Tag: Tax deduction

Know the difference between exemption and deduction

Personal Finance

[ad_1]

Read More/Less


A coffee time conversation between two colleagues leads to an interesting explainer on tax jargon.

Tina: Problems with the new IT website seem to be never ending. Have you filed your tax returns?

Vina: No Tina. I seem to have missed the receipt for my insurance premium payment. That could help me with some exemption in income.

Tina: Er.. exemption? You mean deduction?

Vina: Yeah potato, po-tah-toh! Aren’t they the same thing said differently?

Tina: No. Even though both the terms do ultimately mean a lower tax outgo for you, they are different.

Vina: Why? What is the difference?

Tina: Exemptions deal with incomes or rather sources of incomes that are not required to be considered while calculating your taxable income. These excluded incomes may be exempt either entirely or partially depending upon the provisions in the Income Tax Act.

For instance, agricultural income and sums received under a life insurance policy (subject to some conditions) are examples of incomes that are completely exempt from income tax. On the other hand, exemption of long-term capital gains on listed equity shares for an amount of up to ₹1 lakh a year is an example of partially exempt income. Section 10 of the Income Tax Act specifies many other exempt incomes.

Vina: What are deductions then?

Tina: Deductions, as the name suggests, are amounts that are allowed to be deducted or reduced from your gross taxable income. Well-known examples of these are the deductions laid out in Chapter VI A of the Income Tax Act. These deductions generally aim to promote the habit of saving and investment in people. Take for instance, deductions under Section 80 C of up to ₹1.5 lakh a year. One can claim them on making investments in various instruments such as Equity Linked Savings Schemes (ELSS), Public Provident Fund and NPS, or through expenses such as repayment of home loan principal. Also, deduction is allowed for health insurance premium payment under Section 80D.

There are certain other deductions too. Take, for instance, the 30 per cent deduction on income from house property, or the standard deduction of ₹50,000 a year from your salary income. Donations to certain specified funds, interest on home and education loans etc. can also be claimed as deductions from your taxable income.

Vina: Okay, I get it now. So, the difference between exemptions and deductions is that the Income tax Act exempts certain incomes- either entirely or partially – from the calculation of total income to be considered for taxation. Hence, one need not include them in the gross taxable income. On the other hand, deductions must be claimed against (or deducted from) your total taxable income.

Tina: Yes. That’s simply put!

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , , ,

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

Personal Finance

[ad_1]

Read More/Less


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.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,

What tax deductions are allowed on pension income

Personal Finance

[ad_1]

Read More/Less


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

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , ,