Sunday, May 28, 2023

Section 145 Allows Taxpayers To Declare Interest Income On Accrual Or Receipt Basis

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Section 145 Allows Taxpayers To Declare Interest Income On Accrual Or Receipt Basis

You cannot revise old income tax return. Under Hindu Law, only a coparcener can be become the karta of the HUF. Income from sale of house is taxed as capital gains

We have not declared the interest earned on National Savings Certificates (NSC) in the first year and neither claimed it under Section 80C of the Income-tax Act, 1961. Can we start doing this from the second year onwards, i.e., declaring second year interest on NSC and claiming it under Section 80C? Suppose we declare the interest every year, but post office declares the lump sum interest for five years in the last year in the annual income statement (AIS) under statement of financial transaction (SFT) section, will it not become a case of double declaration for us? Technically, the interest income in our income tax return (ITR) should match with AIS and if we show only the interest earned in the fifth year, then the income tax department might send mismatch notices. My income is not in the taxable category, so I have no tax liability.

Under Section 145 of the Income-tax Act, 1961, all taxpayers having taxable income under the head “Profits and Gains of Business and Profession” and “Income From Other Sources” have option to offer the same either on accrual basis or on receipt basis.

The same needs to be done consistently year after year. So, either you can declare all the interest income on an accrual basis or on receipt basis. You cannot show some interest on accrual basis and some on receipt basis. So the answer to your question would depend on how you have been offering other interest income year after year in the past.

If you have shown it on accrual basis, you can start offering the interest income from NSC from the second year onwards on an accrual basis and claim the deduction under Section 80C.

Since you cannot revise your old income tax return, you will also have to offer the interest earned in the first year along with the interest earnings in the second year. However, deduction under Section 80C of the Income-tax Act, 1961 would be available only for the second year. Do note that no deduction under Section 80C is available in respect of interest for the firth year.

As far as your question on AIS is concerned, you need not worry about that. You do not need to add the interest for earlier year already accounted for in the ITR for the last year even if the post office shows the aggregate interest for all five years in the last year. You can always explain that though the post office has shown lump sum interest for all the years in one year, you have been offering it year after year.

We are a Hindu Undivided Family (HUF) where my father was the karta. My father passed away recently. My elder brother and I are the two coparceners. If my brother and I are not willing to be karta of the HUF, can our mother be appointed as the karta? There is a property in name of the HUF, too. Is there a way to dissolve the HUF as well?

After the death of the karta of an HUF, generally, the senior most coparcener becomes the new karta. Under the Hindu Law, only a coparcener can be become the karta of the HUF. Though your mother is a member of the HUF, she cannot be become the karta as she is not a coparcener. It is also worthwhile to note that only the persons who are born or taken on adoption are treated as coparcener.

In case both you and your brother are not willing to be appointed as karta now, any major child of you or your brother could be appointed as the karta with consent of all the members.

As far as dissolution of the HUF is concerned, either you can sell the property and distribute the proceeds among all the eligible members and carry out the full partition of the HUF.

In case you are not willing to sell the property, you can partition the property among the eligible members to effect the full partition of the HUF.

Do note that partial partition is not recognised under the income tax laws, so you will have to carry out partition/distribution of all the movable and immovable assets.

The distribution need not be equal and can be unequal if all the members agree. Once the full partition is carried out, you need to make an application to your assessing officer to pass an order recording the fact of full partition having taken place.

I am salaried person. I have sold a residential property for Rs 1.10 crore in the month of March 2023 which was purchased in June 2002 for Rs 20 lakh. I don’t intend to buy another property immediately. Can I still minimise my tax liability on the income from the sale?

Income from sale of any capital asset, including a residential house, is taxed as capital gains after deducting the cost of acquisition from the net sale proceeds. In case the house is sold after 24 months, you are allowed take the indexed cost as your cost of acquisition for computing long-term capital gains (LTCG). In case the property is sold within 24 months, the difference is taxed as short-term capital gains (STCG) at the slab rate applicable to you.

Indexed cost of an asset is computed by multiplying the cost of acquisition by cost inflation index (CII) of the year of sale and dividing the same by CII of the year of purchase.

In your case, the cost of acquisition is Rs 20 lakh and the indexed cost would be around Rs 63.05 lakh, taking 105 as the CII for year of purchase and 331 CII for year of sale. The indexed LTCG is Rs 46.95 lakh (Rs. 110 lakkh – Rs. 63.05 lakh). The same would be taxed at 20.80 per cent (20 per cent with indexation + cess of 4 per cent).

Since you do not wish to buy a residential house immediately, you can save tax on this LTCG by investing Rs. 46.95 lakh in capital gains bonds of any of the specified financial institutions like Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC) Ltd. within six months from date of sale of the property where one can invest maximum of Rs. 50 lakh in a financial year.

The bonds have a lock-in of five years. The money received on maturity of these bonds is tax-free.

These bonds presently offer an interest of Rs. 5.25 per cent, which is taxable.

If you change your mind within six months and decide to buy property in the future, you can deposit the amount of indexed capital gain in a bank account under the Capital Gains Account Scheme (CGAS) before the due date of filing of ITR, which is July 31, 2024 for salaried persons.

This money can be utilised for buying a ready-to-move in residential house within two years from the date of sale of the property, or within three years of self-constructing a house or booking an under-construction residential house.

There would be no tax on the capital gains if this money is used in this specific manner; else it will be treated taxable upon expiry of the three-year period.

The author is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)