Tax Implications for Indian Residents having Income from Investment in US Equity Market

If a person resident in India has invested in shares listed in the US equity market he will receive income from such investment in form of capital gains and dividends and therefore would be liable to pay tax. Income from those investments will be foreign income.

Since the income is from US, the investor has to pay the taxes in the US, and also because the investor is resident in India he will have to declare the foreign income in his ITR and pay taxes on it. If the investor wishes to avoid this double taxation it is very important to understand the tax treatment of foreign income.

What are the Tax Implications?

There are two types of taxes that can be levied on income form foreign equity shares:

  1. Tax on Dividends
  2. Capital Gains Tax

Tax on US Equity Dividends

Taxability of dividends in US: Income from investments received as dividend is taxable in US. It is taxable at a flat rate of 25%. For example, If a company declares 100$ as a dividend, an investor receives 75$, and 25$ will be withheld as an amount of tax.

Taxability of dividends in India: Dividend received from a Foreign Company is taxable income under the head Income From Other Sources at slab rates. If the assessee incurs the expense of remuneration or commission for the purpose of earning the dividend, he/she can claim it as an expense from dividend income.

However, India and the USA have a Double Taxation Avoidance Agreement (DTAA) that allows using the tax withheld in the US as a foreign tax credit to reduce the tax liability in India.

Therefore, if we consider the above example here, the tax liability in India would be calculated at $100. Suppose the tax liability in India is $27. Since the investor had already paid $25 in the US, he will have to pay only $3 in India.

Further, the rate of exchange for the calculation of dividend in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the company declares a dividend.

Capital Gains Tax on US Equity

Taxability of capital gains in US: When an investor earns capital gains on the sale of foreign shares there is no tax applicable in US.

Taxability of capital gains in India: Income from the sale of foreign shares is a Capital Gains Income as per the Income Tax Act and also it is taxable in India.

Tax on US equity capital gains in India depends on the period of holding of investment. If an investor sells an unlisted stock held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL). However, If an investor sells an unlisted stock held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).

Moreover, If an investor has long-term capital gain it is taxable at a flat rate of 20% (after indexation benefit) and if an investor has short-term capital gain it is taxable at applicable slab rates.

Further, the rate of exchange for the calculation of capital gains in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the capital asset is transferred.

You can refer to this table below to understand the taxability of income in hands of resident Indian

Country Dividends Capital Gains
India Taxable Taxable
US Taxable Not Taxable

Disclosure in ITR

Apart from tax implications, an obligation to file a tax return in India also arises. The assessee has to furnish the complete details. In the case of individuals, having regard to the nature of income they can file ITR 2 (in case there is no business or professional income) or ITR 3 (in case there is business or professional income). 

Moreover, Assessee needs to disclose dividend in Schedule OS i.e Income from other sources, in case income is taxable at normal tax rates also in Schedule SI i.e Income chargeable to tax at special rates, if such income is taxable at special rates.

Details of income by way of capital gains need to be furnished in Schedule CG i.e Capital Gains depending on its nature (Short term or long-term). Further information is required to be furnished in Schedule SI, Income chargeable to tax at special rates, in case such income is taxable at special rates.

Further, If any resident is holding investments then such disclosure is mandatory in schedule FA i.e. Foreign Assets.

Furthermore, If resident is claiming any foreign tax credit then such disclosure is mandatory in schedule TR i.e. Taxes paid outside India.

FAQs

How to claim foreign tax credit?

Investor needs to file form 67 on Income tax e-filing website to claim foreign tax credit.

How do I report income from sale of shares of Foreign Company in the Income Tax Return?

The investor should file ITR-2/ITR-3 and report income from the sale of Foreign Shares as Capital Gains.
Tax on sale of Foreign Shares is as follows:
LTCG – 20% without indexation
STCG – slab rates
Moreover, the investor shall declare details of Foreign Shares should in Schedule FA i.e. Schedule Foreign Assets of the ITR.

Is it mandatory to disclose foreign assets ITR?

Yes it is mandatory to to disclose foreign assets ITR.

How many methods are there to claim DTAA tax relief?

There are two methods to claim DTAA tax relief – exemption method and tax credit method.
– By exemption method, income is taxable in one country and exempt in another.
– In the tax credit method, where the income is taxable in both countries, tax relief is available in the country of residence.

I am an NRI. Do I need to pay tax in India on Income from Investment in US Equity Market?

No, If you are an NRI you need not to pay any tax in India on Income from Investment in US Equity Market in India.

Is it mandatory to file form 67 for claiming tax credit?

Yes it is mandatory to file form 67 for claiming tax credit.

Which rate of conversion I should use to convert capital gains amount in rupees?

It shall be the TTBR rate of such currency as on the last day of the previous month in which the capital asset is transferred.

Demand Notice under section 156 of Income Tax Act, 1961

What is the Outstanding Tax Demand Notice Taxpayers receive u/s 156?

The assessee may receive a outstanding tax demand notice under section 156 of Income Tax Act. This notice specifies the amount payable if the assessing officer raises any demand for tax, interest, penalty, fine, or any other sum as per the provision of Income Tax Act, 1961. Notice for sum payable u/s 143(1), 200A (1), 206CB (1), etc., shall be deemed to be Demand Notice u/s 156. Assessee has to pay the amount specified in the notice within 30 days of receipt of the notice. The only prerequisite to submit a response to such a notice is to be registered as a taxpayer on the e-Filing portal. A Registered user can submit a response from the portal itself.

Response to Outstanding Tax Demand Notice under section 156 of Income Tax Act

For submitting the response there are three options available with a taxpayer as below:

  • Demand is correct
  • Demand is partially correct
  • Disagree with demand

How to Respond to Outstanding Tax Demand Notice?

  1. Login to Income Tax Portal

    Login to the e-Filing portal using your user ID and password.

  2. Response to Outstanding Demand

    Click Pending Actions > Response to Outstanding Demand to view a list of your outstanding demands from the dashboard.

  3. Pay Now

  4. Submit Response

    On the Response to Outstanding Amount page, click Submit Response to submit a response to an outstanding demand. 

  5. Option 1 – Submit response if Demand is correct and you have not paid already

    On the Response to Outstanding Amount page, select the Demand is Correct option and the disclaimer Once you submit the response as Demand is correct, then you cannot Disagree with Demand later on. Moreover, On the same page, select Not paid yet option and click Pay Now

  6. Successful Payment

    On successful payment, a success message is displayed along with a Transaction ID.

  7. Option 2 – Submit response if Demand is correct and you have paid already

    On Response to Outstanding Amount page, select the Demand is Correct option and the disclaimer Once you submit the response as Demand is correct, the you cannot Disagree with Demand later on.

  8. Enter Required Details

    Select Yes, Already paid and Challan has CIN. Click Add Challan Details.

  9. Add Challan Details

    To add the challan details, select Type of Payment (minor head), enter Challan Amount, BSR Code, Serial Number and select Date of Payment. Click Attachment to upload the copy of the challan (PDF) and click Save.

  10. Submit the Response

    After entering the Challan details, click Submit to submit the response and the details of challan entered. On successful validation, a success message is displayed along with a Transaction ID. Please keep a note of the Transaction ID for future reference.

  11. Option 3 – Submit response if you Disagree with the demand (Either in full or in Part)

    On Response to Outstanding Amount page, select Disagree with the demand (Either in full or in Part) option. Click Add Reasons. 

  12. Select Reason for Disagreement

    To select the reason(s) for your disagreement, select from the options and click Apply. (You can select one or more options)

  13. Enter Details

    After selecting the appropriate reasons for your disagreement, select each reason you listed on the Response to Outstanding Amount page and enter the appropriate details for each reason.

  14. Pay if you Partially Disagree

    After submission of details for all the reasons listed, click Pay Now to pay the remaining outstanding amount available in the payment summary (if you partially disagree). After payment, you will be taken to the Response to Outstanding Amount page, click Submit to submit your response.

  15. Confirm Submission

    Click Confirm to confirm your submission. On successful submission, a success message is displayed along with a Transaction ID. Please keep a note of the Transaction ID for future reference.

Time limit to respond

As per Section 220, amount shall be paid within a period of 30 days from the date of service of notice. However, in some cases, time period of 30 days may be reduced by the assessing officer with prior approval of joint commissioner.

An assessee can also make an application to the AO to extend the time for payment or allow payment by installment, provided application should be made before expiry of thirty days.

Check Responded Submitted Response of Outstanding Tax Demand

  • Login to the e-Filing portal
  • Click on Services > Response to Outstanding Demand from the dashboard
  • On the Response to Outstanding Demand page, enter the PAN of the assessee and click on the option to search
  • From the list of responses submitted by the assessee whose PAN you entered, click View on the particular notice to view the response submitted by the assessee

Consequences of delay

  • Interest u/s 220(2) – Interest at a rate of one percent per month or part of the month will be payable after the expiry of 30 days. Such interest shall be payable by the assessee even if the AO has approved the application for an extension of the time period.
  • Penalty u/s 221 – AO can impose a penalty up to the amount of demand in the demand notice. Provided, a reasonable opportunity of being heard is given to the assessee. If the assessee proves that the default was for good and sufficient reasons, no penalty shall be levied.

FAQs

What will happen if I disagree with a tax demand notice?

If the assessee disagrees with the tax demand notice then he can challenge the same to the next higher authority.

Where can I find my demand notice online?

You can log in to the Income Tax Site and then select the option “Respond to Outstanding Tax Demand” in the e-File tab, and you can check the tax demand notice.

What is the meaning of assessee in default?

If the assessee does not pay the amount specified in the demand notice within 30 days of service of notice then the assessee becomes assessee in default.

Why do I need to submit response to an outstanding demand?

The Income Tax Department may find some Outstanding Tax demand against your PAN. In order to confirm if the stated demand is correct, an opportunity is given to you to respond. If you do not respond to it, the demand will be confirmed and will be adjusted against your refund (if any) or show as demand payable against your PAN ( in case, no refund is due).

What if I do not have the copy of the challan to be attached? Where can I find it?

You can reprint / regenerate your challan from your respective bank account using Net Banking or visiting the bank branch.

Notice Under Section 148 of the Income Tax Act, 1961

Section 148 stands for the reassessment of income escaping assessment. The Assessing Officer could pick income tax return for reassessment by sending a notice under section 148 subject to some pre-defined criteria for income Escaping Assessment.

Issuance of Notice under Section 148

There are various reasons as well as terms and conditions under section 148 for the issue of Notice as follows:-

Before issuing any notice u/s 148 the assessing officer must have reason to believe that any income chargeable to tax has escaped assessment along with the strong evidence. Without any proof, the officer can’t produce a notice based on mere suspicion.

There must be a direct nexus between the material coming to the notice of the assessing officer and the belief of AO that there has been escapement of income.

The material for formation of belief must be relevant and not vague based on any superficial reasoning and understanding.

The assessing officer must record reasons in writing before issuing notice under section 148. Merely a change of opinion cannot constitute a reason to believe. 

Mere a reason recorded that there is concealment of income without any specific evidence or material will not constitute a valid reason as it is vauge.

The Assessment officer cannot issue a notice based on the facts and information gained by reading the documents and information that assessee has already submitted during the course of the assessment.

The Assessing Officer can only issue a notice if and only if he/she has been presented with the new information and not by reading it by himself/herself.

If any fact or information arises, which has been disclosed previously relevant to the assessment in question, the assessing officer can immediately issue a notice under Section 147/148, even if the information has come to notice in a later period.

Who can issue a notice under Section 148

As per section 148 of the Income Tax Act 1961, the following persons can issue a notice to the assessee who has escaped assessment or reassessment of taxable income under the following conditions:-

  • Assessing Officer who ranks below the rank of Assistant Commissioner or Deputy Commissioner cannot issue a notice under Section 148. AO can issue notice only if Joint Commissioner is satisfied, on reasons recorded by such AO, that it’s a fit case for issuing such notice.
  • AO cannot issue notice to associate assessee following the expiration of a four-year period from the conclusion of the assessment year in question. Unless the Chief Commissioner is satisfied that the explanations given by the Assessing Officer are valid enough for the sending of a notice to the assessee.

Time limit to issue a notice under Section 148

As per section 149 of the Income Tax Act, If the income escaped doesn’t exceed INR 1 lakh the notice under section 148 can be issued within a period of 4 years from the end of the relevant AY (assessment year).

If the income escaped is more than INR 1 lakh the notice under the said section can be issued within a period of 6 years from the end of relevant AY subject to provisions contained in section 151.

If the income escaping assessment relates to assets located outside India the notice under section 148 can be issued within a period of 16 years from the end of the relevant AY.

Further, if an assessment has been completed under section 143(3) or 147 no further action can be taken under section 147 after the expiry of 4 years from the end of relevant AY unless income chargeable to tax has escaped assessment for such AY due to failure on assessee’s part to file the return under section 139 or 142 or 148 or fully and truly disclosing all the material facts required for the assessment for that AY.

Replying to notice under Section 148

In case assessee receives the notice under section 148, he should follow the below-mentioned pointers:

Firstly, check the notice for reasons to believe which are recorded by the assessing officer for issuing the notice under section 148. If the notice doesn’t include the reasons, then the assessee can request the assessing officer to send a copy of the recorded reasons.

In case the assessee is satisfied with the reasons recorded by the assessing officer, he/she should file the return at the earliest. If the return is already filed, he/she send the copy to the assessing officer.

In case the assessee files the income tax return in response to notice issued under section 148, it is necessary to ensure that the assessee files it carefully by declaring all the incomes and expenses to avoid unnecessary penalties.

Assessee can challenge the validity of notice before the assessing officer or higher authorities if notice isn’t served validly or reasons provided for opening assessment under section 147 aren’t proper. However, in case the decision doesn’t go in favour of the assessee, then the assessing officer could proceed with the reassessment.

FAQs

What assessee needs to do after receiving notice under section 148?

The assessee needs to produce the details of his/her income tax returns within 30 days duration that has been specified by the assessing officer in the notice given.

Who can issue a Notice under Section 148?

Assessing Officer currently who does not ranks below the rank of Assistant Commissioner or Deputy Commissioner can issue a notice under Section 148.

What happens if the assessing officer does not files his IT return after receiving notice u/s 148

The assessee shall be liable to pay interest under Section 243(3) for late filing of Income Tax return or for not filing of Income Tax return,

Notice under section 143(2) of Income Tax Act, 1961

Notice under Section 143(2) of the Income Tax Act is the second chance to assessee after Income Tax Department find major or minor discrepancies in the tax return. The discrepancy can be in the form of under-reporting the income or over-reporting of the losses. On receipt of a notice, an individual must timely respond to the tax department along with the supporting proof to defend themselves.

Reasons for issuance of notice u/s 143(2)

Income Tax Department issues notice u/s 143(2) when Income Tax Return is selected for scrutiny assessment or detailed assessment u/s 143(3).

Scrutiny assessment or detailed assessment u/s 143(3) means scrutiny carried out to confirm the correctness and genuineness of various claims, deductions, etc made in Income Tax Return. The basic purpose of this scrutiny assessment is to ensure that assessee has filed the return with the correct income and paid the tax accordingly.

Time limit for issuance of notice u/s 143(2)

AO can issue notice u/s 143(2) for scrutiny assessment only up to a period of six months from the end of the financial year in which the assessee filed his return.

For example, Ms. X filed her return on 25.07.2020 for the financial year 2019-20. In such a case, the notice u/s 143(2) AO can issue notice to Ms. X only up to 30.09.2021 being the end of six months period from the FY 2020-21 in which the said return was filed.

Types of notices u/s 143(2) of Income Tax Act

There can be 3 types of following notices under Section 143(2): 

Limited Scrutiny: This is a Computer-Assisted Scrutiny Selection (CASS) where cases are selected based on set parameters. The scrutiny will be limited to the particular area of return mentioned in the notice. An example of this scrutiny can be a mismatch in tax credits, inaccurate information, etc.

Complete Scrutiny: A complete scrutiny is carried out on the return filed along with all supporting documents. Cases are flagged based on CASS. Scope of scrutiny is not limited in these types of notices. However, the assessing officer cannot verify documents beyond the particular assessment year. 

Manual Scrutiny: Cases are selected for complete scrutiny based on the criteria defined by the Central Board of Direct Taxes; the criteria may vary every year.

How does this works?

AO can issue notice u/s 143(2) within 6 months from the end of FY in which the assessee filed his return, to carry out scrutiny of income tax return u/s 143(3).

The assessee or his tax representative will have to appear before the AO to place arguments and pieces of evidence as required by the assessing officer. Alternatively, the assessee can submit an online response to notice u/s 143(2) by uploading evidence and your arguments.

After looking over to all the evidence, AO will pass an assessment order determining total tax payable or refund to the assessee after taking into account produced evidence.

Time limit for issuance of the final assessment order u/s 143(3)

Time Limits are as below as per section 153

* For Assessment year 2017-18 or before 21 months from the end of the assessment year
* For Assessment year 2018-19 18 months from the end of the assessment year
* For Assessment year 2019-20 and onwards 12 months from the end of the assessment year

Consequences of not complying with the notice issued u/s 143(2)

If the assessee receives a notice from the Income Tax Department, and there is any default, he/she may be liable for the following:

  • Penalty u/s 271(1)(b) amounting to Rs. 10,000 and even prosecution if found guilty. However, for the A.Y commencing on or after the 1st day of April 2017 the penalty shall be levied in Sec 272A(1).
  • AO can do the best judgment assessment u/s 144 for the assessee.

FAQs

Is it possible to receive notice u/s 143(2) if I have not filed my return?

No it is possible to receive notice u/s 143(2) if I have not filed return. You might receive a notice u/s 142(1) asking for filing the return.

How will I receive this notice u/s 143(2)?

Generally, you will receive this notice via email in a PDF format on your email ID. You will also receive this notice at your postal address.

What is the final order u/s 143(3)?

If AO issues notice u/s 143(2) for production of evidence and after taking into account such pieces of evidence and hearing the arguments, the AO will make an assessment of total income or loss and also determine any sum payable by assessee or due to assessee by passing the order u/s 143(3).

Notice under section 142(1) of Income Tax Act, 1961

Notice under section 142(1) of the Income Tax Act, 1961 is to call for further details and documents from the assessee after filing the return. This notice can also be sent to require him to file his return where he has not yet furnished it. This notice is issued when information is missing from the taxpayer’s end.

Purpose of Notice under section 142(1) of Income Tax Act

Notice u/s 142(1) can be issued by the Income Tax Department for the following reasons:

1. To ask the assessee to file the Income Tax Return: If the assessee has not filed a return within the specified period of time or before the end of the relevant assessment year, then the assessee might receive notice u/s 142(1) asking to file the return.

2. Producing specific accounts and documents: If the assessee has already filed an income tax return, the Assessing Officer (AO) may ask assessee to produce such specific accounts and documents as required by him by way of Notice u/s 142(1). For example, assessee might need to produce your purchase books, sales books, or proofs of any deductions, etc.

3. Any other information, notes, or workings as desired by the AO: Assessing Officer may require the assessee to furnish in writing and in the prescribed manner the information, notes, or workings on specific points as required by him which may or may not form the part of books of accounts. For example, A statement of assets and liabilities.

Penalty for non-compliance of Notice under section 142(1)

Failure in compliance with the Section 142(1) Tax Notice may result in Best Judgment Assessment by assessing officer u/s 144. Further, the penalty includes:

  • Imposition of penalty of Rs 10,000 for each failure u/s 271(1)(b) or;
  • Prosecution under section 276D may extend up to 1 year with or without fine.
  • A warrant may also be issued u/s 132 for conducting the search.

FAQs

What do I do when I receive a 142(1) notice from the income tax department?

When notice is for filing of return, an assessee should file his return within the time period in the notice and if documents and details asked to produce and then give the same to A.O. within the specified period.

What can I expect after the submission of my ITR u/s 142(1)?

Your return will be sent for processing. If everything looks good to AO, No further action is required. Also, there are changes of notice under section 143(2) for scrutiny assessment if any information is doubtful to AO as per the documents and information submitted by you.

How to respond to this notice?

You need to respond to notice in the manner which is mentioned by AO

Section 194P- Exemption for ITR filing for senior citizen

Union Finance Bill 2021 came up with the introduction of a new section 194P. It provides conditions for exempting from filing Income Tax returns to senior citizens aged 75 years and above. New Section 194P is applicable from 1st April 2021.

Explanation to Section 194P

Section 139 of the Income Tax Act provides that every person being an individual shall furnish a return of his income if his total income during the previous year exceeded the basic exemption limit.

Section 194P was introduced in order to provide relief to senior citizens who are of the age of 75 years or more and to reduce compliance for them.

Moreover, Benefits under section 194P are subject to fulfillment of certain conditions.

Conditions to Section 194P

Section 194 exempted senior citizens of 75 years of age or more from filing the income tax return, subject to the following conditions:

  • Senior citizens should be of age 75 years or above. 
  • Senior citizens should be ‘Resident of India’ in the previous year. 
  • He has no other income except pension income and interest income.
  • Interest income accrued/ earned from the same specified bank in which he is receiving his pension.
  • The senior citizen will declare to its bank containing details of Chapter VI-A deductions and rebate allowable under 87A.
  • Also, They need to declare that they have not earned any other income except pension and interest income.
  • The bank is a ‘specified bank’ as notified by the Central Government. Such banks will be responsible for the TDS deduction of senior citizens after considering the deductions under Chapter VI-A and rebate under 87A. 

If all conditions are satisfied, there will not be any requirement of furnishing return of income by such senior citizens.

FAQs

What is Section 87 A in income tax?

A rebate under section 87A is one of the income tax provisions that help taxpayers reduce their income tax liability. One can claim an income tax rebate of a maximum of INR 12500 if total income does not exceed INR 5 lakh in a financial year.

Who is senior citizen as per Income Tax Act?

As per Income Tax Act 1961, an individual is treated as senior citizen once he attains the age of 60 years or more and he will be treated as super senior citizen once he attains the age of 80 years or more.

When is tax filing not mandatory?

As per the tax provisions, filing income tax returns is mandatory where the gross total income of an individual is more than the basic exemption. Here, Gross total income would mean the income before any deductions under chapter VI-A.

Section 36 of Income Tax Act, 1961

Section 36 of the Income Tax Act deals with the list of specific expenses which are allowed for the purpose of computation of income chargeable to tax under the business and profession head of income.

INDEX

Section 36(1)(i) – Insurance Premium

Insurance Premium deduction u/s 36(1)(i) is in three parts. First is in respect of risk of damage or destruction of stock in trade second for life of the cattle and last one for health insurance of employees.

Section 36(1)(i) Deduction for insurance premium paid to cover the risk of damage and destruction of stock in trade, used for the purpose of Business & Profession of the assessee.
Section 36(1)(ia) Insurance premium paid by Federal Milk Cooperative Society for the life of cattle owned by the members to primary society supplying milk to it shall be allowed as deduction.
Section 36(1)(ib) Deduction for health insurance premium paid for insurance of employees. Deduction will be allowed for the premium paid by any mode other than cash.

Section 36(1)(ii) – Bonus or Commission to Employees

Statutory bonus or voluntary bonus shall be allowed as deduction in the year of payment subject to provisions of section 43B and it shall be allowed only if bonus paid is not in lieu of dividends or profits.

Section 36(1)(iii) – Interest on Borrowed Capital

The amount of interest paid in respect of capital borrowed for the purpose of Business & Profession of assessee shall be allowed as deduction.
Also deduction shall be allowed subject to the section 43B if the loan is taken from bank, PFI, state financial corporation or state industrial financial corporation.

Moreover, When the capital is borrowed for acquisition of a capital asset, then interest liability pertaining to the period till the date such asset is put to use shall not be allowed as deduction.

Section 36(1)(iiia) – Discount on issue of Zero Coupon Bonds

Discount on a zero-coupon bond is available as a deduction under Section 36. However, pro-rata amount of discount amortized over the life (calendar months) of the zero-coupon bonds will be allowed.

Section 36(1)(iv) – Employer’s contribution to provident fund or superannuation fund

Employer’s contribution to recognized provident fund or a superannuation fund is allowed as a deduction subject to limits laid down for the purpose of recognizing the provident fund or approved superannuation fund, on the payment basis i.e only in the year when it is actually paid by the employer.

Section 36(1)(iva) – Employer’s Contribution to National Pension Scheme (NPS)

Employer can claim deduction for contribution towards a pension fund as specified under Section 80 CCD, however, the deduction allowed will be limited to the extent of 10 percent of employees’ salary.

Moreover, salary includes dearness allowance but excludes other perquisites and other allowances.

Section 36(1)(v) – Employer contribution towards Approved Gratuity Fund

Deduction is allowed for the amount paid towards the approved gratuity fund created by employer exclusively for the benefit of his employees under an irrevocable trusts. However, it is subject to the provisions of section 43B.

Section 36(1)(va) – Employees’ Contribution to Staff Welfare Schemes

Any sum deducted from the salary of the employee as his contribution to any provident fund or superannuation fund or ESI or any other fund for the welfare of such employee is treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the due date the deduction will be allowed for the same under this clause.

Section 36(1)(vi) – Allowance in respect of Dead or Permanently useless Animals

Expenditure on the purchase of animals for the purpose of business or profession is a capital expenditure. However, there is no depreciation allowance on such capital expenditure.

Moreover, one has write off such capital expenditure as a loss in the year in which the animal dies or becomes permanently useless.

Further, deduction amount will be the cost of animal minus the proceeds of sale of the carcasses or the animals.

Section 36(1)(vii) – Bad debts written off

Deduction for bad debts could be claimed if such bad debts are related to the profession or business and must have been considered while computing the income from such profession or business. However, the deduction isn’t available for any provision for the bad debts.

Moreover, If the bad debt represents money lent then it is not available as deduction except if assessee has lent money in the ordinary course of the business of banking or money-lending.

Section 36(1)(viia) – Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks

Deduction for provision for bad debts is available to banks and financial institutions. Also, the amount of deduction for Indian Banks will be equal to 8.5 percent of their gross total income plus 10 percent of their aggregate average advances made by the rural branches. Moreover, For banks that are incorporated outside India and other non banking financial institutions, the deduction will be limited to the extent of 5 percent of their gross total income

Section 36(1)(viii) – Transfer to Special Reserve

When any profit from eligible business is transferred to the reserve it can be claimed as a deduction. The amount allowed as a deduction is lower of the following.

  • 20% of the profit computed as per section 28 before deduction u/s 36(1)(viii)
  • Actual amount transferred to special reserve
  • 200% of (Paid-up capital+ General reserve) – Opening balance in special reserve

Further, Eligible business means Financial corporation engaged in providing long term finance (5 years or more) for industrial, agricultural, infrastructure and housing development companies.

Note : If any amount withdrawn from this reserve, one has to consider it as business income in the year of withdrawal.

Section 36(1)(ix) – Family Planning Expenditure

This expense is allowed as a deduction to the company, when such expenditure is capital in nature, in five equal annual installments. First installment is allowed in the year in which the expense is incurred. (For revenue expenses 100% deduction is allowed)

Section 36(1)(xv) – Securities Transaction Tax

Trader can claim the deduction of STT when shares/units/commodities are stock-in trade.

Section 36(1)(xvi) – Commodities Transaction Tax

A public financial institution can claim deduction for its contribution to notified credit guarantee trust for small industries(i.e. Credit Guarantee Fund Trust for Micro and Small Enterprises). Couldn’t find it online

Section 36(1)(xvii) – Expenditure by Co-Operative Society for purchase of Sugarcane

Cooperative society engaged in the business of manufacturing of sugar can claim the deduction for purchase of sugarcane at a price which is equal to or less than the price fixed by the government.

Section 36(1)(xviii) – Marked to Market Loss

Deduction is available for marked to market loss or any other expected loss as computed in the manner provided in ICDS (Income Computation & Disclosure Standards).

FAQs

What is Section 43B?

As per the income tax act, 1961 Section 43B states that certain payments can be claimed as an expense in the year of payment and not in the year of occurrence the liability.

Is deduction available for payment of health insurance premium for insurance of employees?

Yes, deduction is available for payment of health insurance premium for insurance of employees

Is deduction available for provision of bad debts?

No, deduction is not available for provision of bad debts.

Section 115BAC – Understanding the New Tax Regime

The Finance Minister, Nirmala Sitharaman had presented the Budget 2020 on the 1st of February 2020. Finance Minister had many major announcements including introduction of new tax regime under section 115BAC of Income Tax Act, 1961. The new tax regime is available only to individuals and HUF. Also, new regime comes with reduced income tax slab rates and the removal of rebates and exemptions.

New Tax Slab Rates

Under section 115BAC, new tax slabs have been introduced with existing rates which are slashed on income up to INR 15 Lakh. The tax slab rates as per the New Income Tax Regime are as follows:

Income Range Rates as per New Tax Regime
Up to INR 2,50,000 Nil
INR 2,50,000 – 5,00,000 5%
INR 5,00,000 – 7,50,000 10%
INR 7,50,000 – 10,00,000 15%
INR 10,00,000 – 12,50,000 20%
INR 12,50,000 – 15,00,000 25%
Above INR 15,00,000 30%

Changes in Deductions and Exemptions in as per section 115BAC

According to the announcement made in the Budget 2020, there have been major removals of tax exemptions and deductions. This has made tax compliance less tedious. Here is the list of what deductions that have been removed as per clause (i) of sub-section (2) of section 115BAC:

  1. Leave travel concession as per section 10(5);
  2. House rent allowance as per section 10(13A);
  3. Official and personal allowances (other than those as may be prescribed) as per section 10(14);
  4. Allowances to MPs/MLAs as per section 10(17);
  5. Allowance for income of minor as per section 10(32);
  6. Exemption for SEZ unit as per section 10AA;
  7. Standard deduction, the deduction for entertainment allowance and employment/professional tax as per section 16;
  8. Interest under section 24 in respect of self-occupied or vacant property as per section 23(2).
  9. Additional depreciation under clause (iia) of sub-section (1) of section 32;
  10. Deductions u/s 32AD, 33AB, 33ABA;
  11. Various deduction for donation or expenditure on scientific research contained in section 35;
  12. Deduction u/s 35AD or section 35CCC;
  13. Deduction from family pension under clause (iia) of section 57;
  14. Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA,etc). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment can be claimed.

Set-off of Losses and Unabsorbed depreciation as per section 115BAC

As per section 115BAC, losses from house property can only be set off against other income from house property. Moreover, losses from income from house property cannot be carried forward in the new income tax regime.

In the case of a business income, an individual or HUF cannot claim set-off of the brought forward business loss or unabsorbed depreciation and also cannot carry forward the same to the extent they relate to deductions/exemptions withdrawn in clause (i) of sub-section (2) of section 115BAC.

Opting for new scheme

As per the income tax laws, an individual having business income shall submit form 10-IE before the due date of filing ITR i.e. July 31 (unless extended by the government). For salaried individuals, they can submit form before/at the time of ITR filing.

Switching between Old Tax Regime & New Tax Regime

  • Business Income
    • Individuals having business income are not eligible to choose between the new and old tax regime every year. Once they have opted for the new tax regime, they only have a one-time option of switching back to the old tax regime in their lifetime. Once they switch back, they cannot opt for new tax regime again.
    • Essentially, people with business income may have to fill Form 10-IE twice – once to use the new tax regime and the second time to switch back to the old regime.
  • No Business Income
    • An individual having salaried income and no business income has the option to choose between the old and new tax regimes every year. This means that a salaried individual will have to file this form for every year for which he wants to choose the new tax regime.

FAQs

Can I choose a new tax regime at the time of filing ITR, if I have opted for the old tax regime with my employer?

If an individual who has opted for old tax regime with his/her employer for TDS on salary, plans to opt new tax regime at the time of filing ITR, then he/she can do that by filling the new form i.e. 10-IE.”

Is standard deduction on salary u/s 16 available under new tax regime?

No, standard deduction on salary u/s 16 is not available under new tax regime

How to inform the IT Department which tax regime is selected?

The Central Board of Direct Taxes (CBDT) has released Form 10-IE. Any person who wish to pay income tax as per the new tax regime has to communicate his/her choice to the Income Tax Department through form 10-IE.

I have incurred short-term and long-term capital losses. Also, I have losses from trading in derivatives. Can I carry forward those in the new tax regime?

Yes, You can carry forward short-term and long-term capital losses as well as loss from trading in derivatives in the new tax regime because only the losses that relate to deductions/exemptions withdrawn in clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward.

Variable Cost

It is important for an organization to understand nature of cost to calculate how much it is spending on production. Cost can be either variable cost or fixed cost based on its nature. Unlike fixed costs, variable costs are directly related to sales volume. That means, the variable expense increases or decreases in the same proportion to the quantity of the output. 

What is Variable Cost?

There are various types of costs that an organization needs to incur for production such as variable costs, fix costs, and semi-variable costs. Unlike fixed costs, variable costs are dependent on the production or output of goods or services. Fix costs often relate to time period , and generally do not change over time.

Variable costs associated with the production of goods or services include direct material, wages and other operating expenses.

Semi-variable costs have components some that are fix and some that are variable. These costs are partly fix up to a level of production and then increase with the production volume. Most common examples of Semi-variable costs are electricity and wages for sales force.

Like electricity costs are fix up to a certain number of units of consumption. The cost increases with the next set of units consumed and tends to increase after the level fixed. Also, a portion of wage for a salesperson may be a fixed salary and the rest may be sales commission.

Examples of variable cost

  • Direct Materials – the raw materials used in production of product
  • Production Supplies – the supplies that are necessary for the machinery that help produce the product, such as supplies that help maintain equipments.
  • Sales Commissions – the part of a worker’s salary based on the sales they do.
  • Credit Card Fees – the fees that the merchant has to pay in order to offer credit card services to their customers

Other examples of variable costs are delivery charges, shipping charges, salaries,​ and wages. Performance bonuses to employees are also variable costs.  In many instances, reducing variable costs are easier to manage without major disruptions than changing fixed costs. 

Conclusion

Variable costs are not only a major part of running a business, they also can be key to turning breaking-even into profits. Or existing profits into larger profits. Also, it is easier to recover the variable costs from sales.

Keeping track of variable costs can provide crucial insight into where cash outflow is going and to what extent. The profits of a business directly inflate by adjusting the variable costs but maintaining sales prices.

FAQs

What are three examples of variable expenses?

Common variable costs for businesses include:
– Raw materials
– Packaging
– Shipping
– Labour
– Commission
– Credit card fees

Is salary a variable cost?

Annual salaries are fix costs but other types of compensation, such as commissions or overtime, are variable costs.

What is fix cost and variable cost with example?

Fix costs relate to a particular period i.e. they remain constant for a period of time. Variable costs are volume-related and change with the changes in output level. Examples. Depreciation, interest paid on capital, rent, salary, property taxes, insurance premium, etc.

Fixed Cost

Cost can be classified in several ways such as fixed cost or variable cost, depending on its nature. One of the most popular methods is classification according to fixed costs and variable costs. Unlike variable costs, fixed costs are not dependent on the production or output of goods or services. Moreover, fix costs often relate to time period, and generally do not change over time.

What is a Fixed Cost

A fixed cost is an expense that does not change as production volume increases or decreases within a relevant range. In other words, fix costs do not change as long as operations stay within a certain size. Fixed costs are less controllable by an organization because they aren’t based on volume or operations.

As an example of a fixed cost, the rent on a building will not change until the lease runs out or is re-negotiated, irrespective of the level of activity within that building. Examples of other fixed costs are insurance, depreciation, and property taxes. Fixed costs generally incur on a regular basis, and so they are period costs.

Moreover, for marketing, it is important to understand how costs vary depending upon their nature i.e. variable or fix costs. This distinction is also essential in forecasting the earnings, preparing reports and budgets.

Difference Between Fixed Cost and Variable Cost?

  Fixed Costs Variable Costs
Meaning Fixed costs are expenses that remain constant for a period of time irrespective of the level of outputs. Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume. 
Incurred when Even if the output is nil, fixed costs are incurred. The cost increases/decreases based on the output 
Also known as Fixed costs are also known as overhead costs, period costs or supplementary costs. Variable costs are also referred to as prime costs or direct costs as it directly affects the output levels.
Nature Fixed costs are time-related i.e. they remain constant for a period of time. Variable costs are volume-related and change with the changes in output level.
Examples Depreciation, interest paid on capital, rent, salary, property taxes, insurance premium, etc. Commission on sales, credit card fees, wages of part-time staff, etc.

Nature of Cost

As discussed, Fixed costs are not permanently fix but they change over time. Also they are fix by contractual obligation, in relation to the the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, such as warehouse costs.

Some fixed costs such as investments in infrastructure can not be substantially decreased in a limited time span are referred as fixed committed costs. While discretionary fixed costs depend on management decisions.

Examples of discretionary costs include spending on advertising, insurance premiums, machine maintenance, and research & development; the discretionary fixed costs can be excessive.

FAQs

Can a fixed cost change?

Yes. Fixed costs can change if the costs of operations changes. For example, if rent goes up, the fixed costs might be re-evaluated.

Is Depreciation a fixed cost?

Depreciation is the regular charge on tangible or intangible asset over the course of its useful life irrespective of output. Therefore, Its is considered as a fixed cost.

Is Advertising a Fixed Cost?

Advertising costs may fluctuate over time, as management may decide but advertising isn’t affected by sales or production levels so it is said to be a fixed cost.