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Residential taxability of an individual

Residential status and taxability of an individual

The residential status under Income Tax law plays a vital role while considering taxation of certain incomes of an Individual. It is not related to citizenship of a country.

The residential status of a person is required to be determined for each assessment year in order to ascertain the scope of his total income. The residential status of a taxpayer is worked out on the basis of tenure of his physical stay in India during the Financial Year.

For tax purpose all tax payers are classified into two broad categories based on their period for which they were physically present in the country:
1. Resident
2. Non-resident(NR)

Residents are further classified into:
1. Resident and ordinarily resident (ROR)
2. Resident but not ordinarily resident (NOR)

An individual is said to be Resident in India in any previous year, if he satisfies any one the following conditions:
a) He has been in India for a period or periods amounting in all to a minimum of 182 days during the previous yearor
b) He has been in India for a total of 365 days or more during the 4 years immediately preceding the previous year and for at least 60 days during the previous year.

If any individual satisfies any of the one conditions mentioned above, he is a Resident of India. If none of the above mentioned criteria is fulfilled by an individual then he is categorized as Non-resident.

*The 60-day period mentioned above (in point b) will be substituted for 182 days in case of the following persons:-

  • A citizen of India who leaves the country as a crew member of an Indian ship or for the purposes of employment outside India.
  • A Citizen of India or Person of Indian Origin who visits India in any previous year.

A resident individual will be treated as ROR in India during the year if he satisfies both the following conditions:
a) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant financial year.
b) His stay in India is for 730 days or more during 7 years immediately preceding the relevant financial year.

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as NOR.

Key points to consider while ascertaining residential status of an individual

  • Receipt of Income: If an amount is 1st received outside India and then subsequently remitted to India, it will be considered as Income received outside India just remittance of such income would not make it an income received in India.
  • Citizenship of a country and residential status: Residential status of an Individual is not nexus to his citizenship. An Indian citizen may be a resident of India or not. On other hand a person may not be citizen of India /foreign citizen but resident of India.
  • Calculation of period of stay: In calculation of period of stay for purpose of determining residential status, it is not compulsory that person had a continuous stay. Total number of days of stay in India during that financial year are to be considered.
  • Residential status for a particular year: Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law laid in this regard. So, it may happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

The following table highlights the tax incidence as per residential status:

Nature of income ROR NOR NR
Income which accrues or arises in India Taxable Taxable Taxable
Income which is deemed to accrue or arise in India Taxable Taxable Taxable
Income accrue or arise outside India but received in India Taxable Taxable Taxable
Income which is deemed to be received in India Taxable Taxable Taxable
Income accruing outside India from a business controlled from India or from a profession set up in India Taxable Taxable Not taxable
Income other than above (i.e., income which has no relation with India) Taxable Not taxable Not taxable

For assistance in determination of your residential status and computation of tax liability based on it, please contact AJSH & Co LLP. You can click here and reach our taxation experts for further queries.

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Filing tax return for a deceased person

It is a misconception that person’s tax liabilities end with his life. Filing an income tax return (ITR) is mandatory if your income is taxable. But, it’s not only the living who are required to pay their taxes. ITR for deceased person also needs to be filed in case where a person dies and had taxable income. It is common that after the death of the taxpayer, family members often concentrate only on the debts, investments, savings accounts, insurance and transfer of estates of the deceased and ignore the taxation aspect.

On the death of the assesse, the income from his / her assets and the tax liability is transferred to his / her legal heirs. So, it becomes liability of legal heirs / representative to file the return on his behalf and such heirs can pay taxes in their representative capacity. The return needs to be filed for the income earned by person passed away during that financial year up to the time of his/her death.

Procedure of filing ITR as representative of deceased assessee
Get the legal heir certificate: To register as legal heir, any of the following documents are accepted as legal heir certificates:

  • Legal heir certificate issued by a court.
  • Legal heir certificate issued by local revenue authorities.
  • Surviving family member certificate issued by local revenue authorities.
  • The registered WILL.
  • The family pension certificate, issued by State/Central Govt.

Register on income tax website as legal heir: According to section 159 of Income Tax Act 1961, the legal heir or representative is deemed the assessee. Registration as a legal heir is must for e-filing of return on behalf of deceased person. Legal heir needs to register online by submitting his details with the details of deceased. He is required to upload legal heir certificate along with other documents like copy of Death Certificate, copy of the PAN Card of the deceased, self-attested PAN copy of the Legal heir.

Computation of income of the deceased: The total earnings of the deceased during the year have to be bifurcated into two parts – Income earned while he was alive and income earned after the date of his death. Income earned during the period of April 1 to the date of death shall be considered as deceased person’s own and legal heir is supposed to file return for this income in name of deceased assessee. Income earned after the date of death till the end of the financial from the inherited asset shall be considered as legal heir’s income and he would be liable to pay tax on this income.

Filing ITR of the decease: After successful registration, the legal heir has to file the return on behalf of the deceased for income earned from the 1st April of the financial year till the date of death. The legal heir needs to log in to E-filing portal for online filing of the tax return using his own. Then the legal representative should furnish the details of the deceased like his name, PAN, date of birth, Date of death etc. Also, he need to provide the scanned copy his PAN, the death certificate, PAN copy of deceased.

Key points to consider while filing ITR of a deceased assessee

  • The ITR of the deceased should be filed in the same format and time as for all other tax payers.
  • The tax must be payable on income earned from starting of the financial year (April 1) till the date of death.
  • The legal representative gets the benefits of all the rebates and deductions that the deceased would have been eligible for.
  • Any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;
  • Property of the deceased person inherited to his legal heir shall not be reported in the Income-tax return of the deceased person, because this transaction is not carried out as transfer for the capital gain purpose.
  • Money or property received by legal heirs by way of inheritance shall not be reported in income-tax return because Section 56(2)(x) does not apply to money or property received by way of inheritance.
  • Income earned after the date of death, from any inherited property shall be considered as legal heir’s own income and is to be reported in his tax returns.
  • If the total income of a legal heir, including the income of deceased person from the date of death, exceeds INR 50 lakhs, the heir shall be required to provide details of all Assets and Liabilities held by him at the end of the financial year in Schedule AL. These details shall include all assets and liabilities including the assets acquired by way of inheritance.
  • Proceeds from the sale of property by legal heir he received by the way of inheritance  shall be taxable as capital gain in hands of a legal heir and is required to be reported under scheduled capital gains in ITR forms.

Extent of liability of a legal representative: The liability of the legal heir would be limited to the extent of assets of the deceased which are or might come into his possession.  The money to recompense the taxes does not go out of the legal heir’s pocket.

Claiming refund on behalf of deceased assessee: Where there is any refund of a tax has to be claimed in the Income-tax return a deceased assessee, the refund can be received by the legal heir just like he/she can file ITR on behalf of the deceased assessee. Usually, the refund is directly credited to the bank account. If the deceased tax payer holds a joint account with the legal heir, then it becomes convenient to receive the amount. In case of absence of a joint account, the account can be operated by the nominee who is appointed by the deceased. In the absence of a nominee, the legal heir can operate the account.

Tax compliances that legal representative need to be adhere to while filing his own ITR
Carry forward and Set off of Deceased Person’s Business loss: When a legal heir takes over in the business of his predecessor by inheritance, he is entitled to carry forward the loss incurred by the previous owner. However, the total period of carrying forward cannot exceed 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

Tax on inherited property: The tax on inheritance, called ‘Estate Duty’ was abolished in 1985 and so, there is no tax on inheritance in India. Transfer of capital asset under inheritance will is not taxable in hands of deceased as well.

Though no tax shall arise either in hands of a legal heir or deceased at the time of inheritance, yet capital gain tax liability arises in hands of a legal heir in case of subsequent sale of the inherited property. For calculation of capital gain on proceeds from sale of inherited property, the actual cost of acquisition is taken as the same at which the property was acquired by the previous owner. While determining the period of holding of, the period of holding of inherited assets by the deceased shall also to be taken into consideration.

Surrender of the PAN card: Legal heir is advisable to surrender the PAN card of the person who is no more, after submission of his last income-tax return and payment of tax dues or receipt of a refund if any.

We cannot compensate for the loss of your loved ones, but can definitely help you in the complex process of filing his / her tax returns .For further assistance click here.

 

Tax adviser in India

Tax breaks not to be missed

Investing a little time and thought into process of filing Income tax return (ITR) can allow you to claim deductions you might have missed, while submitting your investment declarations.

  • Savings account interest: Your savings account is credited every quarter with interest on amount it holds at the end of quarter, this amount earned by you as interest is considered as part of your total income. However, the income tax (I-T) department, under Section 80TTA, allows exemption of up to INR 10,000 on this interest. Interest earned on post office savings will also be treated similarly.
  • Rent exemption without HRA: Many taxpayers make payment towards house rent but can’t claim deductions if your salary package does not include house rent allowance (HRA) as its component. Under Section 80GG, you can avail of the exemption benefit for the rent, provided you are not eligible for any housing benefit. You will not stand eligible for this break if you, your spouse or child owns the house you accommodate in. The exemption is limited to the least of: actual rent paid less 10% of total income; or INR 5,000 per month; or 25% of total income.
  • Exemptions for specified illnesses: Treatment of critical diseases like cancer, kidney failure or AIDS involves huge expenses, the income tax rules allow relief under Section 80DDB to tax-payers suffering from such diseases. Taxpayers can claim deductions if he / she suffers from any of the ailments viz.  ataxia, full-blown AIDS, malignant cancers, dementia cholera, hemiballismus, thalassaemia, chronic kidney failure, parkinson’s disease, haemophilia, motor neuron disease, dystonia, aphasia.
    They can claim a tax deduction of up to INR 40,000. If taxpayers is a senior citizen, the deduction can go up to INR 60,000 and the relief is enhanced to INR 80000, if the afflicted taxpayer happens to be a super senior citizen. However, if the expenses incurred on treatment of these critical ailments have been reimbursed by employers or through insurance policies, the taxpayers will not qualify for the deduction. If the reimbursement is partial, they will be eligible for the tax exemption on the balance amount.
  • Ancillary charges on home loan: Home loan borrowers just know that the chief benefits of this loan are the tax benefits it offers on the principal repayment (Section 80C) and interest paid (Section 24). However, very few know that also the processing fee paid is treated as interest and can be claimed as deduction under Section 24. The processing fees and other ancillary charges are considered as interest and qualify as exemptions.
  • Loans for down payments of house: Home loan-seekers often borrow from friends and relatives to arrange for the down payment. They either do not pay any interest on these loans or if they do, fail to claim deductions under Section 24, despite being eligible. Section 24 also covers interest paid on any loan taken for the purchase, renovation or reconstruction of a house. To claim exemptions, one should draw up a written loan agreement with the lender. The interest earned by the lender will be taxed as his income.
  • Deduction for disabilities: If a Person suffers from 40% disability (as certified by a medical authority), he/she can claim a deduction of up to INR 75,000 under Section 80U. Expenses incurred in respect of a disabled dependent will fetch a deduction of INR 75,000 under Section 80DD. In both cases, if the disability is more than 80%, the permissible amount for deduction is INR 1.25 lakh. This is a flat deduction.
  • Income of disabled child: If you make investments in the name of your spouse or minor child, the income earned from these investments is clubbed with your income under Section 64 and taxed as per the slab applicable to you. However, in case the child is disabled, income from investments made in his / her name will not be clubbed with the income of parents. The latter can use this provision to invest in taxable instruments like FDs and debt funds.
  • Setting off losses: If your investments resulted in losses during the previous financial year, you can adjust some losses against capital gains from the sale of stocks, property, gold or debt funds. Short-term capital losses can be set off against both short-term capital gains as well as taxable long-term capital gains. Long term capital losses can only be set off against taxable long
    term capital gains.
  • Benefits for donations made: In most cases, deductions under Section 80G on donations made do not reflect in Form 16. So, you have to keep in mind that this exemption can be claimed while filing returns. Depending on where you have made contribution, you can claim a deduction of 50-100% of the donation made .But total deduction cannot exceed 10% of your total income. Cash donations are eligible for deduction if the amount exceeds INR 2,000

 

If you require any assistance in filing your personal income tax returns, corporate tax returns, income tax assessments, response to income tax notices, please contact AJSH & Co LLP. If you have any query regarding this Visit: www.ajsh.in .

 

Tax-Return

Filing your Income Tax Returns for A.Y. 2018-19 – Consider these changes

The Finance Act 2017 introduced last year came with multiple changes in regard with filing of income tax return (“ITR”) for A.Y. 2018-19. Thus, it is necessary for you to keep abreast of the latest amendments at the time filing the current year’s return of income. Also, the CBDT introduced the new ITR forms A.Y 2018-19 on 5th April, 2018 with alterations as compared to the ITR forms of the previous A.Y. Here we list down 10 critical changes that we should consider while filing the income tax return of taxpayers who are required to furnish their return of income for A.Y 2018-19 by 31st July, 2018.
 

  1. Income tax rate

Despite the fact that the tax slabs remain the same, there has been a slight revision in the income tax rates. The income tax rate for the slab INR 2,50,001 – INR 5,00,000 (applicable to Individuals, HUF, AOP, BOI and Artificial Juridical Person) has been reduced from 10% to 5%. The basic exemption limit for a resident individual aged between 60 and 80, is INR 3,00,000 and for a resident individual aged 80 or above, this limit is INR 5,00,000.

The tax slabs applicable for filing return of income for A.Y 2018 -19 for a non-senior citizen are as below:

Total income Tax rates
Up to INR 2,50,000 NIL
INR 2,50,001 to INR 5,00,000 5%
INR 5,00,001 to INR 10,00,000 20%
INR 10,00,000 and above 30%

 

  1. Rebate under section 87A

A taxpayer can claim the benefit of rebate under section 87A if he/she fulfils both of the following conditions:

  • The taxpayer is a Resident Individual
  • The total income less deductions (under Chapter VI-A) is equal to or less than INR 3,50,000

Until A.Y 2017-18, the limit to claim rebate was set at INR 5,00,000 instead of INR 3,50,000

 

  1. Surcharge and Cess

The rates of surcharge applicable to Individuals and HUF have been revised A.Y 2018-19 onwards.

  • Where the Individual/HUF has taxable income of more than INR 50 lakhs but not exceeding INR 1 crore, surcharge shall be levied at 10%.
  • Further surcharge of 15% is levied for individuals having an income of more than INR 1 crore. The higher and secondary education cess shall continue to be levied at 3% for the current A.Y.

 

  1. Set off of loss from house property

Until AY 2017-2018, there was no limit on the amount of loss arising from house property that could be set off against other heads of income. With effect from A.Y 2018-19 the set off of loss arising from house property against other heads of income is restricted to INR 2,00,000 and the unadjusted loss is to be carried forward for set off against income from house property for eight subsequent assessment years.

 

  1. Capital gains
    • Base date for Cost Inflation Index (CII)

Earlier the Base Date for CII was 1st April, 1981. However, with the changes brought about by the Finance Act, 2017, the base date for CII has been shifted from 1st April, 1981 to 1st April, 2001. The tax payers would have the option to consider the FMV of such asset as on 1st April, 2001 or the actual cost of such capital asset as the cost of acquisition while computing long term capital gains. The cost of improvement would include capital expenditure incurred after 1st April, 2001.

    • Holding period of capital assets

In order to determine whether the gain arising on the transfer of a capital asset, is a long term capital gain or a short term capital gain, the holding period of the capital asset is a key factor. Gains arising from the transfer of listed shares, units of equity oriented mutual funds and zero-coupon bonds shall be considered as long term if the period of holding such assets is more than 12 months. Further in case of unlisted shares and immovable property (land and building) the period of holding has been reduced to 24 months from 36 months. For the remaining capital assets, the period of holding continues to be 36 months.

    • Section 50CA

A new section, Sec 50CA was introduced by Finance Act, 2017. This section deals with the transfer of unlisted shares and provides that consideration for transfer of such shares shall be deemed to be the fair market value calculated by a Merchant Banker or a Chartered Accountant as on the valuation date if the transfer price is less than its FMV.

 

  1. Penalty for late filing of returns

The Finance Act, 2017 introduced a new fee under section 234F if the taxpayer did not furnish the return of income on or before the due dates prescribed under Section 139(1). The fees shall be levied as under:

  • INR 5,000 if return is furnished after the due date but before December 31 of the assessment year [INR 1,000 if total income is up to INR 5 lakhs].
  • INR 10,000, in any other case.

Care must be taken to ensure that wherever applicable, this fee is paid before filing the return. The new ITR forms contain fields for inputting the amount of fee paid u/s 234F.

 

  1. Tax deducted as source and advance tax
  • Individuals and HUF (apart from those subject to tax audit) paying rent to a resident exceeding INR 50,000 per month are required to deduct TDS at the rate of 5%. This amendment was put into effect from 1stJune, 2017 as per section 194-IB. Attention must be paid to ensure that any TDS appearing in the tax payer’s form 26AS against this section is also taken into consideration while computing the income and tax payable/refundable.
  • The advantage of paying advance tax on or before 15thMarch by way of one instalment instead of four instalments has been extended to professionals declaring profits and gains in accordance with presumptive taxation regime. This may be taken into consideration while computing interest, if any, u/s. 234B / 234C.

 

  1. Income from other sources – Gift

Finance Act, 2017 has widened the scope of provisions dealing with the taxability of gifts. A new clause (x) was inserted in Sec 56(2) whereby any sum or property received without any consideration or inadequate consideration (in excess of INR 50,000) shall be taxable as ‘Income from other sources’. This clause is applicable to all taxpayers. Earlier this provision was applicable only to an Individual and HUF.

 

  1. Details to be furnish in ITR forms
  • Taxpayers earning Income from Salary and Income from House Property are required to furnish break up of amounts as against only the final taxable figures as per ITR forms for the previous A.Y. They are expected to report particulars with respect to value of perquisites, profit in the lieu of salary, taxable allowances and deductions u/s 16 in case of Income from Salary and the gross rent, tax paid to local authorities, interest payable on borrowed capital in case of Income from House Property. Consequently, additional rows have been added in order to report the above figures.
  • Non-Residents would have an option to furnish details of any one foreign bank account for the purpose of claiming income-tax refund. Earlier they were allowed to provide details pertaining to bank accounts in India only.

Taxpayer’s eligible to claim DTAA relief under Capital Gains and Income from Other Sources shall be required to furnish the following details:

i) Rate as per treaty
ii) Rate as per Income tax
iii) Section of the Income-tax Act
iv) Applicable rate [lower of (i) or (ii)]

 

  1. Selecting the correct ITR form

The most important point to be kept in mind while filing the return of income is to file the correct ITR form. The CBDT recently notified the ITR forms for A.Y 2018-19. The taxpayers should select and file the form depending upon the sources from which they derive income. The various ITR forms and the taxpayers to which they apply have been listed below. It may be noted that ITR 4 is no longer in force for A.Y. 2018-19.

 

Form Applicability
ITR 1 For a resident individual (other than not ordinarily resident) having income from salaries, one house property, other sources (interest etc.) and having total income up to Rs.50 lakh
ITR 2 For other Individuals and HUFs not having income from profits and gains of business or profession
ITR 3 For individuals and HUFs having income from profits and gains of business or profession
ITR 4- SUGAM For presumptive income from business & profession
ITR 5 For persons other than (i) Individual, (ii) HUF, (iii) company and (iv) person filing Form ITR-7
ITR 6 For companies other than companies claiming exemption under section 11
ITR 7 For persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) or 139(4E) or 139(4F)

 

If you require any assistance in filing your personal income tax returns, corporate tax returns, income tax assessments, response to income tax notices, please contact AJSH & Co LLP. If you have any query regarding this Click Here.

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File ITR- get perks

July 31st is the last day for filing an Income Tax Return (ITR). Most people regard this task as a burden, but filing an ITR filing of Return – on time is an extremely important tool to create your financial history. When you file your tax returns every year, you manage to maintain your financial record with the tax department. This financial / tax history is positively viewed and auspiciously utilized by most agencies with whom you may need to interact at times. It will help you to be in the good books of the financial institutions such as banks, Insurance companies, NBFCs etc. and also serves as a proof of income earned by an individual and total taxes paid.

It is always advisable to file one’s tax return even if the taxable income falls below the basic exemption threshold. Currently the limits are INR 2.5 lakhs for ordinary individuals, INR 3 lakhs for senior citizens and INR 5 lakhs for super senior citizens.

You can enjoy the following benefits if you file tax returns:

  • ITR Receipt is an important document: Having an ITR receipt is important because it is more detailed than Form 16, entailing your income and taxation along with revenue from other sources.
  • Use as address proof: If you have been filing your returns regularly, then the assessment order can act as a proof of residence.
  • Easy loan or card processing: Being a diligent income tax filer makes it easier for banks to assess your financial position when you apply for loans like an auto loan, home loan etc. Providing a copy of ITRs receipts with your loan application make it easier for you to get approved it quickly.
  • Compensate losses in the next financial year: Unless you file the ITR you will not be able to carry forward capital losses (short-term or long-term), if any, in a financial year to be adjusted against capital gains made in the following years. As per the income-tax provisions, if tax returns are not filed on time, unadjusted losses (with some exceptions) cannot be carried forward to subsequent years. A long-term capital loss in one year is allowed to be carried forward for eight consecutive years immediately succeeding the year in which the loss is incurred. Long-term capital loss can only be adjusted against a long-term capital gain in the following years. But short-term capital loss can be adjusted against long- as well as short-term capital gains.
  • Hence, to ensure that the losses are carried forward for future adjustment, a tax return would be required to be filed within the due date (31st July) of the assessment year.
  • Avoid paying additional interest: If you owe some taxes and still do not file your tax return, then you may be liable to pay additional interest u/s 234A at 1% per month on remaining tax payable by you. For instance, banks would deduct tax from interest on fixed deposits exceeding a certain limit.
  • Avoid penalties or scrutiny from the tax department: From FY 2017-18, INR 10,000 would be imposed for not filing ITR. Also there could be prescribed penalties ranging from 50 to 200% in certain cases. This black mark on your financial history will remain for years to come.
  • Credit card processing: Credit card companies also insist on having proof of return prior to issuing a card, so they can reject to issue you a credit card if you haven’t filed your ITR.
  • For a hassle-free visa application procedure: If you are planning to immigrate to another country or exploring a high-paying overseas job opportunity, then prepare yourself well in advance.At times visa authorities ask for copies of past tax returns, therefore to apply for a visa a tax return would essential to be filed. Embassies, especially those of US, UK, Canada etc., require you to furnish the copies of your tax returns for the last couple of years at the time of the visa interview.
  • To buy an insurance policy with a higher cover: Taking in consideration high cost of living, buying life cover of INR 50 lakh or INR 1 crore has become very usual from past few years. However, these covers are available against your ITR documents that verify annual income. “Life insurance companies ask to furnish ITR receipts if you opt to buy a term policy with sum insured of INR 50 lakh or more. If insurance providers have reasons (non-compliance) to believe that you are a tax-evader, they will not give you policies with more cover.
  • Government tender: If one plans to start his business that require him to apply for a government tender or two, he will be need to present his tax return receipts of the previous five years. This again, is to show your financial position and whether you can meet the payment obligation or not. However, this is no strict rule. It may vary depending on the internal rules of the government department. Even the number of ITRs required can vary.
  • Makes life easier for freelancers and independent professionals: Businessmen, consultants, partners of firm, freelancer or self-employed people don’t get Form16. This is the only document to prove that they have filed the ITR. Without this, they can face funding issues and transactional problems.
  • High-value transactions: If you regularly file your ITR, then it will create a strong financial history and credibility. When you do any high-value transactions such as purchase or sale of property, buying a car, cash deposits in bank, investment in mutual funds, credit card bill payments, etc., by filing ITRs, one can report these transactions & substantiate the same as per one’s income.

If you require any assistance in filing your personal income tax returns, corporate tax returns, income tax assessments, response to income tax notices, please contact AJSH & Co LLP. If you have any query regarding this Click Here.

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Common Income tax penalties in India

Introduction
Under the Income-tax Act, penalties are levied for various defaults committed by the taxpayer. Some of the penalties are mandatory and a few are at the discretion of the tax authorities. In this part, you can gain knowledge about the provisions relating to various penalties leviable under the Income-tax Act.

As per the Union List in the Constitution of India, the Central Government has the power to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961, which is the charging statute of income tax in India. Income tax is the annual tax levies on the income of businesses and individuals, wherein businessmen and other individuals are required to file their income returns to the central government every year to determine the amount of tax they owe to the government. It is the key source of funding available to the government. As per the Income Tax laws in India, income tax is imposed by the government on,

  • Individuals
  • Hindu United Families (HUF)
  • Companies and firms
  • Limited Liability Partnership (LLP)
  • Association of persons, a body of individuals
  • Local authority and any other artificial juridical person

 

Tax evasion in India is a serious affair and for any defaulters or fraudsters, the Income-Tax act provides for adequate repercussions.

  • Not Filing Income Tax Returns
  • Failure to Pay Tax as Self-Assessment
  • Failure to Comply with Demand Notice
  • Failure to Get Accounts Audited
  • Concealment of Income
  • Failure to comply with Income Tax notice

 

The Income Tax Act exists to ensure tax defaulters and offenders are brought to light. Do not join this list, pay the correct tax on time.

If you have any query regarding this Click Here

 

tax-changes-for-landlords

Tax changes effective from 1 April 2018 (FY 2018-19)

Tax Changes effective from 1 April 2018 (FY 2018-19)

  • Penalty on late filing of ITR upto Rs.10,000
  • Reduction in time limit to revise ITR, to be done in same assessment year
  • No ITR can be filed after the assessment year
  • Transport allowance and medical reimbursement to employees are taxable
  • Standard deduction of Rs. 40,000 to salaried assesses
  • Hike in cess from 3% to 4%
  • Levy of Long Term Capital Gain Tax (LTCG) on shares and equity mutual funds
  • Senior citizens (above 60 years) interest income exempted to Rs.50,000. TDS on interest for senior citizen will be deducted only if interest income is more than Rs.50,000
  • Tax benefit on premium on medical insurance for senior citizen upto Rs.50,000

If you have any query regarding this Click Here

Tax Filing 15

Foreign citizen – a resident Indian

In the Constitution of India, as per Income Tax Act 1961, Central Government has the power to levy tax on any income other than agricultural income. The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF’s), companies, firms, LLP, association of persons, body of individuals, local authority and any other artificial juridical person. Levy of tax on a person depends upon his residential status.

For tax purposes under Indian income tax law, an Individual can be: Resident or Non-Resident. Further the Resident category is classified into two parts i.e. Ordinary Resident and Not Ordinary Resident.

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Does taxability changes on the basis of Residential status?
Yes, Indian income tax law has different tax treatment for incomes earned by each of this category. For instance, if you fall under resident status, there will be tax on overseas salary. But, if you are a non-resident, same will be non-taxable.

With our blog, we intend to help you understand who an RNOR is and why endowed with special status.

Instance to explain RNOR

Kartik resided in India till October 08, 2010 and thereafter migrated overseas. He is doing well in the business that he set up there. He transfers money to his Non Resident External (NRE) account and Non Resident Ordinary (NRO) account regularly. He visits India on an average 70 days every year. In the FY 2017-18, he resided in India for 190 days. He had income from salary, earned from overseas and India, both; and other income which consisted of interest from bank.

Now, you might have a list of questions in mind. Let’s consider them gradually.

1. What is the residential status of Kartik?

To be a Resident for a financial year, he needs to satisfy either of the following condition:

  • He is in India for 182 days or more during the financial year

OR

  • He is in India for at least 365 days during the 4 years preceding that year and at least 60 days in that year

In case anyone is an Indian Citizen and leave India for employment outside of India or as a member of the crew on an Indian ship, in other words if you take up a job outside India, the 60 days minimum period will be increased to 182 days.

Being in India for 190 days in FY 2017-18, Kartik concludes to be a resident.

2. Is he an Ordinary Resident or Non-Ordinary?

To be a RNOR, you have to fulfill any of the conditions understated:

  • If you have been an NRI in 9 out of 10 financial years preceding the year

OR

  • You have during the 7 financial years preceding the year been in India for a period of 729 days or less

With an average of 70 days, Kartik fulfill second condition and results to be a Resident but Non Ordinary Resident.

3. Does he have to pay any tax in India?

The RNOR is endowed with special status in order to provide some benefits to returning NRIs. For Indian income tax purposes, an RNOR is treated at par with NRIs. That means an RNOR needs to pay tax only on income received or accrued in India. Any other income will not be taxed. And you can continue this status for a period of 2 years after returning back to India. However, once you have attained the status of a Resident, all of your income within and outside India will be taxable.

Here, Kartik has income from two sources: income from salary and income from other sources. Salary income earned in India is fully taxable whereas salary from oversea is non-taxable. Interestingly, income from interest on bank accounts needs to be bifurcated whether it is accrued from NRE or NRO. NRE account is a bank account for his foreign earnings and exempted from tax. Neither the balance, nor the interest earned on these accounts is taxable. NRO account is to manage the income earned in India. These incomes include rent, dividend, pension, interest, etc. Therefore, income from NRE account’s interest will not be taxable and interest from NRO account will be a part of taxable income.

4. Is he required to file an income tax return?

If an individual’s income exceeds the basic exemption limit, before deductions in the financial year then they are required to file Income Tax Return. The same rule applies on NRI as well. Therefore, Yes, Kartik needs to file an Income Tax Return if his Gross Total Income exceeds the basic exemption limit. Even if the tax payable calculated be “NIL”, then also he has to file the return.

There is a saying in Income Tax, “An Indian Citizen may not be resident Indian, but a Foreign Citizen may be resident Indian.” With this blog, we made sure that you conclude the same. Our team can assist you for kinds of tax planning, tax compliance, filling of returns, assessments and tax representations.

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Income Tax Notices: How to avoid them?

Paying taxes and filing tax returns go hand in hand. There has been an increase in the number of tax notices sent by authorities in the recent years. The rise is not necessarily due to lack of paying taxes or filing returns, but because the tax authorities are now equipped with an integrated database on taxpayers which allows them to track almost all financial transactions.

Third Parties like Bank, Mutual Fund companies, companies issuing shares, bonds, debentures and real-estate related sub-registrar offices report high value financial transactions to the IT department through the Annual Information Return (AIR).

The 10-digit PAN, which has been made mandatory for all high value transactions, not only enables the tax department to know how much you have earned, but also provides information on how you have been spending and investing this money. High value transactions include, but are not limited to, the following:

  1. Cash transactions of over 2.5 lac rupees.
  2. Purchase & sale of all immovable property exceeding 30 lac rupees.
  3. Cash deposits in bank aggregating to 10 lac rupees or more.
  4. Donation of over 2,000 rupees to registered trust or political parties.

The common reasons why individuals may receive these notices are outlined below:

1. Incomplete or Incorrect PAN Details 

Non-submission of PAN details while making an investment or taking up a job will lead to a higher rate of tax deducted at source (TDS), 20 per cent instead of 10 per cent. If the PAN submitted is incorrect, one could even be slapped with a penalty of up to 10,000 rupees. The higher implication of submitting incorrect PAN details is that the TDS will not be credited to your account. This often results in an additional tax demand. The tax refund may also be credited to a different account in case of wrong submission of PAN details.

2. Lack Of Reviewing Form 26AS Before Filing The Return 

The Form 26AS contains the details of the tax paid by an individual during a financial year. Form 26AS is easily accessible online. Before filing the return, it should be ensured that Form 26AS has correctly credited the tax deducted. If the bank, bond issuer or employer has deducted TDS, it should be ensured that this has been mentioned in the Form 26AS. All the investments with TDS should also be duly reflected in the tax return. In case of any mismatch, notice shall be issued from the department. This includes income received by previous employers.

3. Discrepancy In Income, Expenses & Investments Reported

Financial services firms, merchant establishments and some registration authorities are required to report certain high-value transactions to the Central Board of Direct Taxes (CBDT). This information is then matched with the returns filed by the taxpayer and a notice is promptly issued if there is a mismatch.

4. Lack of Filing Returns despite income exceeding 2.5 Lac Rupees

If the gross taxable income is above 2.5 lac rupees then it is mandatory to file the tax return, even if there is no tax liability.

5. Wrongly Avoiding TDS Through Forms 15G and 15H

The bank deducts TDS if the interest income on bank deposits exceeds 10,000 rupees (50,000 rupees for senior citizens in FY 2018-19) in a year. However, if you are not liable to pay tax, you can avoid TDS by submitting the Form 15G or 15H. You may receive a notice from the tax department if you try to evade taxes, such as by splitting the deposits in different banks or bank branches as the PAN number would be linked with the accounts.

6. Delay In Filing Of Return Or Payment Of Tax

Delay in filing of tax return and/or payment of the tax liability can trigger the issuance of tax notice. Hence, the statutory liabilities should be completed within the stipulated timelines.

7. Material Change In Income/ Tax Refund Claimed

Significant change, primarily decrease in income or increase in refund claimed, compared to previous year may raise doubts over the income tax return filed and may cause the authorities to further investigate this. Individuals should cooperate with the IT department and provide the relevant documents as requested.

8. Non-Declaration Of Exempted Income

Exempted income like long-term capital gains from securities, up to 10,000 rupees earned on your savings bank account, the PPF interest income etc., even though exempt, still needs to be disclosed in the tax return. Non-disclosure can prompt the authorities to investigate the return filed further for other discrepancies.

9. Being Chosen For Random Check

The Income Tax department also performs random checks on the returns submitted. Hence, receiving a notice does not necessarily mean submission of a wrong Income Tax return. In such cases, the steps mentioned in the notice should be followed and provision of requested documents should be made to the IT department so they can complete their checks and close the case.

Avoiding these common mistakes can help your tax returns be filed more accurately and avoid receipt of income tax notices.

We, a Chartered Accountant firm, serve a number of clients who need assistance for various legal, financial and tax matters who have benefitted from our professional services. We also assist in setting up business in India, company formation in India, income tax return filling, bookkeeping, accounting, GST matters and auditing. Find out more on how we can help your business by speaking to one of our advisors at AJSH & Co LLP. If you have any query regarding this Click Here.

transfer pricing law in India

Transfer pricing law in India

Introduction

Transfer Pricing (“TP”) regulations have been at the forefront of corporate headlines over the last few years due to the increasing number of controversies resulting out of tax structuring by multinational companies in India. What makes the topic both contentious and interesting is that regulators view the various techniques applied to inter-corporate transactions as purportedly planned with the intent of achieving benefits of comparable labor cost and tax advantage at the cost of a countries tax revenues.

Hence, there was a need to introduce a uniform and internationally accepted mechanism of determining reasonable, fair and equitable profits and tax in India in the case of such multinational enterprises.

Statutory rules and regulations

A separate code on transfer pricing under Sections 92 to 92F of the Indian Income TaxAct, 1961 (“the Act”) covers intra-group cross-border transactions and specified domestic transactions. Since the introduction of the code, transfer pricing has become the most important international tax issue affecting multinational enterprises operating in India. The regulations are broadly based on the Organisation for Economic Co-operation and Development (“OECD”) Guidelines and describe the various transfer pricing methods, impose extensive annual transfer pricing documentation requirements and containharsh penal provisions for noncompliance.

The Indian Transfer Pricing Code prescribes that income arising from international transactions or specified domestic transactions between associated enterprises should be computed having regard to the arm’s length price. It has been clarified that any allowance for an expenditure or interest or allocation of any cost or expense arising from an international transaction or specified domestic transaction also shall be determined having regard to the arm’s-length price. The Act defines the terms international transactions, specified domestic transactions, associated enterprises and arm’s length price.

Type of transactions covered

The Indian transfer pricing regulations are applicable to an international transaction as well as to specified domestic transactions entered into two (or more) associated enterprises.Section 92B of the Act defines the term “international transaction” to mean a transaction between two (or more) associated enterprises involving the sale, purchase or lease of tangible or intangible property; provision of services; cost-sharing arrangements; lending/borrowing of money; or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

Further, the Finance Act 2012 extended the application of transfer pricing regulations to “specified domestic transactions”, being the following transactions with certain related domestic parties, if the aggregate value of such transactions exceeds INR 5 crore:

  • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities (Section 80-IA) and SEZ units (section 10AA); and
  • Any other transactions as may be specified.

Associated enterprises (“AEs”)

The relationship of associated enterprises is defined by Section 92A of the Actto cover direct/ indirect participation in the management, control or capital of an enterprise by another enterprise. It also covers situations in which the same person (directly or indirectly) participates in the management, control or capital of both the enterprises. For the purposes of the above definition, Section 92A of the Act specifies certain parameters have been laid down based on which two enterprises would be deemed as AEs.

Arm’s length principle and pricing methodologies

The term ‘arm’s length price’ is defined by Section 92F of the Act to mean a price that is applied or is proposed to be applied to transactions between persons other than AEs in uncontrolled conditions. The following methods have been prescribed by Section 92C of the Act for the determination of the arm’s-length price:

  • Comparable uncontrolled price (CUP) method
  • Resale price method (RPM)
  • Cost plus method (CPM)
  • Profit split method (PSM)
  • Transactional net margin method (TNMM)
  • Such other methods as may be prescribed

These regulations require a taxpayer to determine an arm’s-length price for international transactions or specified domestic transactions. However, transfer pricing provisions will not apply if the arm’s-length price would result in a downward revision in the income chargeable to tax in India.

Documentation requirements

Taxpayers are required to maintain, on an annual basis, a set of extensive information and documents relating to international transactions undertaken with AEs or specified domestic transactions. Rule 10D of the Income Tax Rules, 1962 prescribes detailed information and documentation that has to be maintained by the taxpayer.

Further, it is mandatory for all taxpayers, without exception, to obtain an independent accountant’s report in respect of all international transactions between associated enterprises or specified domestic transactions. The report has to be furnished by the due date of the tax return filing (i.e. on or before 30 November) to avoid stringent penalties prescribed for noncompliance with the provisions of the transfer pricing code.

 For a more detailed discussion of specific transfer pricing rules, or to obtain further assistance in transfer pricing compliance, transfer pricing study, planning activities,addressing and resolving intercompany transfer pricing issues, please contact AJSH & Co LLP. If you have any query regarding this Click Here.