DTC: How will it impact Tax Payers

The Direct Tax Code (DTC) is expected to be rolled out from April 1, 2012 and the proposed bill is likely to be tabled soon before the Parliament. In this article, we discuss how the proposed changes can impact your taxation under the DTC regime.

Salary Income

The limit for medical reimbursement is proposed to be enhanced from Rs 15,000 to Rs 50,000. But the exemptions in relation to Leave Travel Assistance, children education allowance and hostel allowance are missing in the DTC. Salaried class, in fact, would need to wait to know the real impact as rules for valuation of perquisites have still not been rolled out.

Rental Income

Those having rental income will have to pay little more under DTC as the standard deduction is proposed to be reduced from 30 per cent to 20 per cent. The concept of taxing income from house property on notional basis has been done away and it is the income from actual letting which would be taxed.

Capital gains

The concept of long term capital gains (LTCG) and short term capital gains (STCG) has been done away with, in the DTC. Capital gains would be taxable as income from ordinary sources at applicable slab rates. Individuals falling under 30per cent tax bracket having any taxable LTCG are presently taxed at 20 per cent. Such individuals may end up paying 30 per cent tax on such gains under the DTC regime. The LTCG gain arising from shares or equity linked mutual funds (assets) on which STT has been paid would continue to be not taxable as under the DTC 100 per cent deduction is to be allowed from such gains. However, individuals falling in the tax bracket of 10 per cent or 20 per cent and having STCG would pay lower tax at 5 per cent or 10 per cent respectively as 50 per cent deduction has been proposed from such gains under the DTC. STCG from such assets presently suffer tax at 15 per cent.

The benefit of indexation is proposed to be provided in respect of assets transferred after one year from the end of the fiscal year in which it is purchased. The date of considering the fair market value as on April 1, 1981 is also proposed to be advanced to April 1, 2000.

Deductions

DTC proposes to restrict the deduction of Rs 1,00,000 only to the approved funds, namely, approved provident fund, pension fund, superannuation fund, PPF etc. However, an additional deduction of Rs 50,000 has been proposed to cover payments such as life insurance premiums (where premium not to exceed 5 per cent of sum insured), health insurance premiums and the tuition fee. The principal repayment of housing loan, 5 year term deposits with banks or post offices or deposits in senior citizens saving schemes, non pure life insurance premiums etc will no longer be eligible for deduction under the DTC.

Others

Currently, Indian citizens qualifying to be ordinarily resident are subjected to wealth tax in India on their wealth situated anywhere in the world. Assets situated outside India are excluded from the taxable wealth in case of non-residents or even for any ordinarily resident foreign nationals. Under the DTC, ordinary residents be taxed on their wealth situated anywhere in the world irrespective of whether such individuals are citizens of India or not. Although the taxable wealth exemption limit is proposed to be enhanced from Rs 30 lakh to Rs 1 crore, but the definition of taxable wealth is also proposed to be expanded.

Also, Indians settled abroad who come to India on visit may trigger global taxation in India sooner due to certain changes in the tax residency provisions under DTC.

Although the prime objective of DTC is to simplify the provisions, but taxpayers do expect to see simplifications on ground, that is, timely receiving of refunds, less hassles at tax offices etc. One will have to wait for the final print to see what the DTC actually brings.

source: www.indianexpress.com

What to do with your Annual Bonuses?

It’s Feb. Apart from the heat, it’s also the season for your annual performance bonus.

A few of you may already have made plans for the use of this money as soon as it hits the salary accounts. But many of you must be wondering what to do with this money. Often this money gets spent in an unplanned manner and afterwards, you may repent and wish that you had used the money in a better way.

Here is a list of financially prudent things to do (in the order of priority) with your annual bonus rather than blowing it all up in one massive binge.

Build up your contingency fund –

You should build up your contingency fund to at least 3 to 4 months of expenses in case you haven’t done that already. Building up a contingency fund is a crucial part of your financial plan. This contingency fund can be maintained in the form of bank FDs (try opting for sweep in sweep out option if your bank offers) or liquid mutual funds. Contingency fund comes in to picture in case of emergencies like job loss, illness or any other condition due to which one is not able to earn any sort of income for a few months.

Prepay your expensive loans –

In case you are having expensive loans like credit card debt, personal loans, gold loan, loan against security, or such where you are paying high interest rate, you should choose to utilize your annual bonus to prepay these loans and closing them even if there is a stiff pre-payment penalty. This will save you a lot of interest which you are going to pay in future. You can also consider repaying relatively lower priced loans such as home loans and education loans after seeking advice from your financial planner or tax consultant.

Tax planning –

Most of you may try to allocate the money towards tax planning by buying tax savings mutual funds to get deductions under section 80C. Tax savings through equity based instruments should always be done systematically and never in lump sum. Investment in to equities should always be systematically over a period of time rather than putting money in lump sum. So, in case you are planning to invest the money into tax savings mutual fund schemes, you should keep the money in liquid funds or your savings bank account with sweep in and sweep out option and invest the money through Systematic Investment Plan (SIP)/Systematic Transfer Plan (STP) over the balance part of the year.

Save for your future goals –

Keep this money aside for any goals you had in mind but you were not able to save enough or at all for the goal due to shortage of funds. You should invest this money wisely with an appropriate asset allocation between equity and debt keeping your time horizon in mind. In case your time horizon is sufficiently long (more than 5 years), a significant proportion (around 80%) of your bonus amount can be allocated towards equity based instruments. The remaining amount should be invested in appropriate debt products. Also consider balanced funds which give you this kind of asset allocation anyways with tax advantage to boot. While investing in equity products, please remember to do it over a period of time and not in a lump sum.

In case you have a goal which is just a few months away, for example, if you are planning to buy a home in time horizon of less than 3 years, then investment in equities is not prudent. You should choose appropriate debt products like bank FDs, Fixed Maturity Plans and Income Funds etc. for these kinds of investments. Also you should choose debt products in case you are awaiting any investment opportunity anytime in near future.

Of course a certain portion of the annual bonus can be used to go on that dream holiday that you have planned or that LCD TV or home theatre which you have been planning to buy. If at least a significant portion of the annual bonus has been used in the other alternatives, you can splurge guilt free on these kind of expenses.

Ideally you should sit with your financial planner and have a plan in advance on how to use the annual bonus.

source: www.indianexpress.com

Set up an Office at Home

It may help cut down on rent and commuting cost, but check the legal and operational limits before doing so.

Who can set up an office at home?

Full-scale commercial usage of residential flats is often opposed by cooperative housing societies, a certain percentage, or in some cases, a fixed area, is legally marked for official use. This area can vary across the country and even within the city, and you will have to go through the different state laws, local or housing society by-laws to find out the exact figure. For instance, within the Mumbai Metropolitan region, an area of 220 sq ft can be used for certain commercial activities. The rules are as valid for apartments as for independent houses. The usage is also confined to professions, such as those practiced by doctors, lawyers and chartered accountants. Besides, activities like teaching painting or dancing, holding yoga classes, tuitions, or conducting cookery classes, are also allowed in a residential area.

The dual usage of space has been allowed after various court rulings and Acts passed over the past five decades. In one such ruling, the Maharashtra State Cooperative apellate court favoured a resident of Ghatkopar, Mumbai, in 1986, stating that activities such as conducting yoga classes in a residential flat did not breach the by-laws of the cooperative housing society. According to the ruling, professional activities, such as teaching of certain art forms, would not be viewed as commercial activity, even if charges are levied.

In another case filed under the Karnataka Shops and Commercial Establishments Act, 1961, it was ruled that the use of residence as an office by CAs, lawyers and doctors would not be considered a commercial activity. The premise was that the work and skill involved in such professions are predominantly mental or intellectual rather than physical or manual.

However, these should not be considered as blanket rulings.

Seeking mandatory approvals

Before you convert a part of your house into an office, you will need to acquire permission from various authorities. If you don’t, the business will be considered illegal.

You need three types of approvals.

1. Permission from the local municipal authorities

Explaining the kind of commercial activity and the area you will require to conduct the business. Once the go ahead is given, commercial charges will be applicable on property, water and other taxes paid on the said property. Even electricity charges will be levied according to the commercial rates applicable in that area, the size of the property and the commercial activity conducted. A person will also need a shop and establishment license from the local municipal authorities before starting the business.

2. Permission from the town planning authority

Since certain zones are demarcated in the town as residential commercial areas, one will need permission from the town planning authority before starting a commercial activity.

3. Approval from the housing society where the flat is situated

If the person is a tenant, he will need a no-objection statement from his landlord as well. The society may levy higher building maintenance and parking charges on such flat owners.

Pros and cons

Pros:

1. You can save on rent. The savings will be higher if your current office is in an expensive commercial/ business area. As you won’t have to buy the same equipment for your home and office, such as a printer or furniture, you can shave off more expenses.
2. You can devote more time to the family, which is beneficial if you have young children or elderly parents, who need constant care.
3. One of the biggest savings is on commuting time, which could be channelled towards more productive pursuits.
4. Working from home also means that you can be your own boss and fix your timings to accommodate other tasks that need to be completed also you can develop a flexible office schedule.

Cons:

1. Your productivity may fall if there are no deadlines or job pressure or if the demands of home are greater and become more time-consuming.
2. If you aren’t diligent about your work schedule, it could impact productivity, or you could find yourself more involved with personal and familial work.
3. The absence of colleagues and collegial atmosphere may also lead to a diminished competitive spirit.
4. Office and home help to de-stress the pressure in each sphere. You could feel high-strung if you are overworked on both the fronts.
5. There could be the problem of neighbours, who could create a fuss if the number of visitors is large as it may lead to more parking problems and greater commotion in the area.

Despite the charges paid to the society and local municipal authorities, you could end up saving 30-40%:

1) On lease compared with the amount and

2) Charged by commercial establishments.

Source: ET Wealth

PUBLIC PROVIDENT FUND - PPF

The key to wealth creation lies in the practice of saving regularly and systematically. The Public Provident Fund (or the PPF) is one such long-term investment option that would suit investors of all types. Scoring high on safety, by virtue of it being government backed, this wonderful option comes with tax benefits, loan options and a low maintenance cost.

Scheme Availability

A PPF account can be opened at anytime during the year. It is open all through the year.

Who can open a PPF account?

A PPF account can be opened by an individual on his own behalf or on behalf of a minor of whom he is the guardian or on behalf of an association of persons or a body of individuals. An individual can open only one account for himself.

Mode of Operation

• Single
• Minor with parent/guardian

Returns

Interest 8.6% p.a. (earlier 8.0% p.a.) (Compounded annually) is credited to the PPF account at the end of each financial year.

The interest rate in your PPF account is calculated on the lowest balance between the fifth and the last day of the month. So to maximize your earnings, try making deposits between the 1^st and the 5^th of the month. Interest is compounded annually and credited on 31^st of March each year.

Investment Limitation

Min Amount: ` 500/- and additional investment in multiples of ` 5/-

Max Amount: ` 1,00,000/- (earlier ` 70,000)

You could vary the amount and the number of installments, as per your convenience, provided you do not exceed 12 installments in one financial year.

Tax Benefits

Deposits in a PPF account qualify for a deduction under section 80C. Furthermore, the entire maturity amount including the interest is non-taxable. Not only is the interest earned tax free, PPF deposits are exempt from wealth tax too.

Tenure of Investment

15 years from the date of initial investment with a block of 5 years there-after up to a max of 30 years incl. 15 years.

Maturity

The PPF account matures after 15 years. One can then exercises on option of continuing the account for an additional block of 5 years or close it.

Continuing PPF after the 15 year period

PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of 5 years. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted

Withdrawal

The entire amount in your account could be withdrawn only on maturity. However, in times of financial crises partial withdrawals are permitted subject to certain ceiling limits. You could withdraw once a year, from the 7^th year onwards. Such withdrawals, must not exceed, 50% of the balance at the end of the fourth year, or 50% of the balance at the end of the immediate preceding year, whichever is lower, less the amount of loan if any.

Loans

You could take a loan on your PPF deposit, subject to certain terms and conditions. The first loan could be taken from the third year onwards till the sixth year. Up to a maximum of 25% of the balance at the end of 2nd immediately preceding year would be allowed as loan. Such withdrawals are to be repaid within 24 months. Rate of interest charged on the loan would be 2% more than the PPF interest rate prevailing then. A second loan could be availed as long as you are within the 3rd and the 6th year, and only if the first one is fully repaid. Also note that once you become eligible for withdrawals, no loans would be permitted. Inactive accounts or discontinued accounts are not eligible for loan.

Transfer

The account can be transferred at the request of the subscriber from one office to another, including from Bank to Post Office and vice- versa all over the country.

Nomination

Nomination can be done at the time of opening the account or during the tenor of the account.

A subscriber may nominate one or more persons to receive the amount standing to his credit in the event of his death. No nomination can, however, be made in respect of an account opened on behalf of a minor.

In the event of the death of the subscriber, the amount standing to his credit can be repaid to his nominee or legal heir, as the case may be, even before the expiry of fifteen years. Legal hairs can claim the amount up to Rupees One Lakh without production of succession certificate after observing certain formalities.

Payment Default

If the PPF account-holder fails to deposit the minimum ` 500 in a given financial year, the account is considered as discontinued but the interest will continue to accrue and be paid at the end of the term. Loans and withdrawals are not allowed. This account can be revived on payment of a fee of ` 50 for each year of default, along with the arrears of subscription of ` 500 for each such year

Termination of an Account

No PPF account can be terminated before its completion. However, if requests for premature closure of PPF accounts and refund of deposits from the subscribers are genuine in nature, such cases can be dealt with under Rule 13 of the scheme.

Since no withdrawal is permissible before the expiry of four years from the end of the year in which the account was opened vide para 9 (withdrawal) of the scheme, the request for termination or closure of accounts can be considered only after the expiry of the said period. For example, the request for premature closure of accounts opened in 2010-11 can be considered only after 1.4.2016. Such requests may, therefore, be forwarded to the Ministry of Finance along with the following information -

• Name and address of the account holder
• Account number
• Date on which the account was opened
• Loans availed of if any from the account with dates and position regarding repayment
• Satisfactory reasons given for the request and evidence in support thereof
• Designation and address of the income tax authority under whose jurisdiction the subscriber falls
• Any other information relevant to the request.

Free from any Attachment

A PPF account is free from any attachment under any order or decree of a court in respect of any debt or other liability incurred by him.

PPF for NRIs

Non Resident Indians may also open a PPF account out of the funds in the applicant's non-resident account in India in banks subject to the following conditions -

• The account is marked as non-resident account.
• All credits therein or debits thereto are made subject to the same regulations as are applicable to non-resident account.

TIPS FOR INVESTING

• Best for long term investment.
• Apart from a Post Office, a PPF account can also be opened in SBI and its associates and other select nationalized banks.
• The most popular tax saving instrument where deposits in a PPF account qualify for a deduction under section 80C. Furthermore, the entire maturity amount including the interest is non-taxable. Not only is the interest earned tax free, PPF deposits are exempt from wealth tax too.
• A PPF account cannot be attached by the Govt. or any court of law or through any decree.
• To maximize your interest earnings, try making deposits between the 1^st and the 5^th of the month.

Do you need to pay tax on receiving a gift?

If the value of the gifts received by you during a year is above 50,000, you will have to pay tax on it. However, there are a few exceptions to this rule.

According to the Income Tax Act (as well as the Direct Taxes Code, which is likely to come into effect from 1 April 2012), if you receive a gift whose value exceeds 50,000, it will be clubbed with your income and you will have to pay tax on it. This rule is also applicable if the combined value of all the gifts received by you during a financial year exceeds the limit. If the total value of your gifts exceeds 50,000, you have to pay tax on the entire amount, not simply on the difference.

This rule applies even in cases where you have bought a product from someone at a much lower price than its fair value. For instance, if the depreciated value of a car is 4.5 lakh, but you buy it for 3 lakh, the balance 1.5 lakh will be considered as a gift and clubbed with your income. However, if you pay 4.1 lakh, you will not have to pay tax as the value of the gift (or the balance amount) is less than 50,000. The fair market value of a gift is the price that it would fetch if it is sold in the open market on that particular date as determined by a registered valuer. For real estate, the stamp duty value will be considered as the market value.

Gifts given by specified relatives are exempt from tax, regardless of their value. Such relatives include spouse, siblings, brothers or sisters of spouse/parents, grandparents and grandchildren as well as their spouses. Also, if a property is bequeathed to you under a Will, given on the occasion of your marriage or gifted by a local institution/authority, you won’t be taxed. A gift given in contemplation of death by the donor will also be exempt. If a person knows that he is going to die in a few days and gifts his assets to a person, the recipient is exempt from paying tax. However, if you receive an expensive gift during an engagement, anniversary or birthday party, it will be taxed.

Under Section 56 of the Income Tax act, the value of the gift is clubbed with your total income and taxed according to your tax slab. For example, if you receive a gift worth 10 lakh in a financial year, it will be clubbed with your income. As this amount will put you in the highest income bracket, you will have to pay a 30% tax, plus surcharge, on your total income.

In case you earn an income from the gift, it will be taxable under the heading ‘Income from other sources’. For instance, if you get rental income from a house that has been gifted to you, this will be taxed. A gift given to your minor child or income from that gift will be clubbed with your income. Suppose, you have gifted a house or shares to your minor child (or spouse), it will be tax-exempt. However, the rental income or dividend earned will be clubbed with your income and taxed accordingly. But if you give such assets to your parents, who have no source of income, the income earned from it will be considered as their income. This can help you reduce your tax liability.

If you have received real estate as a gift, it is advisable to get a gift deed signed by the donor or get the property registered with the registrar. This will help you avoid legal hassles in the future. However, you should be careful as a gift deed, once signed, cannot be revoked. In case you are gifting real estate, you can add a condition/clause stating that if the recipient dies within your lifetime and does not have any descendants, the property should return to you. Property cannot be gifted to a foreign national though you can gift residential or commercial property to an NRI. However, you cannot give him agricultural/plantation land.

You need to be careful about assessing the gifts you have received in a year while filing your income-tax return. If you fail to do so, not only will you have to pay the interest liability on your outstanding payments, but could also end up paying a fine that is one to three times the amount of tax you were supposed to pay.

What can be gifted?

1. Real estate, which includes residential and commercial structures, as well as land.

2. Paintings and sculptures.

3. Archaeological artefacts.

4. Jewellery, as well as gold and silver bars and coins.

5. Stocks and bonds of companies.

When is it exempt from tax?

1. If the total value of the gifts received in a financial year is less than 50,000.

2. If the asset has been gifted by specified relatives, regardless of its value.

3. If you have received the gift on your marriage.

4. If the asset has been bequeathed to you through a Will.

source:economictimes.com