There surely is nothing certain in life except death and taxes. And when it comes to the latter, things are made difficult by the fact that tax laws are often complex. However, understanding the nuances of taxes and how they impact finances are an important part of financial planning. There are broadly two parts to understanding taxation. One is how taxes affect different investments, whether it is buying a house or investing in mutual funds. The other is how to make use of deductions available to reduce one’s tax outgo. Section 80C, with a wide variety of tax saving options, is the most important. Proper planning is needed so that one does not end up making last-minute investments to save tax. Here, we look to answer some common tax queries our readers ask.
1. What is advance tax and do I need it?
Advance tax is a mechanism to ensure a steady flow of tax revenue to government exchequer without waiting for actual crystallisation of tax liability on completion of the previous year. The scheme of advance tax requires every assessee to estimate his current income and if the tax liability on such estimated income exceeds `10,000, the assessee is required to pay the estimated tax in installments during the financial year itself. However, a resident individual, being a senior citizen (60 years or more), not having any income chargeable under the head ‘profits and gains from business or profession’ is not required to pay the advance tax. (Check the Table: Advance tax shall be payable by the assessee in following 4 instalments)
(Naveen Wadhwa, Deputy General Manager, Research & Development, Taxmann)
2. I would like to redeem several equity MF SIPs I have made during the last 5 years. How do I calculate my capital gains on those?
Amount received on redemption of Mutual Fund SIPs is taxable under the head ‘capital gains’. While computing the capital gains, one needs to determine the nature of asset. Nature of an asset is based on the period for which such asset was held by the taxpayer.
If a unit of an equity-oriented fund is held by the assessee for a period not more than 12 months, it shall be regarded as short-term capital asset. Gains arising from transfer of short-term capital asset are taxable at the rate of 15 per cent under Section 111A.
However, if such units are held for more than 12 months, it shall be classified as long-term capital asset and gains arising there from in excess of `1 lakh shall be taxable at the rate of 10 per cent under section 112A. One cannot claim the benefit of indexation in this case.
3. My wife and I are co-applicants for a house. We are both working. What are the additional tax benefits we are eligible for?
You and your wife can avail the following tax benefits under the
Income Tax Act:
Deduction u/s 24(b):
If the property has been acquired or constructed on loan, both spouses can claim a deduction of up to Rs2 lakh under the head income from house property.
Deduction under 80C:
Repayments of principal amount of housing loan during the year will qualify for deduction under Section 80C. Further, the deduction can be claimed for stamp duty, registration fee and other expenses incurred for the purpose of acquiring a new house.
Deduction u/s 80EEA:
Both spouses can claim for a deduction under Section 80EEA in respect of interest on housing loan up to Rs1,50,000 in addition to deduction under section 24(b). This deduction can be claimed if loan has been sanctioned during the financial year 2019-20 and the stamp duty value of residential house property is less than Rs45 lakhs.
4. If I have a second home loan, am I entitled to additional tax benefits?
It depends on the individual situation. Actually, prior to April 1, 2019, individuals having the second house were required to pay tax on the notional rent even though such a house was not rented out. So, there was an additional tax burden. However, now provisions have changed and taxable value is considered ‘nil’ in case the second house is also self-occupied. In case, you take a loan to acquire the second house, you are eligible to claim deduction of the interest on such housing loan. Where after deduction of the interest, the net result is negative income (loss), such loss can be adjusted against the other heads of income (including salary income) upto Rs2,00,000 and remaining unadjusted loss can be carried forward for 8 years to be adjusted against future income from house property.
(Kuldip Kumar, Partner and Leader Personal Tax, PwC India)
5. I have two houses. One is rented out while the other is self-occupied. Will I get more tax deductions if I rent out this house too?
No, you will not get more tax deductions merely because you rented out the second house. If you have two houses, one self occupied and other let out, the value of self-occupied house property is considered to be ‘nil’. In case you took a loan to acquire such a self occupied house property, you can claim a deduction of interest on housing loan to the extent of Rs2,00,000. If the second house is let out, such rental income would be taxable in your hands. However, you can claim a deduction of the municipal taxes paid, and then standard deduction of 30 per cent on that net amount.
6. What is the best way to use the limit for my 80C investments and align it to my financial goals?
Under Section 80C, there are several choices to invest, like payment of life insurance premium or non-commutable deferred annuity, contribution toward recognised provident fund or public provident fund or approved superannuation fund and NPS, subscription to NSCs or ULIPs of UTI/ LIC mutual fund or units of mutual funds or UTI, contribution towards Sukanya Samriddhi Account, contribution to Voluntary Provident Fund (VPF), five year term deposits. In addition to this, certain expenditures like repayment of principal of housing loan and tuition fees are also eligible for deduction under Section 80C.The deduction is capped to the maximum amount of Rs1,50,000. It will really depend on your individual situation and financial goals when you choose any particular investment.
7. Do additional tax benefits of ?50,000 under NPS make it a good investment?
Firstly, taxpayers need to plan how they want to prepare for their retirement. For some taxpayers this may be too far ahead (those who are in their 20s or 30s), while for others who are in their 40s and 50s, things will be much clearer. NPS is an excellent option for those who want to start putting aside money to fund at least some portion of their retirement. NPS also invests in equities and since it is long term there is higher probability of superior returns than purely debt-based products. Once an employer also begins to contribute to NPS, the corpus can be significant. For taxpayers who have exhausted the 80C limit and have additional investible surplus, NPS is a good option to consider. The government has been popularising this scheme with various measures and hopefully will continue to refine it.
(Archit Gupta, Founder and CEO, ClearTax)
8. How are debt mutual funds taxed? How can I reduce the incidence of tax on debt funds?
Gains from the sale of debt mutual funds are considered short-term capital gains when such mutual funds have been held for less than 36 months and long-term capital gains when these funds are held for 36 months or more. Short-term capital gains from the sale of mutual funds are taxed according to the slab of the taxpayer. Long-term capital gains are taxed at the rate of 20 per cent after indexation. Note that indexation is mandatory.
9. I am a retired person and have ?1.2 core as my retirement benefits. How do I invest this amount in the most tax-efficient way possible?
There are several ways to invest your corpus. Given that you are now retired, you need to assess your risk appetite and whether you need a monthly income or not and how liquid you want your investments to be. You may prefer to invest this money lump sum or split it in such a manner so as to benefit from various types of products available in the market. Depending on these parameters, you may consider the following options. Some of this money may be invested in mutual funds with at least a 5 to 7 years horizon. You may choose debt or equity based on how much risk you are comfortable with. If you are looking for more secure (albeit low return) options you may consider MIS scheme of post offices or the Senior Citizens Savings Scheme(SCSS) both of which may give you some regular income, however, such income will be fully taxable. You may choose to invest in 5 years fixed deposit, even though the returns shall be taxable you will be able to claim a deduction.
10. Are arrears of my salary taxable?
Yes, arrears of salary are taxable in the year of receipt or when they are due to be paid, whichever earlier. If arrears are announced later or back dated, and could not be taxed in the year to which they pertain, relief under section 89(1) is allowed to the taxpayers.