Upon maturity of the FD, the interest and principal amount was credited to my savings bank a/c with the said bank. But unfortunately, the bank was sealed by the RBI due to some fraud committed there and huge NPA, and no business is being transacted by the bank. The RBI has also set a limit on withdrawals of not more than ₹1 lakh. Revival of bank is progressing. I want clarifications on a few points as I want to file ITR for FY2019-20 and pay tax. As my SB a/c is limited, is there any relief given to taxpayers, viz the above circumstances as I am unable to withdraw my money to pay tax. Can I file ITR without paying tax? Can I defer the tax payment?

HS Muralidhar

An individual can file tax return with tax liability and subsequently discharge the taxes.

Until FY2015-16, tax return filed with outstanding liability was regarded as defective return. With the amendment to tax laws, effective FY2016-17, filing tax return with tax payable is not regarded as defective return.

However, the taxpayer should be mindful that he would be regarded as assesse-in-default and thus may be subject to penal consequences besides interest implications.

Hence, it is recommended to discharge the taxes first before filing the tax return.

However, in case you choose to pay the taxes post filing of your tax return, such taxes, along with applicable interest, will have to be settled at a later date.

The due date of filing income tax return for FY2019-2020 is December 31, 2020. In the event the tax return is not filed within the said date, belated return can be filed on or before March, 2021, with additional interest and late payment fees.

Besides this, losses (except house property loss) cannot be carried forward if the return is not filed within the due date.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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How work from home can impact your tax outgo

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The Covid-19 pandemic has triggered radical changes for all, especially for the employee workforce.

The combination of the pandemic fallout and the advances made in technology has led to a sharp rise in work-from-home arrangements for employees, employees working from residences near their office locations or from their home town, making work-from-home now the new normal.

With the new working arrangements come new processes, challenges and situations. Unfortunately, existing tax reliefs/exemptions are not inclusive enough to cover the new normal unless there are specific amendments or clarifications. Further, the current salary structures are also aligned to existing tax provisions to optimise tax breaks for employees. Thus, with the new normal having not been envisaged, there is the possibility of increased tax outflow for employees.

As per current tax laws, salary and allowances from the employer are taxable unless specifically exempted.

Certain allowances/reimbursements such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are exempt from tax as per specified limits, subject to actual expenditure under the old tax regime.

With the new normal, employees are required to work from home, and it is difficult to go on vacations and there is also limited travel for commuting to work. Thus, it is not possible for them to expend money for the designated purposes, making it imperative to understand tax implications in such situations.

Impact on exemptions

In cases where employees pay rent and if specified conditions are met, HRA exemption can be claimed as per defined limits under the old tax regime. The HRA exemption is based on various limits — defined as a percentage of salary, HRA received, the actual rent paid and location of accommodation.

One of the defined limits is based on the place of the rented accommodation; for metro cities, the specified limit is 50 per cent of the basic salary and for other cities, it is 40 per cent.

Considering the new normal, to save on unnecessary expenses, employees have vacated their rented houses and moved to their home town or to another house with lower rent. Thus, if employees are no longer paying rent, HRA received will be fully taxable. Further, if employees are paying lower rent and/or there is a change in place of accommodation from metro to non-metro, the quantum of exemption available will substantially decrease.

Further, LTA shall be exempt to the extent of actual expenses incurred in respect of two journeys performed within India in a block of four calendar years under the old tax regime.

The current block runs from 2018-2021. If an employee does not use their exemption during any block, their exemption can be carried over to the next block and used in the calendar year immediately following that block.

However, as employees and their families are not able to travel due to the pandemic, any travel plans in the future looks limited.

Hence, some employees may need to claim LTA as a taxable allowance.

Some employers have extended additional support to make work-from-home arrangements conducive. Some of the common supports extended are furniture (table, ergonomic chairs), increased utility (electricity, internet), etc. However, in the absence of specific provisions, the tax implications of such extended support will also have to be evaluated basis the exact arrangement.

True-up

It is a normal practice for employers to deduct tax on salary every month based on estimates of rent and other investment details submitted by the employee at the start of the year (ie, in April 2020 for the current financial year).

Subsequently, towards the year end, the employer verifies the declarations made by the employee as supported by actual declarations and considers a true-up for excess/ short tax withholdings.

Therefore, it is important for employees to update the employer on any change in declaration given at the start of the year (such as changes in rent paid, city of accommodation, etc) so that necessary true-up adjustments in tax withholdings can be factored in the remaining months.

Else, there could be substantial cash flow challenges for employees.

The writer is Partner, Deloitte India. With inputs from Jimish Vakharia, Senior Manager, and Reena Poddar, Manager, Deloitte Haskins & Sells

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Taxpayer Charter: Why execution matters

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The Centre recently unveiled a new Taxpayer Charter, listing out an income taxpayer’s rights and obligations.

The UK and Australia have similar charters in place.

This move comes a year after the Centre abolished the Tax Ombudsman institution that was established nearly a decade ago. The Charter is trying to address this gap in a way. It addresses only income taxpayers, while the ombudsman scheme was available for both direct and indirect taxpayers. The Charter emphasises that the Income Tax (I-T) Department trusts the taxpayers upfront.

However, there are no new elements in the charter as such because the rights and obligations are already part of the Income Tax Act, 1962.

Global experience

Australia and the UK have strived to codify their tax charters into an institutional philosophy on how revenue-collecting agencies deal with taxpayers. There are frequent reviews of implementation of their charters based on the experience of taxpayers. In India, there has been no such information yet, except the one page that enumerates rights and obligations of a taxpayer.

It doesn’t stem from any legal provision in the I-T Act either. The announcement of the charter seems to be an attempt to tone down the adversarial approach that the I-T Department has taken in the past with some taxpayers.

The charter seems to dovetail the new faceless assessment and appeal scheme that the Centre has unveiled.

Here, the assessment proceedings have been de-linked from the taxpayer’s location, and will be distributed to income-tax officials across the country in a randomised manner.

There is not enough clarity as to whether all cases will be taken up through this faceless assessment and appeal scheme, or how documents that are needed for assessment proceedings will be allowed to be shared with the assessing officer or at the level of commissioner appeals.

Execution is key

The Taxpayer Charter seems to have resurrected the complaint mechanism that was earlier available through the ombudsman scheme.

Taxpayers who are unhappy or perceive the handling of their assessment proceedings to be contrary to the Taxpayer Charter can approach the Principal Chief Commissioner of Income Tax of their respective zones.

How this will work in an environment where assessments are distributed across the country to income-tax officials is still not clear. One will have to wait for more details.

One reason the Taxpayer Charter might not work well in the current environment is the practice of assigning steep revenue targets to income-tax officials.

Only if the I-T Act, its rules and the Central Board of Direct Taxes’ regulations make complying with the charter mandatory, can there be any meaningful change in the experience of an income taxpayer.

It needs to be seen whether this new charter changes the income taxpayer’s experience while dealing with officials while undergoing scrutiny assessments.

It also needs to be seen whether the charter evolves into a more robust grievance redressal mechanism. The current mechanism available through the Income Tax Department’s return e-filing portal and ASK centres allows grievances such as non-processing of returns, not receiving refunds, return rectification pending with assessing officer and correction of incorrect outstanding demand.

It will be interesting to see how the charter evolves these processes to make the interaction of Income Tax Department with taxpayers easier, especially in cases involving alleged harassment.

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