TAX TALK-06.07.2015-THE HITAVADA
CA. NARESH JAKHOTIA
Classification of income is important from tax planning perspective
- Do we need to enter interest income, dividend income and long term capital gains (STT paid) anywhere else also which are already entered in schedule E-1 in column 1, 2 & 3? If yes, where?
- Can a salaried person having income as LIC / Mutual fund agent, file return in ITR-2, showing these commissions as income from other sources? [Shankerlal fatnani- firstname.lastname@example.org]
- The exempt income is required to be disclosed only in “Schedule EI” of the ITR forms. Additionally, agriculture income is required to be reported in Part B to “Schedule TI”. Further, if the return is to be submitted manually, the consolidated exempt amount is required to be filled up in the acknowledgment in ITR-V.
- “Today, it takes more brains and effort to make out the income-tax form than it does to make the income”- Alfred E. Neuman
With the bulky return form, its normal for taxpayer to feel irritated & consider the option of filing easier return forms. Before finalizing, taxpayer should ascertain the correct ITR forms in which return has to be filed. Make sure that the correct form is chosen for filing. If the wrong form is selected, it will be considered as a failure to file returns by the IT department. Undoubtedly, ITR-1, 2, & 2A are more preferred tax return forms for the individuals without any income from business.
However, income from every facet of an occupation carried on by an individual is taxable as “Income from business & Profession”. Whether LIC & MF agent could treat their agency commission income as “Income from Other Source” is necessarily a question of facts & circumstances. If the agents are not regular in procuring new business & are getting only a renewal commission, they may consider offering the income under the head “Income from Other source” & may consider ITR-2 or 2A for return filing. However, the persons who are actively engaged in the agency business are advised to offer the income under the head “Income from Business & Profession” only even if the amount is meager. Individual with business income may have the option to file the return in ITR-4 or 4S. ITR-4S is comparatively simpler forms to fill. But, ITR-4S could not be filed in case of an individual with business income if they have (a) Income from more than one house property (b) Income from lottery or race horses (c) Capital gain income (d) Agriculture/exempt income in excess of Rs. 5,000/- (e) Speculative income or special nature income (f) Income from Profession (g) Commission Income (h) Agency business income (i) Assets (including financial interest in any entity) located outside India; or (j) Signing authority in any account located outside India. Individual with these ten categories of income has to file return in ITR-4.
If taxable income from salary is below Rs. 5 lakhs, I can get tax credit of Rs. 2,000 under Section 87A. My TDS with taxes paid is Rs. 23,228. As a result of Bank FD interest of Rs. 6,701/-, my income crosses Rs. 5 Lacs. My query is whether tax credit u/s 87A will be intact or I have to pay tax difference? Whether rebate 87A will be intact? Please clarify. Also advice whether any rebate is available in income tax against professional courses college fees? [Balkrushna Bhoskaremail@example.com]
- Section 87A offers a tax rebate to an individual resident tax payer whose total income doesn’t exceeds Rs. 5 Lacs. The rebate shall be equal to the amount of income tax payable on the total income or Rs. 2,000/- whichever is lower. It may be noted that tax credit of Rs. 2,000/- would be admissible only if the total income of individual assessee is not exceeding Rs. 5 Lacs. [Readers may please note that no rebate is admissible u/s 87A to HUF].
- Even if the income exceeds marginally over Rs. 5 Lacs, no tax credit of Rs. 2,000/- would be admissible. To be more precise, even if income exceeds by Rs. 10, no tax credit u/s 87A would be available.
- No rebate is available to salaried taxpayer against the professional courses college fees for self study. However, if the fees (in the nature of tuition fees) is paid to any university, college or institution situated in India for the study of the children, whether major or minor & whether dependant or not, deduction could be claimed u/s 80C up to a maximum cap of Rs. 1.50 Lacs.
My Father (age 75 years) is staying separately in rental house. His income is only from buying & selling of equity share (short term capital gain) and interest of Bank FD. Please advice, what is the tax saving option? In which ITR form, return has to be filed? [firstname.lastname@example.org]
- Which ITR form to be used:
The applicability of ITR forms depends upon the nature of income taxpayer is having. If individual taxpayers don’t have any business income but have capital gain income, return could be filed in ITR-2 or 2A. If however individual taxpayers have business income (other than income from partnership firm), ITR has to be filed either in ITR-4 or 4S.
- Share trading- Whether Business Income or Capital Gain Income:
Your father has income from shares trading & interest on Bank FDR. Income from delivery based share transactions could either be taxed under the head “Income from Business & Profession” or under the head “Income from Capital Gain”. Categorization would depend upon number of factors. The prominent factors that play an important role in determining whether it is a business income or capital gain income are: (a) Volume/Nature of transactions. (b) Intention/Logic behind investments. (c) Holding period of shares (d) Investment of own funds or a borrowed fund. (e) Other business activities of the assessee etc.
- Tax saving Tips:
Tax planning would depend upon the nature of income of the taxpayer. Classification of income as business income vis a vis capital gain income is very relevant from the tax planning perspective as well:
a] If share trading is taxable as capital gain income, LTCG would be exempt and STCG would be taxable @ 15%. If taxable as business income then, irrespective of the period of holding, it would be taxed as per applicable tax slab of the individual taxpayer.
b] Chapter VI-A deduction (which includes deduction u/s 80C towards LIC/PPF etc) is not available against capital gain income.
c] Business expenditure like petrol, telephone expenses are admissible against business income. No such deduction is admissible while computing capital gain income.
d] Your father is staying in a rented premise. If share income is taxable as business income, you may explore the possibility of claiming deduction u/s 80GG towards house rent payment.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at email@example.com]