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Income Tax on Debt Funds in India

What are Debt Funds?

If you have invested in Mutual Funds, you need to file your ITR and pay tax on this income. Trading in various types of MFs has become very easy due to the availability of online trading platforms. Under Income Tax, trading in Debt Mutual Funds is classified as a Capital Gains Income.

  • Debt MFs – Funds that invest in fixed income securities like bonds, treasury bills, and other debt instruments. Types of debt mutual funds include liquid funds, short-term funds, income funds, hybrid funds, etc.
  • Equity Mutual Funds – Equity oriented MFs are funds that invest in equity instruments. Types of equity mutual funds include large-cap funds, mid-cap funds, small-cap funds, ELSS (Equity Linked Savings Schemes), Index funds, etc.
ITR for Capital Gains from Investment in Stocks
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Income Heads for Income from Debt Funds

Capital Gains on Debt Funds

Debt Funds – Since these MFs invest in debt instruments, the treatment is similar to other capital assets.

  • LTCG: Any gain arising on the sale or redemption of a debt fund held for more than 36 months is considered as LTCG.
  • STCG: Any gain arising on the sale or redemption of a debt fund held for less than 36 months is considered as STCG.

Debt Fund Taxation

The taxability of MFs would depend upon the nature of income. Capital Gains on Debt Mutual Funds are taxable as per the table below.

Type of MF Period of Holding Long Term Capital Gain Short Term Capital Gain
Debt Fund 36 months 20% with Indexation Slab Rates

Other Income from Debt Mutual Funds is taxable in the following manner:

  • Dividend Income – Exempt up to FY 2019-20. Taxable at slab rates FY 2020-21 onwards.
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ITR Form, Due Date and Tax Audit Applicability for Investors

  • ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
Tip
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
  • Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
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Carry Forward Loss for Debt MFs Trading

  • Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
  • Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. Remaining loss can be carried forward for 8 years and set off against LTCG only.

Example

Mr. Vijay is a salaried individual and has done mutual fund trading in FY 2020-21. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of INR 30,000 from Debt Mutual Funds and Long Term Capital Gain of INR 2,50,000 from Equity Shares.

Now in the above example, Vijay needs to file ITR-2 for FY 2020-21. And his total income and tax liability will be as follows:

Particulars Amount (INR) Amount (INR)
Salary Income   870000
Capital Gains    
Short Term Capital Loss (30000)  
Long Term Capital Gain 250000  
Less: Exemption u/s 112A (100000)  
Taxable Long Term Capital Gain 150000  
Total Capital Gains after set-off of losses (taxed @10%)   120000
Total Taxable Income   990000
Tax at slab rate 86500  
Tax at special rate 12000  
Total Income Tax   98500
Health & Education Cess @4%   3940
Total Tax Liability   102440
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FAQs

How do I report income from trading in Debt Mutual Funds in the Income Tax Return (ITR)?

A trader should file ITR-2 and report income from trading in Debt Mutual Funds as Capital Gains.
Tax on LTCG – 20% with indexation
Tax on STCG – slab rates
The trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.

What is Indexation benefit?

Using the Indexation benefit, the taxpayer can adjust the Cost of Acquisition of the capital asset after considering the effect of inflation. Indexation is calculated using the CII (Cost Inflation Index) issued by the Income Tax Department. The taxpayer is allowed to calculate the indexed cost of acquisition to calculated capital gain on redemption of debt mutual funds. Indexation increases the cost of acquisition and thus lowers capital gains and tax liability.

Is Mutual Fund taxable?

Yes. Income from Mutual Fund is taxable under the Income Tax Act.
(a) Capital Gain on Sale of Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
(b) Capital Gain on Sale of Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates
(c) Dividend Income on Mutual Funds – Taxable at slab rates from FY 2020-21
(d) Interest Income on Mutual Funds – Taxable at slab

GST for Traders – Do they need GST Registration?


GST is applicable if the aggregate turnover of a business exceeds the threshold limit. Once the business is registered under GST, it must charge GST on the sale of goods or services. It is applicable to manufacturers, traders and service providers. Does GST apply to stock traders also? The applicability of GST to trading in securities is a confusing question prevalent amongst traders. GST is not applicable to income from trading in stocks, shares, mutual funds, futures, options etc. Let us understand in detail.

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Is GST applicable to Securities Traders?

It is mandatory to register under GST if the Aggregate Turnover exceeds the threshold limit of INR 40 Lakh (INR 20 Lakh for special category states) for sale of goods or INR 20 Lakh (INR 10 Lakh for special category states) for sale of services. As per Section 22 of CGST Act, Aggregate Turnover is the total sales value of taxable/exempt goods or services.

The GST Act specifically excludes Securities from the definition of Goods. As per Section 2(52), Goods means any movable property except money and securities. The definition of Services means anything other than goods, money and securities. Thus, trading in shares and securities is not considered as supply as per the GST Act and falls outside the purview of GST. Therefore, securities traders are not liable to register under GST.

However, it must be noted that if a broker is earning brokerage income from securities trading, GST registration is mandatory if such brokerage exceeds the threshold limit.

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Should I include Trading Turnover in Aggregate Turnover?

Trading Turnover is the turnover calculated for each trading segment as per the reporting requirements of the Income Tax Act.

Aggregate Turnover includes the sum of the sale of goods and services. Since the definition of goods and services excludes securities, the aggregate turnover should not include trading turnover to determine the applicability of GST Registration.

Trading Expenses on Securities Trading

Expenses incurred on trading in securities also includes CGST, SGST or IGST. This is the GST on expenses such as brokerage, transaction costs, turnover fees, etc that the trader pays for trading transactions. The trader can claim such expenses against the profit/loss from trading while filing the Income Tax Return on the income tax website.

GST for Traders – Reporting in ITR-3

Turnover as per ITR must match with sales reported in GST Return to avoid any mismatch notice. If the trader does not have GST Registration, he/she need not report details of GSTIN in the Income Tax Return. If the trader has income from any business other than securities trading and has GST Registration, it is advisable to report the trading turnover from securities trading under Non-GST Supply in the GST Return.

FAQs

Does securities also cover derivatives?

The GST Act excludes Securities from the definition of Goods. Securities shall have the same meaning as per Section 2 of Securities Contracts (Regulation) Act, 1956 and includes shares, scrips, stocks, bonds, debentures, debenture stock, other marketable securities and derivatives.

Is GST applicable on brokerage earned in Stock broking services?

Yes. A stockbroker provides stockbroking services that fall under the definition of ‘Services’ under GST. Therefore, such sale value must be included in Aggregate Turnover to determine the applicability of GST Registration.

My trading turnover from share trading exceeds INR 40 lacs. Do I need to register under GST?

Trading in securities does not fall under GST since the definition of ‘Goods’ and ‘Services’ as per the GST Act excludes securities. Therefore, even if the trading turnover exceeds the threshold limit, GST is not applicable.

Capital Gain Tax on Sale of Property/Land

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on the sale of property or land is determined on the basis of the nature of the long term or short term.

ITR for Gains from Sale of House / Property
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Capital Gain on Sale of Property / Land

The Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land 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).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land 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).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
Tip
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

The income tax rate for LTCG on sale of property in India is 20% with Indexation benefit. Using the indexation benefit, the taxpayer can adjust the cost of the asset with the CII (Cost Inflation Index) List issued by the Income Tax Department. The Indexed Cost of Acquisition is used to calculate the Capital Gains. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54, 54EC, 54F (XXXX)
  Long Term Capital Gain XXXX
  • Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
  • Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
  • Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
  • Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain is taxed as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the exemption under Section 54 to 54F is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Carry Forward Loss on Sale of Immovable Property

  • The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

Capital Gains on Sale of Property before Possession

Let’s understand the situation first: You have booked a property which is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

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Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under section 54F and Section 54EC will be available.
    • You can not claim the exemption under section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and may result in scrutiny.
ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
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ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
[Rated 4.8 stars by customers like you]

ITR Form & Due Date for Income from Sale of Immovable Property

  • ITR Form: Taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
  • Due Date – 31st July of the Assessment Year
    • Up to FY 2019-20 – 31st July
      31st July – for taxpayers to whom Tax Audit is not applicable
      30th September – for taxpayers to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for taxpayers to whom Tax Audit is not applicable
      31st October – for taxpayers to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

FAQs

What is section 54F under capital gains?

Section 54F, exemption of capital gain is made available in the situation of long term capital assets transfer against the investment one makes in a residential house. he capital gain that arises for transferring any long term capital assets that is other than the residential house.

How can I save capital gains tax on the sale of my property?

By Investing in Capital Gains Account Scheme and while filing your return on Income Tax Portal you can claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.

How do you calculate long term capital gains on sale of property?

Long term capital gain is calculated as the difference between net sales consideration and indexed cost of the property. The benefit of indexation is allowed to set off the impact of inflation from gains made on the sale of the property so that the actual gains on the property will be taxed.

Depreciation under Income Tax Act

What is Depreciation?

The meaning of depreciation is a reduction in the value of an asset over a period of time. A taxpayer can claim it as a valid business expense. Depreciation as per the Income Tax Act is a decrease in the value of the asset over its useful life. It can be claimed as an expense and reduced from the taxable income of the taxpayer. A taxpayer can claim it on both tangible assets and intangible assets as per the prescribed rates in the Income Tax Act.

The calculation of depreciation under Income Tax Act is different than the Companies Act. In the case of a Company, it is calculated as per the prescribed rates and methods under the Companies Act, 2013. Thus, in the case of a Company, the depreciation as per the books of accounts would be different than the amount as per the Income Tax Return.

Block of Assets

Block of Assets mean a group of assets falling under the same category and having the same depreciation rate. Gross Block is the sum of gross value of each asset as on the beginning of the financial year. Net Block is the sum of net value of each asset at the end of the financial year after reducing the depreciation.

Gross Block – Depreciation = Net Block

The Block of Assets comprises of the following types of assets:

  • Tangible Assets – It includes the assets that exist in physical form such as land, building, furniture, car, plant & machinery, etc.
  • Intangible Assets – It includes the assets that do not exist in physical form such as goodwill, patent, copyright, license, franchise, etc.

Calculation of Gross Block of Assets is as per the table below:

  Particulars Amount
  Opening WDV as on 1st April XXXX
Add Cost of Assets purchased XXXX
Less Sale Value of Assets sold (XXXX)
  WDV of Block of Assets XXXX
Less Depreciation (XXXX)
  Closing WDV at the end of year XXXX

Conditions to claim Depreciation

The taxpayer must fulfill the following conditions to claim depreciation.

  • Taxpayer should own the asset either wholly or partially
  • The taxpayer should use the asset for the purpose of business or profession and not for personal purpose
  • The asset should be actually used in the financial year
  • Each co-owner can claim it to the extent of the asset owned by them

Depreciation Rate & Method of Calculation

The rate of depreciation for different block of assets is prescribed under the Income Tax Act.

  • If the asset is used for 180 days or more during the financial year, calculate using full rate.
  • If the asset is used for less than 180 days during the financial year, calculate using half rate.

Interest paid on money borrowed for buying a capital asset should be added to the cost of the asset till the time the asset is put to use. Once the asset is put to use, the taxpayer can claim the interest as revenue expenditure.

Income Tax Depreciation Rates for AY 2019-20

The Income Tax Department has prescribed rates as on the incometaxindia.gov.in. These rates are applicable AY 2003-04 onwards. You can refer to the rates as prescribed by the Income Tax Department here – Income Tax Depreciation Rates.

Additional Depreciation

In addition to the normal depreciation, you can also claim Additional Depreciation at the rate 20% if the following conditions are satisfied:

  • Taxpayer is in the manufacturing business
  • There is purchase of new plant or machinery installed after 31st March, 2005

The rate of additional depreciation would be 20% of the actual cost if the asset is used for 180 days or more. If the asset is used for less than 180 days, the rate would be 10%.

Example for Depreciation Calculation

Shaurya is in the business of manufacturing. Here is the data of the capital assets of his business.

Particulars Amount
Opening WDV of Plant & Machinery as on 1st April 2019 40,00,000
New machine purchased & put to use on 30th June 2019 15,00,000
New machine purchased & put to use on 1st February 2020 10,00,000
Computer purchased on 25th January 2020 2,00,000

Solution

Particulars Amount
Normal Depreciation  
Dep at the full rate of 15% on P&M of 40 lacs 6,00,000
Dep at the full rate of 15% on P&M of 15 lacs used for more than 180 days 2,25,000
Dep at half rate of 7.5% on P&M of 10 lacs used for less than 180 days 75,000
Dep at the full rate of 40% on Computer of 2 lacs 80,000
Additional Depreciation  
Dep at the full rate of 20% on new P&M of 15 lacs used for more than 180 days 3,00,000
Dep at half rate of 10% on P&M of 10 lacs used for less than 180 days 1,00,000
Total Depreciation 13,80,000

Block of Assets

  Particulars P&M Computer
  Opening WDV as on 1st April 40,00,000 NIL
Add Cost of Assets purchased 25,00,000 2,00,000
Less Sale Value of Assets sold NIL NIL
  WDV of Block of Assets 65,00,000 2,00,000
Less Depreciation 13,00,000 80,000
  Closing WDV at the end of year 52,00,000 1,20,000

AMT – Alternative Minimum Tax under Section 115JC

The Income Tax Department had introduced the provision of AMT i.e. Alternate Minimum Tax for taxpayers other than Company. The government had introduced incentives and deductions to specified industries to encourage investment and growth. There were many taxpayers who misused the provision by paying zero tax. Thus, the IT department introduced MAT (Minimum Alternate Tax) for Companies and AMT (Alternative Minimum Tax) for taxpayers other than Company. As part of AMT, the government ensured collecting minimum tax from such taxpayers. Further, it also gave an option to carry forward the AMT Credit and adjust it in future years.

Applicability of AMT

The provisions of Alternative Minimum Tax are applicable to the following category of taxpayers:

  1. Individual, HUF, AOP (Association of Persons) or BOI (Body of Individuals) if the adjusted total income exceeds INR 20 lacs
  2. Any other taxpayer (other than Company) irrespective of the total income.

The AMT provisions are applicable to the above category of taxpayers only if:

  • Taxpayer claims a deduction under Section 80H to Section 80RRB (except Section 80P)
  • Taxpayer claims a deduction under Section 35AD.
  • The taxpayer claims a deduction under Section 10AA.

AMT Rate & Adjusted Total Income

Rate of Alternative Minimum Tax is 18.5% of the Adjusted Total income. In addition to this, surcharge and cess are applicable. Calculate the adjusted total income in the following manner:

  Particulars Amount (INR)
  Taxable Income XXXX
Add Deduction claimed u/s 80H to 80RRB (except 80P) XXXX
Add Deduction claimed u/s 35AD reduced by regular depreciation allowed as per Section 32 XXXX
Add Deduction claimed u/s 10AA XXXX
  Adjusted Total Income XXXX
  AMT – 18.5% of Adjusted Total Income XXXX

Tax Liability if AMT is applicable

If the provisions of Alternative Minimum Tax are applicable, Tax Liability would be higher of the following:

  • Tax Liability as per normal provisions of the Income Tax Act
    Calculate Total Income of the taxpayer from all sources of income and after claiming Chapter VI-A deductions. Calculate Tax Liability on the Total Income as per the applicable slab rates.
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  • Tax Liability as per AMT Rate
    Calculate Adjusted Total Income of the taxpayer as per the above table. Calculate Tax Liability on the Adjusted Total Income at the rate of 18.5%.

Example

Taxable Income of Samir for FY 2019-20 is INR 18,00,000. The taxable income is computed after claiming the deduction of INR 3,00,000 under Section 80QQB for a royalty on books. Is he covered under the provisions of AMT? Calculate Tax Liability.

Solution

  1. Calculate Adjusted Total Income

    Taxable Income = INR 18,00,000
    Add: Deduction u/s 80QQB = INR 3,00,000
    Adjusted Total Income = INR 21,00,000

  2. Applicability of AMT

    Adjusted Total Income exceeds INR 20 lacs. Therefore, the provisions of Alternative Minimum Tax are applicable.

  3. Calculate Tax Liability as per normal provisions

    Tax on Total Income of INR 18,00,000 as per slab rates
    Basic Tax = INR 3,52,500
    Total Tax = Basic Tax + Cess = 3,52,500 + 4% Cess = INR 3,66,600

  4. Calculate Tax Liability as per AMT provisions

    Tax on Adjusted Total Income of INR 21,00,000 at 18.5%
    Basic Tax = INR 3,88,500
    Total Tax = Basic Tax + Cess = 3,88,500 + 4% Cess = INR 4,04,040

  5. Final Tax Liability

    Higher of the above = INR 4,04,040

  6. AMT Credit

    Tax as per AMT – Tax as per Slab rates = 4,04,040 – 3,66,600 = INR 37,440. The AMC Credit can be carried forward for 15 years.

AMT Credit

A taxpayer to whom provisions of Alternative Minimum Tax are applicable pays tax as per normal provisions or as per the rate of 18.5% whichever is higher. When the tax liability for a financial year is paid as per Alternative Minimum Tax, the taxpayer can claim the credit of excess tax paid in the future financial years as per Section 115JD of the Income Tax Act. Excess Tax is the amount of Alternative Minimum Tax paid in excess of tax as per normal provisions.

The AMT Credit can be carried forward for a period of 15 financial years. If the taxpayer is unable to utilise the AMT Credit in 15 years, this credit will lapse. No interest is paid on such credit.

Example

Aryan Enterprises is a Partnership Firm covered under the provisions of Alternative Minimum Tax. Below are the details:

FY 2019-20

Tax Liability as per normal provisions = INR 15,00,000
Tax Liability as per AMT provisions = INR 18,00,000

Final Tax Liability = INR 18,00,000 (higher of the above)
Carry Forward AMT Credit = INR 3,00,000 (18,00,000-15,00,000)

FY 2020-21

Tax Liability as per normal provisions = INR 10,00,000
Tax Liability as per AMT provisions = INR 9,00,000
Brought forward AMT Credit from FY 2019-20 = INR 3,00,000

Final Tax Liability = INR 10,00,000 (higher of the above)
Since there is an AMT Credit of the previous financial year, the taxpayer can utilise AMT Credit up to the extent of difference between tax liability as per normal provisions and tax liability as per AMT.

Thus, the credit can be utilised for INR 1,00,000 (10,00,000-9,00,000). Remaining Credit of INR 2,00,000 can be carried forward to future years.

Report from CA

A taxpayer to whom the provisions of Alternative Minimum Tax are applicable should obtain a report from a Chartered Accountant in Form 29C. It is the report under Section 115JC of the Income Tax Act Under this report, the CA would certify that the Adjusted Total Income and AMT is calculated as per the provisions of the Income Tax Act.

Tax Audit Report – Form 3CA, 3CB, 3CD

What is a Tax Audit Report?

As per the Income Tax Act, Tax Audit as per Sec 44AB of the Income Tax Act is applicable to a business or profession in certain specified situations. Tax Audit Report is the report prepared by a Chartered Accountant in practice after auditing the books of accounts of a business. Under Tax Audit, the CA ensures whether the books of accounts are correctly prepared and the taxable income is accurately calculated as per the provisions of the Income Tax Act.

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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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In the case of an assessee to whom Tax Audit as per Section 44AB of the Income Tax Act is applicable, here are the next steps:

  • Appoint a Chartered Accountant in practice to audit the books of accounts
  • Chartered Accountant files Audit Report in Form 3CB-3CD or Form 3CA-3CD
  • Taxpayer files Income Tax Return in Form ITR 3

Tax Audit Report – Form 3CA, 3CB, 3CD, 3CE

The format of the Audit Report is specified by the Income Tax Department with specified particulars. Form 3CA and 3CB is the statement with auditors’ information while form 3CD is the statement with details of the tax audit.

Form Name Description
Form 3CA-3CD Tax Audit Report in the case of a taxpayer having business or profession income who is mandatorily required to get accounts audited under any other Act (other than Income Tax Act)
Form 3CB-3CD Tax Audit Report in the case of a taxpayer having business or profession income who is not required to get accounts audited under any other Act (other than Income Tax Act)
Form 3CE A Tax Audit Report in the case of a taxpayer who is a Non-Resident or Foreign Company receiving a royalty or fee for technical services

Method to Upload and File Tax Audit Report

Up to FY 19-20

  • Taxpayer adds CA from their Income Tax Account
  • CA uploads P&L, Balance Sheet & Tax Audit Report from their income tax account
  • Taxpayer approves Tax Audit Report
  • Taxpayer files ITR using DSC

FY 20-21 Onwards

  • Taxpayer adds CA from their Income Tax Account
  • Taxpayer uploads P&L and Balance Sheet from their income tax account
  • CA approves P&L and Balance Sheet
  • CA files Tax Audit Report
  • Taxpayer approves Tax Audit Report
  • Taxpayer files ITR using DSC

Due Date to Upload Tax Audit Report

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Guidance Note on Tax Audit

The Tax Audit Report has 2 parts – Form 3CA/3CB and Form 3CD. While Form 3CA/3CB is the statement with details of auditor, Form 3CD is the Statement with particulars required to be reported as per Sec 44AB of the Income Tax Act.

Form 3CA

Clause Information
Point no.1 Name, Address & PAN of taxpayer
Name of Auditor
Law under which accounts are audited
Date of Audit Report
Period of P&L Account
Date of the Balance Sheet
Point no.2 A declaration that the Audit Report Form 3CD is attached
Point no.3 Audit Observations or Qualifications as per Form 3CD
Point no.4

Name, Address, Membership Number of Auditor
Place & Date of Sign
Stamp & Seal of Auditor

Form 3CB

Clause Information
Point no.1 Date of Balance Sheet and P&L Statement
Name, Address, and PAN of Taxpayer
Point no.2 Address where books of accounts are kept
Address of branches (if books of accounts are kept at branches)
Point no.3 Observations, Comments, Discrepancies, and Inconsistencies reported by the auditor
Declaration by the auditor of:
* Obtaining all information required for audit
* Confirming that the business has maintained proper books of accounts
* Reporting that Balance Sheet and P&L Account reflects a true and fair view of the business
Point no.4 Declaration of attaching Form 3CD along with the Audit Report Form 3CB
Point no.5 Details of the Auditor – Name, Address, Membership Number, Firm Registration Number, Date, and Place

Form 3CD

It is a detailed statement with 44 different clauses filed by the auditor reporting information related to the business and its transactions for the relevant financial year. The IT Department has prescribed Form 3CD format and utility that a CA can use for filing the audit report.

Form 3CE

Clause Information
Point no.1 Name, Address & PAN of Non-Resident
Financial Year
Point no.2 Declaration of obtaining all information and explanations for audit
Point no.3 Certification on Permanent Establishment or Fixed Place of a profession in India
Point no.4 Declaration of income from royalty or fees for technical services under Section 44DA
Point no.5 Signature and Name of Auditor with stamp and seal

In addition to Form 3CE, details of income from royalty or fees for technical services should be mentioned in an Annexure.

Penalty for not filing Form 3CD

An assessee who is liable to get books of accounts audited as per Section 44AB fails to do so, the Assessing Officer i.e. A.O. may impose a penalty under Section 271B. The penalty shall be lower of the following:

  • 0.5% of Total Sales / Turnover of business or 0.5% of Gross Receipts of profession
  • INR 1,50,000

However, if the assessee can prove a reasonable cause for failure to get a tax audit done, the A.O. may not impose the penalty.

FAQs

If a taxpayer is required to do an audit under any other law, is it mandatory to do Tax Audit as per Income Tax?

Taxpayers like Company or Cooperative Society are required to do audits under their respective laws. The audit conducted under any other law may not provide a confirmation that the requirements of the Income Tax Act have been complied with. In such cases, if Tax Audit as per Section 44AB is mandatory, the audit report should be filed by the Chartered Accountant in prescribed form i.e. Form 3CA-3CD.

Is it possible to revise Tax Audit Report?

Yes. Tax Audit Report already filed can be revised. However, a valid reason for revising the audit report must be specified by the auditor. It must have a reference to the old Audit Report and must be signed in the current date. Generally, an audit report can be revised due to the following reasons:
1. Revision of accounts of the taxpayer
2. Change of law with a retrospective amendment
3. Change in the interpretation of provisions, CBDT circular, CBDT judgment, etc
4. Technical change in system or software

Section 44AD – Presumptive Taxation for Business

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Section 44AD is the presumptive taxation scheme for business. A business with turnover up to INR 2 Crore can take the benefit of presumptive taxation under Section 44AD.

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Who can opt for Presumptive Income under Section 44AD?

The following taxpayers engaged in any business can opt for the Presumptive Taxation Scheme under Section 44AD.

  • Resident Individual
  • Resident HUF
  • A resident partnership firm (not LLP)

The following taxpayers cannot opt for the Presumptive Taxation Scheme under Section 44AD.

  • Non-Resident Taxpayer
  • LLP i.e. Limited Liability Partnership
  • A taxpayer other than individual, HUF, partnership firm
  • Taxpayer claiming deductions under Section 10A/ 10AA/ 10B/ 10BA or Section 80H to 80RRB
  • Business of plying, hiring or leasing of goods carriages under Section 44AE
  • A taxpayer with agency business
  • Taxpayer earning brokerage or commission income. Eg: Insurance Agent

Calculation of Presumptive Income under Section 44AD

To opt for Presumptive Taxation Scheme under Section 44AD, the following two conditions should be satisfied:

  1. The gross sales or turnover of the business should be less than or equal to INR 2 Crore.
  2. The taxpayer should report 6%/8% or more of the gross sales or turnover as income in the ITR.

Note: The prescribed rate of 8% is for non-digital transactions in the business and the rate of 6% is for digital transactions in the business.

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Example

Akshay runs a trading business. The gross sales for FY 2019-20 are INR 1.8 Crore. Sales include cash payments of INR 80 lacs and non-cash payments of INR 1 Crore. Total Purchases are of INR 50 lacs. The total expenses are INR 20 lacs that includes a salary, rent, electricity, maintenance, travelling, etc. Can he opt for the Presumptive Taxation Scheme under Section 44AD?

Since the gross sales are less than INR 2 Crore, Akshay can opt for Presumptive Taxation Scheme under Section 44AD.

  • Pay tax on INR 12,40,000 lacs as per the slab rate.
  • Do not maintain books of accounts as per Sec 44AA.
  • Do not go for Tax Audit since the income reported is atleast 6% of gross receipts for digital transactions and atleast 8% of gross receipts for non-digital transactions.

Income Tax on Presumptive Income under Section 44AD

  • Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
  • Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she cannot claim expenses. However, they can claim deductions under Chapter VI-A. Partner’s remuneration and interest on capital can be claimed as an expense in case of a partnership firm opting for presumptive taxation.
  • Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44AD should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
  • ITR Form – Taxpayers opting for presumptive taxation under Section 44AD should report such income as PGBP Income and file Form ITR 4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.

Tax Audit and Books of Accounts for Presumptive Income under Section 44AD

  • Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44AD and reports income at 6%/8% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
  • Applicability of Tax Audit – If a taxpayer declares income less than 6%/8% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(e)
Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Section 44AD of Income Tax – 5 Year Rule

As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44AD for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26.

FAQs

Do I need to pay advance tax if I opt for the Presumptive Taxation Scheme under Section 44AD?

Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.

Do I need to maintain books of accounts if I opt for the Presumptive Taxation Scheme under Section 44AD?

A person engaged in a business having gross sales or turnover up to INR 2 Cr has the option to opt for the Presumptive Taxation Scheme under Sec 44AD. He/she can report 6%/8% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.

Section 44ADA of Income Tax Act – Presumptive Taxation for Profession

What is Section 44ADA of Income Tax Act?

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Under Budget 2016, the finance minister introduced the presumptive taxation scheme for specified professionals under Section 44ADA of Income Tax Act. FY 2016-17 onwards, a professional with gross receipts up to INR 50 lacs can take the benefit of presumptive taxation under Section 44ADA.

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Who can opt for Presumptive Taxation under Section 44ADA of Income Tax Act?

A resident taxpayer engaged in any of the following professions can take advantage of the Presumptive Taxation Scheme under Section 44ADA:

  1. Legal
  2. Medical
  3. Engineering
  4. Architecture
  5. Accountancy
  6. Technical Consultancy
  7. Interior Decoration
  8. Any other specified profession that CBDT notified
    • Film Artists – cameraman, producer, editor, dance director, actor, director, music director, art director, lyricist, story writer, screenplay or dialogue writer, singer, and costume designers.
    • Authorised Representatives – a person who represents someone before a tribunal or any legal authority in exchange for a fee. It does not include an employee of the person or a person who is carrying on the profession of accountancy.

Calculation of Presumptive Income under Section 44ADA of Income Tax

To opt for Presumptive Taxation Scheme under Section 44ADA of Income Tax Act, the following two conditions should be satisfied:

  1. The gross receipts of the profession should be less than or equal to INR 50 lacs.
  2. The taxpayer should report 50% or more of the gross receipts as income in the ITR.
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Example

Arjun is a freelance designer. His total receipts for FY 2019-20 is 45 lacs. The total expenses are INR 25 lacs that includes a subscription for designing software, salary, rent, electricity, travelling, etc.

Particulars Amount
Gross Receipts 45,00,000
Expenses (25,00,000)
Net Profit 20,00,000

Does not opt for Presumptive Taxation u/s 44ADA

  • Pay tax on INR 20 Lakhs as per the slab rate.
  • Maintain books of accounts as per Sec 44AA.
  • Go for Tax Audit since the profit is less than 50% of gross receipts and total income is more than the basic exemption limit of INR 2.5 lacs.

Opts for Presumptive Taxation u/s 44ADA

Particulars Amount (INR)
Gross Receipts 45,00,000
Presumptive Income (50%) 22,50,000
  • Pay tax on INR 22.5 lacs as per slab rate.
  • Do not maintain books of accounts as per Sec 44AA.
  • Do not go for Tax Audit since the profit is at least 50% of gross receipts.

Income Tax on Presumptive Income under Section 44ADA

  • Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
  • Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she is not allowed to claim expenses. However, they can claim deductions under Chapter VI-A.
  • Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44ADA should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
  • ITR Form – Taxpayers opting for presumptive taxation under Sec 44ADA should report such income as PGBP Income and file Form ITR-4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.

Tax Audit and Books of Accounts for Presumptive Income under Section 44ADA

  • Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44ADA and reports income at 50% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
  • Applicability of Tax Audit – If a taxpayer declares income less than 50% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(d)
Check Tax Audit Applicability u/s 44AB
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Check Tax Audit Applicability u/s 44AB
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FAQs

I am a freelancer and I opted for Presumptive Scheme u/s 44ADA. Can I claim expenses like internet, rent, travelling, etc?

A freelancer who has opted for Presumptive Scheme u/s 44ADA should report 50% or more of gross receipts as income. There is an option to declared a fixed percentage of receipts as profit and not maintain any books of accounts. Thus, the freelancer cannot claim any further expenses. However, he/she can claim Chapter VI-A deductions like LIC premium, mediclaim premium, donations, etc.

Do I need to pay advance tax if I opt for Presumptive Taxation Scheme under Section 44ADA?

Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.

Do I need to maintain books of accounts if I opt for Presumptive Taxation Scheme under Section 44ADA?

A person engaged in specified profession having gross receipts up to INR 50 lacs has the option to opt for Presumptive Taxation Scheme under Sec 44ADA. He/she can report 50% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.

Dividend Distribution Tax – DDT

What is a Dividend Distribution Tax?

Dividend Distribution Tax is the tax paid on dividends distributed by a company to its shareholders. A Domestic Company must pay DDT as per the provisions of Section 115O of the Income Tax Act. Since the Company pays DDT, the dividend income is exempt in the hands of the shareholder under Section 10(38). Under Budget 2020, the Finance Minister abolished DDT. As a result, the dividend income is now a taxable income in the hands of the shareholder. DDT would not be applicable to any dividend paid on or after 1st April 2020.

  • A Domestic Company was liable to pay DDT Tax as per Section 115O.
  • The company should pay DDT within 14 days from the date of declaring, distributing or paying the dividend whichever is the earliest.
  • If the Company does not pay dividends within 14 days, interest at a rate of 1% is payable by the Company from the date on which DDT was payable up to the date of payment of DDT to the government.

Union Budget 2021 Update

After the abolishment of DDT under Budget 2020, dividend which was earlier exempt now became a taxable income. Under Budget 2020, TDS under Section 194 and Section 194K was introduced for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, dividend paid to REIT / InvIT is now exempt from TDS.

Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.


DDT – (Dividend Distribution Tax) Rate

A Domestic Company distributing or declaring dividends should pay DDT at 15% on the gross dividend as per Section 115O. Since the DDT is calculated on Gross Dividend, the effective rate comes to 17.65%.

TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
View Blog
TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
View Blog

Example

A Domestic Company declares a dividend of INR 5,00,000 on 10th April 2019. Calculate DDT that Company should pay.

  1. Calculate Gross Dividend

    Gross Dividend (100%) = Net Dividend (85%) + DDT (15%)
    Gross Dividend = INR 5,00,000 * 100/85 = INR 5,88,235.29

  2. Calculate DDT on Gross Dividend

    DDT = Gross Dividend * 15%
    DDT = INR 5,88,235 * 15% = INR 88,235

Note: Thus, the effective DDT rate is 17.65%. Further, the above rate does not include cess and surcharge. After calculating cess and surcharge, the effective rate is 20.56%.

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Abolishment of Dividend Distribution Tax

Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. A Company is no longer liable to pay DDT. As a result, the dividend income which was earlier exempt up to INR 10 lacs, now became taxable for the investors. Such dividend income would be taxable at slab rates. Since the dividend income is taxable, TDS becomes applicable on such Income. The Finance Minister also introduced a new TDS section for TDS on dividendSection 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares).

FAQs

What is the tax treatment of dividend income from Foreign Company?

Dividend income from a foreign company is a taxable income. The investor should report it under the head Income from Other Sources. The income tax on dividend income is as per slab rates. The provisions of DDT or TDS are applicable to a Domestic Company only.

Why was the Dividend Distribution Tax (DDT) abolished under Budget 2020?

Upto FY 2019-20, a Domestic Company was liable to pay DDT at 15% on the Gross Dividend. On the other hand, Dividend was an exempt income for the shareholders.
To provide relief to the Domestic Companies and boost foreign investments, DDT was abolished under Budget 2020. Since the tax on distribution of dividend was removed, the dividend income became taxable for the shareholders. Thus, for any dividend declared or paid on or after 1st April 2020, it is taxable in the hands of the shareholder. The Company is also liable to deduct TDS as per Sec 194 or Sec 194K.