Tag: Section 80C

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

Personal Finance

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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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Why tax-free bonds are a good alternative to bank FDs

Personal Finance

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With interest rates at historic lows today, investors looking for better-return, fixed-income options can consider tax-free bonds available in the secondary market. These bonds can be a relatively low-risk alternative to many bank fixed deposits for those in the higher tax brackets.

Tax-free bonds

Tax-free bonds are issued by public sector undertakings such as NHAI, HUDCO, PFC, REC, IRFC, with maturities of 10 years or longer. The last primary bond issue was in March 2016. You can buy these bonds from the secondary market. They are listed on the BSE and the NSE.

‘Tax-free’ here refers only to the tax-free interest. That is, you don’t have to pay any tax on the interest (coupon) received on these bonds. These bonds are not included under Section 80C (Income Tax Act) investments and the money invested in them is not eligible for deduction from your taxable income. The interest on such bonds (paid out periodically) is tax-exempt while that on fixed deposits is taxed at your income tax slab rate.

Note though that while tax-free bonds from certain issuers may enjoy good trading volumes, if you have large bond holdings (of say a few crores of rupees), you may need a few days to a week to exit your holdings completely. “Monitoring of price (and hence yield) and volume of past 1-2 months is required before investing,” says Deepak Jasani, Head of Retail Research, HDFC securities. Liquidity may, however, be less of a concern for those with smaller investments.

 

What bonds to choose

Given the current interest rates, further rate cuts don’t appear likely. To avoid missing out on higher returns once the rate cycle starts turning up gradually, you can invest in tax-free bonds (that have good trading volumes) with a residual maturity of around two years that offer the best yield-to-maturity (YTM). Also, it’s best to stick to AAA-rated bonds (a few are rated below AAA) as they come with the highest degree of safety.

Data from HDFC securities show that AAA-rated IIFCL bonds (series -719IIFCL23) priced at ₹1,114 per bond, with a residual maturity of 2.2 years and daily average trading volumes of 2,557, offer a YTM of 4.71 per cent. The YTM shows your return from a bond if you hold it until maturity.

Do note that YTM calculations assume that interest from a bond is getting reinvested at the same current yield. Tax-free bonds make periodic interest payouts to investors. So, depending on the rate at which these are reinvested, your actual return can be lower / higher than the YTM. For a bond with a relatively shorter residual maturity such as two years, this impact may, however, be very small.

If you sell the bond before maturity, your final return will also depend on the selling price versus the purchase price of the bond. This could result in a capital gain or loss for you – which is the interest rate risk.

Risk return trade-off

While tax-free bonds may not carry as low a risk as many bank fixed deposits do, the AAA-rated bonds do offer a good degree of safety. Unlike bonds, fixed deposits carry no interest rate risk – that is, the value of the original investment remains unchanged. Also, while tax-free bonds may not be perfectly liquid (for large holdings), fixed deposits can be liquidated any time, though subject to a penalty in many cases.

That said, tax-free bonds are issued by public sector undertakings that enjoy Government of India backing. So, they carry low risk of default and can be considered safe.

Who should invest

Investors who are not completely risk averse and are in the 30 per cent tax bracket, can invest in the IIFCL tax-free bonds as an alternative to many public and private sector bank, and small finance bank FDs that are offering lower post-tax returns (see table). Those in the 20 per cent tax bracket, can invest in the bonds as an alternative to some lower-interest rate offering of public and private sector bank FDs.

You can buy and sell tax-free bonds through your demat account. Sale of tax-free bonds attracts capital gains tax. If you sell the bonds within 12 months from the date of purchase, you are taxed on the gains based on your income-tax slab rate. If the bonds are sold after 12 months, the gains are taxed at 10 per cent without indexation benefit or at 20 per cent with indexation benefit.

Floating rate bonds

Another safe investment option for those wanting to diversify from bank FDs are the Floating Rate Savings Bonds 2020 issued by the Central government.

These bonds make semi-annual interest payments which are taxed as per your slab rate, and can be bought from some of the leading banks. The current interest rate on them is 7.15 per cent and is payable in January 2021. The interest rate is reset every six months. These bonds look attractive given that interest rates are expected to gradually move up. The only negative here is the long lock-in period of seven years.

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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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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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