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How work from home can impact your tax outgo

September 20, 2020 root Personal Finance

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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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Your Taxes – The Hindu BusinessLine

August 23, 2020 root Personal Finance

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I own two houses. House A is self-occupied (notional rent: ₹15,000 per month ) and House B has been rented out (rent: ₹51,000 per monthm). For filling IT returns, can I show B as self-occupied and A as rented with notional rent. Please advise.

PS Bedi

As per Section 23 of the Income Tax Act, the annual value (income from house property) of any let-out (rented out) property shall be the amount of rent received or receivable in respect of such property, and the annual value of a self-occupied house property shall be nil.

In view of the above, a let-out property cannot be treated as self-occupied. The annual value from the let-out property is required to be offered for tax under the I-T Act.

Therefore, in your case, House A will be regarded as self-occupied property. House B has to be reported as rented-out property and the actual rental income received/receivable from House B is taxable subject to specified deductions as per Section 24 of the I-T Act.

As per the newly inserted Section 112A, long-term capital gains (LTCG) exceeding ₹1 lakh arising from sale of equity shares held for more than one year shall be taxable at 10 per cent. I find that to arrive at the LTCG of more than ₹1 lakh, one has to first adjust the LTCL against LTCG as Schedule 112A provides. Why it is not allowed to utilise first the benefit of exemption of LTCG up to ₹1 lakh before setting the LTCL of the same year and allow the latter to be set off against LTCG over and above the limit of ₹1 lakh?

Secondly, I do not find in the present ITR-2 the column for deduction of LTCG threshold limit as per Section 112A, ie, ₹1 lakh under Para B(4) of Schedule CG as it appeared in the previous year ITR-2. Does it mean the benefit is not available now?

Note: To elaborate the above for clarity, if my LTCG is ₹1.5 lakh and the LTCL is ₹1 lakh, in Schedule 112A, the LTCL first gets adjusted against the LTCG of ₹1.5 lakh, leaving a balance of LTCG of ₹50,000, which is below the threshold limit of ₹1 lakh. In my view, we should be allowed to first deduct the threshold limit of ₹1 lakh from the LTCG of ₹1.5 lakh. The balance ₹50,000 should be allowed to be adjusted against the LTCL of ₹1 lakh, leaving a balance of LTCL of ₹50,000 to be carried forward for future years.

Cyril Dsouza

Section 112A of the I-T Act prescribes the manner for computing the tax dues on long-term capital gains (LTCG).

Accordingly, the taxpayer needs to first arrive at his total taxable income (after adjusting current year’s long-term capital loss (LTCL) and setting off brought-forward LTCL). From the LTCG on specified assets in excess of ₹1 lakh included in the total income, the taxpayer is required to pay tax at the special rate of 10 per cent. This deduction of ₹1 lakh is available for AY2020-21 as well.

Further, there has been only modification in reporting of LTCG under Section 112A in ITR-2 of AY2020-21 compared with ITR-2 of AY2019-2020. In Schedule 112A, a detailed information on purchase/sale of shares needs to be provided. The LTCG income will then reflect in sr.no: 4(a) of sub-head B of ‘Long Term Capital Gain’ under the schedule ‘Capital gains’. Further, under ‘Schedule SI Income, chargeable to tax at special rates’, taxes are computed at 10 per cent on LTCG in excess of ₹1 lakh (Sr.no.4).

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

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Taxpayer Charter: Why execution matters

August 23, 2020 root Personal Finance

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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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Your Taxes – The Hindu BusinessLine

August 16, 2020 root Personal Finance

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I retired from State Bank of India in May this year. Kindly advise me the tax liability on the amount received on retirement by encashing earned leave to my credit as on the date of retirement, ie, May 31, 2020. I came to know from one of my former colleagues, retired from Punjab National Bank, that the amount received is fully exempt from income tax from March 1, 2018. Please clarify.

B Krishnamurthy

As per the provisions of Section 10(10AA) of the Income-Tax Act, leave encashment received by a government employee at the time of retirement is exempt from tax.

However, in case of a non-government employee, exemption for leave encashment upon retirement will be the least of the following:

Actual amount of leave salary received
Period of earned leave standing to the credit* in the employee’s account at the time of retirement
10 months’ average of defined salary**
Maximum amount as specified by the Central government (₹3 lakh)

*‘Leave credit’ to the account of the employee at the time of retirement should be restricted to 30 days per year of service if leave entitlement as per service rules exceeds 30 days per year of actual service.

**‘Salary’ for the above purpose means average salary drawn in the 10 months immediately preceding the day of retirement) and will include basic salary, dearness allowance and commission based on fixed percentage of turnover achieved by the employee.

I understand that you are an employee of State Bank of India , which is a public sector banking and financial services statutory body, in which Government of India holds majority shares. However, the same is not considered to be a government organisation for the purpose of section 10(10AA) and thus, employees of SBI do not qualify as government employee for the purpose of calculation of exemption under the I-T Act.

This view finds support from the judgment of Delhi High Court in the case of Kamal Kumar Kalia and Others v. Union of India and Others [W.P.(C) 11846/2019]

In view of the above, leave encashment received by you at the time of retirement should be considered as exempt subject to provisions of Section 10(10AA) mentioned above, with a maximum limit of ₹3 lakh. Also, in case any such exemption for leave encashment has been taken in earlier previous years, such amount shall be reduced from the maximum exemption limit of ₹3lakh.

I had two demat accounts — one in Karvy and another in Integrated Enterprises. On closure of stock broking at Karvy, I transferred all my holdings to Integrated by giving a closure letter. My doubt is: If I sell a share (transferred from Karvy) in Integrated, what will be the purchase price for arriving capital gains? My son had a demat account in Karvy and transferred all his shares to his mother as gift. The cost of shares gifted is ₹2.49 lakh and the present value of the shares is ₹1.69 lakh. On I-T filing, if my wife sells the gifted shares what, will be the cost for capital gain purpose?

K Nagarajan

Regarding the first query, if you sell the shares transferred from Karvy to Integrated Enterprises, the purchase price for the purpose of calculation of capital gains, as per provisions of the I-T Act shall be the price at which the shares were originally purchased by you. The transfer of share from one demat account to another of the same person will not be considered as transfer to compute capital gains, if any. However, please note that depending on the period of holding of the shares (long/short term) you would still be required to calculate the cost of acquisition of the shares as per the applicable provisions.

Regarding the second query, as per Section 49(1) of the I-T Act, where the capital asset becomes property of the assessee under a gift, the cost of the asset shall be considered as the cost at which the previous owner had acquired it. Thus, for the purpose of calculating the cost of acquisition of shares received by your wife from your son, the purchase price shall be considered as the price at which your son had acquired those shares.

The writer is a practising chartered accountant

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Your Taxes – The Hindu BusinessLine

August 9, 2020 root Personal Finance

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I am a pensioner, a senior citizen with income below ₹5 lakh (after deducting ₹1.5 lakh 80C investments, ₹40,000 standard deduction, ₹50,000 interest and ₹30,000 health insurance premium). I pay no tax. If I have STCG from share-trading, do I have to pay 15 per cent STCG tax or 20 per cent tax (ie, say, my income is ₹4.9 lakh, I incur STCG of ₹ 20,000 and my income totals ₹5.1 lakh).

K Nagarajan

Short-term capital gains (STCG) from sale of equity shares or equity-oriented mutual fund (STT paid) by a resident individual is chargeable to tax at 15 per cent under section 111A of the Income Tax Act. Surcharge (if any) and health and education cess at 4 per cent shall apply.

The basic exemption limit for a senior citizen (a resident individual above 60 years of age but less than 80 years) is ₹3 lakh. Taxes at 5 per cent will be levied for income exceeding ₹3 lakh and up to ₹5 lakh.

Further, a resident individual can claim a rebate of up to ₹12,500 under Section 87A if his total income does not exceed ₹5 lakh.

Your total income (including STCG) will exceed ₹5 lakh. So, you will not be eligible to claim rebate under section 87A. Your income (other than STCG) will be subject to tax at 5 per cent. Income from STCG of ₹20,000 will taxed at 15 per cent.

Your estimated tax liability shall be ₹ 13,000 — on ₹1,90,000 (₹4,90,000 – ₹3,00,000) @ 5% = ₹9,500; on ₹20,000 x 15% = ₹3,000; Total tax = ₹12,500. Including cess at 4 per cent on the tax, the tax liability equals to ₹13,000.

The standard deduction for 2019-20 is ₹50,000, or the amount of salary (pension), whichever is less.

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

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