About Sakshi Shah

Chartered Accountant, Content Writer & most viewed author on Quora.

Sovereign Gold Bond – Taxation on SGB

What is SGB – Sovereign Gold Bond?

SGB i.e. Sovereign Gold Bond are bonds issued by the government of India under the Sovereign Gold Bond (SGB) Scheme. SGB is government security denominated in grams of gold and is thus an alternative to holding physical gold. Investors such as Individuals, HUF, trust, university, and charitable institutions can invest in SGB. RBI i.e. Reserve Bank of India issues such bonds to the investors at an issue price with a fixed maturity.

The minimum investment is 1 gm and the maximum is 4 kg for Individuals and HUFs. It is 20 kg for trusts and other entities as per the government. These bonds are issued for a tenure of 8 years. Premature redemption is only possible after the completion of 5 years of investment. Additionally, investors can sell the bonds in the secondary market at the existing market price of gold.

Income Head for Sovereign Gold Bond

Capital Gains on Sale of SGB

Income from Capital Gains would arise on the redemption of SGB or sale of SGB on the stock exchange. Both redemption and sale are covered under the definition of transfer of a capital asset. While Redemption of SGB means its expiry on the date of maturity (including pre-mature redemption), Transfer of SGB is its sale on a recognised stock exchange.

IFOS Income from SGB

The RBI on behalf of the government pays periodical interest on SGB. The rate of interest is 2.5% per annum on the amount of initial investment. Interest is credited semi-annually and the last interest is payable to the investor on the date of maturity along with the principal.

Interest on SGB is taxable under the head IFOS (Income from Other Sources). The taxpayer should report the interest under Schedule OS in the Income Tax Return.

Tax on Sovereign Gold Bond

Tax Treatment on Interest

The Interest on SGB is taxable at slab rates under the head IFOS (Income from Other Sources).

Section 193 for TDS on Interest on Securities specifically mentions that no tax should be deducted on interest paid on government security. Thus, TDS is not applicable for payment of interest on SGB.

Tax Treatment on Sale or Redemption

Individual Investor

  • Redemption of Sovereign Gold Bond – Capital Gain on Redemption of Sovereign Gold Bond by an Individual Investor is exempt from tax since it is excluded from the definition of transfer as per Section 47 of the Income Tax Act.
  • Transfer of Sovereign Gold Bond – If the individual investor transfers the Sovereign Gold Bond by selling it on the stock exchange, it is taxable as LTCG if held for more than 12 months at the rate of 20% with indexation benefit, otherwise, tax is charged at the rate of 10% without indexation or STCG if held for up to 12 months at the slab rates applicable to the taxpayer.

Other Investors

The redemption or transfer of SG Bond in case of investors other than individuals is taxed as LTCG at the rate of 20% with indexation benefit or at the rate of 10% without indexation benefit. STCG at slab rates if held for up to 12 months.

Applicable ITR Form in case of SGB

  • ITR Form: If you have invested into SGB and earned Interest, you should file ITR-1 (ITR for IFOS Income). However, if you have redeemed or sold SGB, you should file ITR-2 (ITR for Capital Gains Income).
  • Due Date – 31st July of the Assessment Year. Thus, ITR for FY 2020-21 (AY 2021-22) should be filed on or before 31st July 2021.

FAQs

What is the benefit of investing into SGB (Sovereign Gold Bond) over physical gold?

SGB is a government security that investors holds in demat form thus eliminating the risk and cost of holding physical gold. The investor need not worry about the purity of gold and need not pay making charges if they invest into SGB. The investment in SGB is safer than physical gold since SGB is a government security, pays periodical interest and assures market value of asset on maturity.

What would be the tax treatment if SGB is bought on the secondary market and held it till maturity?

Tax treatment of SGB bought from the secondary market and redeemed (held until maturity) is as follows:
– Exempt if you are an Individual Investor
– Taxable at slab rates if STCG and at 20% with indexation benefit if LTCG if you are any other investor.

What is the rate of interest and how is it payable?

The bonds bear interest at the rate of 2.5% p.a. on the amount of initial investment. Additionally, the interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

How will I receive the redemption amount?

The interest and redemption amount will be credited to the bank account furnished by the customer at the time of buying the bond.

Can I receive the bonds in the Demat form?

Yes. The bonds can be held in the Demat account. A specific request for the same must be made in the application form itself. Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to Demat will also be available subsequent to the allotment of the bond.

Can I use these securities as collateral for loans?

Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and NBFCs. But, it would be subject to decision by authority and can’t claim as matter right.

AS 2 – Valuation of Inventories

AS 2 is the Accounting Standard for the valuation of inventories and their accounting treatment. This accounting standard covers methods to value the inventory of a business and its disclosure in the financial statements. The general rule mentions valuing inventories i.e. closing stock of a business at cost or market value whichever is lower. Let us understand AS 2 in detail.

Applicability of AS 2

AS 2 applies to the valuation of following types of inventory:

  • Raw Materials – input goods or services consumed during the production process of rendering of services.
  • Work In Progress – input goods or services that are in the process of production.
  • Finished Goods – final goods or services held for sale in the normal course of business.

AS 2 for Valuation of Inventories is not applicable in the following cases:

  • Work in progress i.e. WIP stock in the construction business
  • WIP stock in the service business
  • Shares, debentures, or other financial instruments held as stock-in-trade
  • Stock of livestock, mineral oils, agricultural and forest product, etc.

    In the above cases, inventory valuation is at net realisable value.

Valuation of Inventory

Follow these steps for valuation of inventory:

  1. Calculate Cost of Inventory

    Cost of Inventory is the sum of purchase cost, conversion cost and other direct costs to bring the inventory in its present condition.

  2. Calculate Net Realisable Value (Market Value)

    Net Realisable Value is the estimated selling price of the inventory in the market i.e. the market value of the inventory.

  3. Lower of Step 1 or Step 2

    Valuation of inventory is the lower of cost or net realisable value (NRV).

For valuation of inventory, we should understand the following terms:

  • Purchase Cost – It is the price at which inventory is purchased. It also includes freight inwards, duties and taxes, trade discounts, rebates, duty drawbacks, and other expenses directly related to purchase.
  • Conversion Cost – It is the cost incurred in the process of production to convert the raw materials into finished goods. Conversion Costs include both fixed costs (depreciation, maintenance expense, etc) and variable cost (labour cost, raw material cost, etc) incurred in the process of production.
  • Other Cost – Any other cost incurred to bring the inventory in its current location and condition should form part of inventory valuation. Other costs include selling and distribution expense, abnormal loss of material or labour, storage cost, etc.
  • Net Realisable Value – NRV is the estimated selling price of the inventory after deducting the estimated costs of completion and expenses on the sale of such inventory.

Methods of Inventory Valuation

  • First In First Out (FIFO) – As per this method, it is assumed that the goods that come in first are sold out first. The cost of goods sold comprises the cost of goods produced first. The closing inventory will include the goods purchased recently.
  • Weighted Average Cost Method (WAC) – Under this method, the average cost of each sale item is calculated. The closing inventory is calculated by taking the weighted average cost of items at the beginning of the year and purchased during the year.
  • Specific Identification Method – If each item in the closing inventory is easily identifiable, the business should use a specific identification method to value the inventory. Thus, include the items sold at a specific cost in the cost of goods sold and the cost of items left on hand in the closing stock.

Accounting Disclosure

As per AS 2, the financial statements must reflect the following details of inventory of a business:

  • Accounting policy and method used for valuation of inventory
  • Classification of inventory i.e. raw material, work-in-progress, or finished goods
  • Carrying amount of inventory = Fair Value – Sale Cost
  • Amount of inventory that business recognizes as an expense
  • Amount of inventory that business writes down and recognizes as an expense
  • Reversal amount of a write-down identified as a reduction in the inventory amount

AS 2 for Manufacturers & Traders

Any manufacturing or trading business that has inventory or stock must follow the accounting principles for the valuation of a stock.

  • Opening Stock – Value of the closing stock of the previous year
  • Purchases – Sum of the purchase value and direct expenses incurred during the financial year
  • Sales – Sum of sales value during the financial year
  • Closing Stock – Value of closing inventory should be lower of cost or market value
  • Gross Profit = Opening Stock + Purchases – Sales – Closing Stock

The business should calculate the net profit by deducting other expenses from gross profit, report it as taxable income under the head PGBP and file ITR on income tax website.

FAQs

What is the cost of inventory for a service provider?

The cost of inventory for a service provider includes labour cost and the cost of personnel who provide the services. It does not include the expenses not directly related to the service.

How to calculate value of inventory using weighted average cost method?

As per the weighted average cost method, you should calculate the value of closing inventory by using the average price of inward values of the inventory. The formula is as below:
Average cost per unit = Total inward value / Total inward quantity

DTAA between India and USA

In the case of a Non-Resident Indian (NRI), income earned outside India is not taxable. If a resident has income earned outside India, it is taxable in India and must be reported in ITR. In most cases, the foreign country also imposes a tax on such foreign income. To avoid the same income getting taxed in two different countries, the taxpayer can avail the benefit of DTAA. Double Taxation Avoidance Agreement is an agreement between two countries to avoid double taxation for the taxpayer. Under this article, we shall read more about the DTAA between India and the USA to avoid double taxation in India and USA.

Example

Rahul, a resident of India works in the USA and pays Federal Income Tax levied by the USA government. Since he is a resident in India, such foreign income would be taxable in India too. To avoid double taxation of the same income in two different countries, India has entered into DTAA with USA.

The government of both countries entered into a DTAA with the intention of providing either of the following:

  • Exemption of income earned outside India
  • Providing credit of tax paid on foreign income in the foreign country

Applicability of DTAA between India and USA

DTAA between India and USA is applicable to individual, trust, partnership firm, company or other entity having income in both countries. The DTAA covers the following taxes:

  • Federal Income Tax imposed by Internal Revenue Code in the USA i.e. the USA Income Tax.
  • Income Tax in India including surcharge and surtax.

Residential Status

For any taxpayer having source of income in two countries, it is important to determine residential status in each country.

Residential Status
Calculator
Enter Number of Days of your stay, citizenship and Person of Origin detials to check your residence status.
Explore
Residential Status
Calculator
Enter Number of Days of your stay, citizenship and Person of Origin detials to check your residence status.
Explore

A resident is a person who as per the relevant law of each country is liable to pay tax because of residence, citizenship, domicile, place of management, place of incorporation, or similar criteria. If a taxpayer is a resident of both the countries i.e. India & USA, residence should be determined as follows:

  • The taxpayer would be a resident of the country in which a permanent home is available. If there is a permanent home at both places, taxpayer would be resident of the country in which their personal and economic relations are closer.
  • If the taxpayer does not have a permanent home in either of the countries, the taxpayer would be a resident of the country in which he/she has the habitual abode.
  • In case, the taxpayer has a habitual abode in both the countries or neither of them, the taxpayer would be a resident of the country in which he/she is a national.
  • If the taxpayer is a national in both the countries or neither of them, the competent authority of both countries would mutually decide the residential status.

DTAA between India and USA – Tax on Income

Income from Immovable Property

If a resident has earned income from immovable property, they should pay tax in the country in which such immovable property is located. Following are the types of income from immovable property:

  • Income from let out of immovable property
  • Agricultural or forestry income
  • Income from immovable property used to perform independent personal services
  • Income of an enterprise from immovable property

Dividend

If a resident company pays a dividend to a resident of another country, the dividend income is taxable in the country in which it is received.

For example: If a US company pays a dividend to a shareholder who is an Indian resident, such a dividend would be taxable in India.

However, the dividend may also be taxed in the paying country and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:

  • 15% of the gross amount – If the dividend recipient is a company that owns at least 10% of the voting stock of the company paying the dividend
  • 25% of the gross amount – in any other case

For example: The dividend paid by an Indian company to a USA resident is taxable in the USA. If such dividend is received in India, it is taxable in India too. However, the tax on such dividends should not exceed the above-specified limits.

Interest

If interest income arises in a country and is paid to a resident of another country, it is taxable in the country in which the receiver is a resident.

For example: If a US resident earns interest income in India, it is taxable in the USA.

However, the interest may also be taxed in the country in which it arises and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:

  • 10% of the gross amount – If the interest is paid on a loan granted by a bank or a financial institution.
  • 15% of the gross amount – in any other case.

For example: If such interest income is taxable in India also, then the tax in India should not exceed the above-mentioned limits.

Income of professors, teachers, and research scholars

The income of a professor, teacher or research scholar who moves to another country is exempt from tax if they fulfill the following conditions:

  • The engagement is for a period not exceeding two years, AND
  • Before the visit, the individual should be resident of the first country

For example: Shreya (resident in India) moves to the USA for an exchange program as a teacher in a recognized college. The income she earns in the USA would be exempt from tax up to 2 years.

DTAA between India and USA – Tax Relief

DTAA Relief in India

If a resident in India earns an income that is taxed in the USA, the taxpayer can claim a deduction of an amount equal to income tax paid in the USA. However, such deduction should not exceed income tax in India on such foreign income. Thus, the resident earning foreign income can claim relief of the tax paid on foreign income.

DTAA Relief in USA

Resident in USA can claim credit against the USA tax for the amount of:

  • Income tax paid to India by or on behalf of such resident
  • Income tax received by the Indian Government from the Indian Company on dividend paid to USA Company that holds at least 10% of the voting stock of the Indian Company

DTAA between India and USA – Reporting in ITR

Non-Resident in India need to report and pay tax on any income earned outside India i.e. foreign income.

Resident in India earning a foreign income should report such income and foreign assets in the Income Tax Return.

Schedule FSI (Foreign Source of Income)

The taxpayer should add details of foreign income i.e. income earned outside India. Enter the following details:

  • Country Code – Select the country in which income is earned
  • Taxpayer Identification Number
  • Income outside India – enter the amount of income earned outside India
  • Taxes paid outside India – tax paid on income earned outside India
  • Tax payable in India – tax payable in India on income earned outside India
  • Tax Relief available = tax paid outside India or tax payable in India whichever is lower
  • Relevant DTAA Article – enter details of the relevant article of DTAA under which the taxpayer claims the tax relief

Schedule TR (Tax Relief)

Once the taxpayer adds details of Foreign Income in Schedule FSI, the details in Schedule TR (Tax Relief) get populated. The double taxation relief is reduced from the tax calculation.

Schedule FA (Foreign Assets)

If the taxpayer holds any foreign assets outside India, they must report it under Schedule FA i.e. Foreign Assets.

Form 67

To claim the foreign tax credit, the taxpayer should file Form 67 online on the income tax website before filing the Income Tax Return. Form 67 comprises details of foreign income and tax relief on such income.

FAQs

I am an Indian working in USA. Should I pay tax on such income in India?

You should first determine your residential status as per the Income Tax Act. If you hold the status of a Non-Resident, income earned outside India is not taxable in India. However, if you are a resident in the financial year, you must report such foreign income in the ITR in India. As per the DTAA agreement between India and the USA, the same income is not taxable in both countries. Thus, if you have paid tax on such income in USA, you can claim the credit of such tax paid by filing Form 67. Tax relief is lower of tax paid in USA or tax payable in India and can be reduced from total tax liability in India.

Rectification under Section 154 of Income Tax Act

What is Rectification Request u/s 154?

As part of the return filing process, the Income Tax Department processes an ITR and sends intimation u/s 143(1) to the taxpayer. Intimation u/s 143(1) matches the data as per ITR filed by the taxpayer with the calculations computed by the Income Tax Department. In the case of a mismatch, the taxpayer has an option to file rectification under section 154 of the Income Tax Act. Both the taxpayer and the assessing officer has the right to make correction in the Income Tax Return. They can file rectification for a time limit of up to 4 years from the end of the financial year.

Prerequisites

  • Registered user on the e-Filing portal with valid user ID and password
  • For registered taxpayers (or Authorized Signatory / Representative Assessee on behalf of the taxpayer):
    • Received an intimation u/s 143(1) of the Income Tax Act, 1961 or u/s 16(1) of the Wealth Tax Act from CPC, Bengaluru
    • Add ERI using the My ERI service (applicable only if the taxpayer wants to engage an ERI)
  • For registered ERI users:
    • Add the taxpayer as a client using the Add Client service
    • ERI status is Active
  • Both registered taxpayers and registered ERI users:
Rectification of Wealth Tax Return can be filed using this service for AY 2014-15 and AY 2015-16 only
Tip
Rectification of Wealth Tax Return can be filed using this service for AY 2014-15 and AY 2015-16 only

Classification of Rectification Requests under section 154 of Income Tax Act

Income Tax Rectification

Reprocess the return

If the taxpayer has furnished correct details in the ITR but CPC has not considered it during the processing

Tax credit mismatch correction

To make correction in details of TDS/TCS/IT Challans and resolve Tax Credit Mismatch

Additional information for 234C interest

To make correction in the calculation of interest under Section 234C for the correct processing of ITR

Status Correction

If the taxpayer has been charged with Maximum Marginal Tax Rates while processing of ITR without giving effect to the correct ‘Status’ and ‘Sub-Status’

Exemption section correction

To make correction in data reported in the ITR by selecting appropriate reasons for correct processing by CPC

Return data correction (Offline)

To make correction in data reported in the ITR by selecting appropriate reasons for correct processing by CPC in offline manner

Return data correction (Online)

To make correction in data reported in the ITR by selecting appropriate reasons for correct processing by CPC in online manner

Wealth Tax Rectification

Reprocess the Return

If the taxpayer has furnished correct details in the wealth tax return but it has not considered during the processing

Tax Credit Mismatch Correction

To make correction in details of Tax Challans and resolve Tax Credit Mismatch

Return Data Correction (XML)

To make correction in data reported in the tax return by selecting appropriate reasons and uploading XML for correct processing

Do not use rectification request for changing bank account or address details of your Income Tax Return
Tip
Do not use rectification request for changing bank account or address details of your Income Tax Return

How to file rectification online under section 154 of Income Tax Act?

  1. Login Income Tax Website

    Login to your e-filing account using your user ID and password.

  2. Rectification Option

    Click on e-File > Rectification option from the dashboard.

  3. New Request

    On the rectification page, click on the option to generate a new request.

  4. Enter Details

    On the New Request page, your PAN will be auto-filled. Select Income Tax or Wealth Tax. Enter the assessment year.

  5. Intimation Reference Number

    If you select the Wealth Tax option, you also need to enter the latest intimation reference number, and click Continue.

View Status of Rectification Report

  • Log in to the e-Filing portal using your user ID and password
  • Click on Services > Rectification Request > Rectification Status
  • On the Rectification Status page, click Rectification Reference Number to view the rectification details based on the Request Type (Income Tax Rectification or Wealth Tax Rectification) submitted by you
  • You can select Take Action or View Details against the Rectification Reference Number

FAQs

When do I need to submit a rectification request?

A request for rectification can be submitted on the e-Filing portal if there is any mistake apparent from record, in an Intimation issued u/s 143(1) or order u/s 154 by the CPC or by the Assessing Officer (where rectification rights are transferred by CPC) . A rectification request can be submitted only for returns that are already processed by CPC.

What are the different request types for wealth tax rectification?

Reprocess the Return, Tax Credit Mismatch Correction and Return Data Correction.

I want to file a rectification against an intimation u/s 143(1) from 5 years ago. Why is the system not allowing it?

You are not allowed to file rectification request after the expiry of 4 years from the end of the FY in which the intimation u/s 143(1) was passed. 

Can I rectify my previously filed ITR using the rectification request service?

If you notice a mistake in your submitted ITR, and it has not processed by CPC, you can submit a revised return. You can use the rectification request service on the e-Filing portal only against an order/notice from CPC.

Salary Arrears – Taxability & Relief under Section 89(1)

Salary arrears means the outstanding salary of a previous month. There may be a revision in the Salary of an employee from retrospective effect. Further, salary may have been revised but increments can be paid at a later date. Therefore, in such cases, the differential amount paid in the subsequent period is known as salary arrears. The employer mentions it separately in the salary slips and part B of Form 16.

Example

Arjun’s salary is INR 50,000 per month. His employer raised the salary to INR 60,000 per month in April 2020 effective from March 2020. Since the salary for March 2020 would already be paid, the additional INR 10,000 should be paid in April 2020. This is called Salary Arrears.

Taxability of Salary Arrears

Arrears in salary is treated as a salary income. They are taxable in the year of receipt. However, the taxpayer can claim relief under Section 89(1). The taxpayer should report it under the head ‘Salary’ and pay tax at slab rates.

Relief under Section 89(1)

A taxpayer receiving any portion of the salary in arrears or in advance or receives profits in lieu of salary can claim relief under Sec 89(1) of the Income Tax Act.

If the total income of a taxpayer includes any past salary paid in the current financial year and the tax slab rates are different in both years, this may lead to higher tax dues. Thus, the Income Tax Act allows relief u/s 89(1) to save the taxpayer from any additional tax liability due to delay in receiving income. Moreover, the employer calculates relief under Sec 89(1) and mentions it in Part B of Form 16. Further, the employee can claim relief under Sec 89(1) by filing Form 10E on the income tax website.

Let us understand the steps to calculate tax relief with the help of an example.

Arjun’s salary is INR 6,00,000 (50,000 per month). His employer raised the salary to INR 7,20,000 (60,000 per month) in April 2020 which is effective from March 2020.

Therefore, the year of Receipt would be FY 2020-21 and the year of Accrual would be FY 2019-20. Hence, the arrears would amount to INR 10,000 for March 2020

File Form 10E

It is mandatory to file Form 10E in order to claim the benefits under section 89(1). The taxpayer needs to file this form on the income tax e filing portal.

Calculation of Tax Relief under Section 89(1) for Salary Arrears

  1. Tax Liability on total income including arrears for year of receipt

    Calculate tax liability on total income including salary arrears in year of receipt
    Year of Receipt = FY 2020-21
    Total Income (including arrears) = INR 7,30,000
    Tax Liability = INR 60,840

  2. Tax Liability on total income excluding arrears for year of receipt

    Calculate tax liability on total income excluding arrears in year of receipt
    Year of Receipt = FY 2020-21
    Total Income (excluding arrears) = INR 7,20,000
    Tax Liability = INR 58,760

  3. Difference between Step 1 & Step 2

    Calculate difference in tax liability between step 1 and step 2
    Difference in tax liability = 60,840 – 58,760 = INR 2,080

  4. Tax Liability on total income excluding arrears for year of accrual

    Calculate tax liability on total income excluding additional salary i.e. salary arrears of financial year to which arrears are related
    Year of Accrual = FY 2019-20
    Total Income (excluding arrears) = INR 6,00,000
    Tax Liability = INR 33,800

  5. Tax Liability on total income including arrears for year of accrual

    Calculate tax liability on total income including additional salary i.e. salary arrears of financial year to which arrears are related
    Year of Accrual = FY 2019-20
    Total Income (including arrears) = INR 6,10,000
    Tax Liability = INR 35,880

  6. Difference between Step 4 & Step 5

    Calculate difference between step 4 and step 5
    Difference in tax liability = 35,880 – 33,800 = INR 2,080

  7. Relief = Step 3 – Step 6

    Tax Relief u/s 89(1) = Step 3 – Step 6. If amount in step 6 is more than step 3, no tax relief is allowed
    Tax Relief = NIL

Additionally, you can calculate tax relief under Sec 89(1) by using calculator of Income Tax Department – Relief under Section 89(1)

Income Tax Notice for Non Filing of Form 10E

From the financial year 2014-15 (the assessment year 2015-16), ITD has made it mandatory to file Form 10E if you want to claim relief under section 89(1). Taxpayers who have claimed relief under section 89(1) but have not filed Form 10E have received an income tax notice from the tax department.

FAQs

How to claim tax relief on Salary Arrears under Section 89?

Arrears or Salary advance are taxable in the year of receipt. The income tax department allows tax relief u/s 89 of the Income Tax Act to save the taxpayer from additional tax burden. Thus, the employer will calculated relief u/s 89 and report in Form 16. The employee can claim such relief in the ITR.

How to save tax on Salary Arrears?

Employee who has received arrears in salary can save tax on such additional income in the following ways:
* Calculate the relief u/s 89(1)
* File Form 10E to claim relief u/s 89(1)

How to file ITR for Rental Income?

If you own a house or earn rental income, it should be reported as Income from House Property in the Income Tax Return (ITR). The taxpayer must calculate the income and pay tax on rental income at slab rates. The taxpayer should report the following types of income under the head ‘Income from House Property‘:

  • Rent Income from house property
  • Vacant house property
  • Housing loan on a property
  • Jointly owned house property

Calculation of Rental Income

  Particulars Self Occupied Property Let Out Property
  Gross Annual Value (GAV) NIL xxxx
Less: Municipal Tax Paid NIL (xxxx)
  Net Annual Value (NAV) NIL xxxx
Less: Standard Deduction u/s 24 @ 30% of NAV max
2,00,000
No Limit
Less: Interest on Borrowed Capital u/s 24 (without any ceiling limit) xxxx (xxxx)
  • The standard deduction u/s 24 of 30% of NAV is allowed irrespective of actual expenditure incurred on insurance, repairs, water supply, etc.
  • The taxpayer can claim a maximum loss of INR 2,00,000 under the head Income from House Property during a financial year.
  • Pre-Construction Interest i.e. the interest paid in the pre-construction period will be allowed as a deduction in five successive financial years starting from the year in which construction was complete.

Co-ownership of House Property

  • Co-owned Self-Occupied House Property
    The annual value (NAV) of the property for each co-owner will be NIL and each co-owner can claim the deduction of up to INR 2,00,000 for housing loan interest.
  • Co-owned Let-Out House Property
    The income will be calculated as per normal provisions of House Property and it will then be apportioned among each co-owner. Each co-owner can claim the deduction for housing loan interest.

Tax Benefits on Rental Income

Taxpayers having a rental income can claim the following deductions and benefits in the Income Tax Return (ITR).

  • Repayment of Loan – deduction of principal amount under Sec 80C
  • Interest on Home Loan – deduction under Sec 24 of House Property subject to the prescribed limit discussed above
  • Sec 80EE – Additional deduction of INR 50,000 for Interest on Home Loan for first time home buyers subject to prescribed conditions
  • Sec 80EEA – Additional deduction of INR 1,50,000 for Interest on Home Loan for first time home buyers subject to prescribed conditions

TDS on Rent Income

If you have income from rent, the tenant would deduct TDS in the following situations:

  • Section 194I – TDS on rent of land or building deducted at 10% if the rent amount exceeds INR 1,80,000 per annum.
  • Section 194IB – TDS on rent of land or building deducted by individual or HUF (not liable to tax audit). TDS is deducted at 5% if the rent amount exceeds INR 50,000 per month.

The taxpayer i.e. landlord would receive Form 16A from the tenant once the tenant files the TDS Return every quarter. The taxpayer can view TDS Credits in Form 26AS on the income tax website and claim the TDS Credit in the Income Tax Return.

ITR Form for Rental Income

The taxpayer should file the ITR Form based on the amount of total income, type of house property income and income under other heads. Here is a summary of ITR Form that a taxpayer can file in case of rent income.

ITR Form Total Income HP Income
ITR 1 or ITR 4 Upto INR 50 lacs One House Property
ITR 2 or ITR 3 More than INR 50 lacs Multiple House Property

Set-Off & Carry Forward House Property Loss

House Property Loss can be set off against any other income in the current financial year. The remaining loss can be carried forward for 8 years and set off only against house property income in future years.

As per the Income Tax Act, a taxpayer who files Belated ITR u/s 139(4) cannot carry forward loss to future years. However, the taxpayer can carry forward house property loss even if he/she files a Belated Return.

FAQs

What is the difference between Sec 194I & Sec 194IB for TDS on Rental Income?

As per Section 194I, individuals or HUF (not liable to tax audit in the previous financial year) are not required to deduct TDS on payment of rent even if the rent exceeds INR 1,80,000 per annum. Under Budget 2019, individuals or HUF (not liable to tax audit in the previous financial year) must deduct and deposit TDS at 5% if the rent exceeds INR 50,000 per month.

What is the difference between Section 80EE & Section 80EEA?

A taxpayer can claim a deduction of either u/s 80EE or 80EEA. The government had introduced the deduction u/s 80EE for first time home buyers. The taxpayer can claim Sec 80EE deduction of up to INR 50,000 for interest on loan sanctioned between 1.4.16 and 31.3.17.
Later, this benefit was extended by introducing Sec 80EEA. A taxpayer can claim Sec 80EEA deduction of up to INR 1,50,000 for interest on a loan sanctioned between 01.04.19 and 31.03.21.

Do I have to pay tax in India on income from house property situated outside India?

If you hold status of a resident, income from property situated outside India is taxable whether such income is brought into India or not.
If you hold status of a non-resident or RBNOR (resident but not ordinarily resident), income from property situated outside India is taxable only if such income is received in India.

Income Tax on Cashback

Cashback is a reward for a customer on the purchase of goods or services. The calculation is a percentage of the purchase amount. Cashback is different from Discount. While the discount is a deduction from the purchase amount, cashback is a reward as a percentage of the purchase amount which the customer can utilize on the next transaction. Under this article, you can read about Income Tax on Cashback in different situations.

Types of Cashback

  • Instant Cashback

Instant cashback is a cashback offered immediately once the customer pays for the transaction. For example, if you book a movie ticket on an online app under an offer of 10% instant cashback. If the movie ticket is for INR 500, You are liable to pay INR 450 only (500 – 10% cashback).

  • Deferred Cashback

Deferred cashback is a cashback that the customer can utilize on the next transaction. For example, if you book a movie ticket on an online app under the referral offer and you refer the app to a friend, you will receive a cashback. You can utilize this cashback on your next transaction.

Income Tax on Cashback – Business Expense

Cashback is a reward or benefit that a customer receives on the purchase of goods or services. It is also a discount since it reduces the cash outgo on the same or next purchase of the customer. Thus, it is considered as an income and is taxable. Let us understand when such cashback is treated as an income and the taxes on cashback.

Revenue Expense for Business

If a business purchases goods or services (not a capital good) and earns a cashback, it can claim the purchase amount reduced by cashback as a revenue expense. Alternatively, the business can claim the purchase amount as an expense and report cashback as an income.

Example

ABC Enterprises purchased online stationery worth INR 5,000 and received an instant cashback of INR 1,000. They can claim net amount of INR 4,000 as an expense. Alternatively, they can book INR 5,000 as an expense and INR 1,000 as an income.

Capital Expense for Business

If a business purchases goods or services (capital good) and earns a cashback, it can treat the purchase amount reduced by cashback as an asset (capital expense) and claim depreciation on the same. Alternatively, the business can claim the entire purchase amount as an asset, report cashback as an income, and pay tax on it.

Example

ABC Enterprises purchased a laptop worth INR 50,000 and received an instant cashback of INR 5,000. They can claim the net amount of INR 45,000 as an asset and claim depreciation expense on the same. Alternatively, they can report INR 50,000 as an asset, report INR 5,000 as an income and pay tax on it.

Income Tax on Cashback – Personal Expense

If an individual purchases goods or services for personal use and earns a cashback, it is as a gift as per Section 56(2) of the Income Tax Act. As per Section 56(2), if a taxpayer receives any sum of money without any consideration that exceeds INR 50,000, it is taxable at slab rates.

Therefore, if the aggregate cashback during a financial year is up to INR 50,000, it is an Exempt Income. The taxpayer should report such cashback as an Exempt Income in the ITR filed on the Income Tax Website.

If the aggregate cashback during a financial year exceeds INR 50,000, it is a taxable income under the head Income From Other Sources and taxable at slab rates. The taxpayer should report such cashback as IFOS income in the ITR.

If the taxpayer has received aggregate cashback and has other gifts during the financial year, the aggregate amount of gifts and cashback exceed INR 50,000, cashback would be taxable.

Example

Mr Mehta recieved a gift from his distant relative on his birthday worth INR 35,000 and over the financial year he had an aggregrate cashback of INR 18,000. The total being INR 53,000 which is above the limit of INR 50,000, the enire amount will be taxable in the hands on Mr Mehta under income from other sources.

FAQs

How is Cashback different from Discount?

Discount is a deduction from the purchase amount and the customer pays the net amount only. Under cashback, the customer pays the full amount and then receives a cashback. Discount is offered instantly and cashback may be offered instantly or after a specified time period.

Should I report Cashback in my Income Tax Return?

Yes. It is advisable to report cashback income in the Income Tax Return. If the aggregate cashback during the financial year exceeds INR 50,000, taxpayer should report it as Income From Other Sources (IFOS) and pay tax at slab rates. However, if the aggregate cashback is up to INR 50,000, taxpayer should report it as Exempt Income in the ITR.

Is Cashback received on Credit Card / Debit Card Offers taxable?

Taxation of cashback on credit card/debit card offers is similar to any other cashback. If the taxpayer receives cashback on a personal expense, it is taxable if aggregate cashback exceeds INR 50,000 during the financial year. If the taxpayer receives cashback on a business expense, he/she should claim an expense for the net amount (purchase – cashback).

Tax on Gifted Shares & Securities

A gift is a sum of money or movable property or immovable property received without consideration or inadequate consideration. Tax on shares gifted is defined under Section 56(2) of the Income Tax Act.

A gift of monetary value exceeding INR 50,000 is taxable as Income from Other Sources (IFOS) at slab rates. The gift received from a relative, or on the occasion of marriage, as inheritance or in contemplation of death is exempt from tax.

Gift of Shares & Securities

Shares and securities are considered as movable property. Trading plaforms like Zerodha have built a platform to gift stocks, mutual funds and bonds after introduction of e-DIS (electronic delivery instruction slip) by CDSL. Thus, it is now possible to gift stocks and securities to friends and relatives online.

Tax on Shares Gifted for Sender

  • On transfer of shares & securities:
    • The Gift Tax Act (GTA) was abolished in 1988 and thus sender need not pay tax on gifts.
    • As per Section 2(14) of the Income Tax Act, shares and securities are Capital Assets. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gifts. Thus, the gift of shares and securities is not taxable in the hands of the sender of the gift.
  • On the sale of shares & securities:
    • The sale of shares & securities is not taxable in the hands of the sender of the gift.
    • Clubbing of Income – If the receiver of the gifted asset is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the sender as per Section 64(1)(iv) & Section 64(1A) of the Income Tax Act.

Tax on Shares Gifted for Receiver

  • On transfer of shares & securities:
    • If the monetary value of shares & securities is up to INR 50,000, such gift is exempt from tax.
    • If the monetary value (FMV) of shares & securities is more than INR 50,000, such gift is an IFOS income and taxed at slab rates.
    • Shares & Securities received from a relative is exempt income since gift from relative is exempt as per Sec 56(2)(vii)
    • Shares & Securities received on the occasion of marriage or inheritance or in contemplation of death of payer is exempt income since such gifts are exempt as per Sec 56(2)(vii)
  • On the sale of shares & securities:
    Capital Gains tax would arise on the sale of shares. To calculate the tax on gifted shares, the following must be noted:
    • Period of Holding: Calculate the holding period from the date of purchase by the previous owner i.e. sender of gift to the date of sale by the receiver of the gift.
    • LTCG – Equity Shares held for more than 12 months from date of purchase by the sender to date of sale.
    • STCG – Equity Shares held for up to 12 months from date of purchase by the sender to date of sale.
    • Purchase Date – The date of purchase by the previous owner i.e. sender of the gift
    • Purchase Value – The value of the purchase of the previous owner i.e. sender of the gift
    • Sale Date – The date of sale by the receiver of the gift
    • Sale Value – The value of the sale by the receiver of the gift
    • Tax Liability – Calculate tax liability as per the nature of the capital asset
Transaction Sender Receiver
Gift of shares & securities Not taxable Exempt Income or IFOS Income
Sale of shares & securities Not taxable Capital Gains

Clubbing of Income – If the receiver of the gifted asset is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the sender as per Section 64(1)(iv) & Section 64(1A) of the Income Tax Act.

ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]
ITR for Capital Gains from Investment in Stocks
CA Assisted Income Tax Return filing for Individuals and HUFs having income from sale of securities.
[Rated 4.8 stars by customers like you]

Example

Rajiv purchased 2000 shares at INR 100 of ABC Ltd on 15th February 2020. He gifted 1000 shares to his mother, Shweta on 1st September 2020. FMV on 01/09/2020 was INR 200 per share. Shweta sold out these shares on 2nd March 2021 at INR 400. Calculate the tax liability.

Tax treatment for Rajiv (sender) – No tax liability since the gift of shares is not treated as a transfer of capital asset.

Tax treatment for Shweta (receiver)

  • On receiving a gift – no tax liability since gift from a relative is an exempt income as per Section 56(2)(vii) of Income Tax Act.
  • On the sale of shares. Here is the tax calculation:
    • Sale Date – 02/03/2021
    • Sale Value – INR 4,00,000 (400 * 1000)
    • Purchase Date – 15/02/2020 (as per previous owner)
    • Purchase Value – INR 1,00,000 (100 * 1000) (as per previous owner)
    • LTCG – 4,00,000 – 1,00,000 = INR 3,00,000
    • Tax on LTCG u/s 112A = 10% * 2,00,000 = INR 20,000

Reporting in ITR – Tax on Shares Gifted

The sender of the gift need not report the gift in the Income Tax Return. The receiver of the gift should report the gift under Schedule Exempt Income if the income is exempt or Schedule OS (IFOS) if the income is taxable. If the gift is taxable, calculate tax liability at slab rates.

On the sale of such shares & securities, report income as capital gains under Schedule CG. The taxpayer should file ITR-2 on the income tax website and pay tax at applicable rates.

Documentation

It is very important to maintain proper documentation for gift transactions. It is advisable for the sender and receiver to maintain a registered a gift deed as a proof of the gift transaction. In cases of scrutiny, this document can be used to justify the genuineness of the gift transaction and avoid charges for tax evasion.

FAQs

I have 1 lac shares. If I gift 50% shares to my brother, can we both claim LTCG exemption of INR 1 lac on sale of such shares?

If you gift equity shares, it is not considered as the transfer of a capital asset, and thus income tax is not applicable. A gift from a relative is exempt and thus it would be exempt for your brother. When your brother will sell the shares, capital gains would arise.
You can both claim the benefit of LTCG exemption of up to INR 1 lakh u/s 112A. However, to determine the nature of the gains, the holding period & cost of acquisition is calculated as per the previous owner (sender).

I want to gift shares to my friend, is it taxable?

If the monetary value of the gift is up to INR 50,000, it is not exempt as per Sec 56(2)(vii).
If the monetary value of the gift is more than INR 50,000, it is taxable in the hands of the receiver as IFOS and taxed at slab rates.
However, if the gift is given on the occasion of marriage, it is exempt as per Section 56(2)(vii) of the Income Tax Act.

Can I save taxes by gifting shares to my wife?

Gift of shares and securities to a relative is not taxable in hands of the sender of the gift and exempt in hands of the receiver of the gift. If you gift shares to your wife, there would be no tax liability on the gift transaction. Further, if your wife sells the shares, Capital Gains would arise and tax should be paid at applicable rates. On gifting of shares, the income would get divided and both can enjoy exemption limits. Thus, taxes would be saved.

Section 194B & 194BB – TDS on Lottery, Game Show, Puzzle, Horserace

What is Section 194B & Section 194BB?

If you have income from winning a lottery, crossword puzzle, card game, gambling, betting or horse race, TDS is deducted under Section 194B or 194BB if the income exceeds INR 10,000.

  • Section 194B – Payer should deduct TDS is at 30% on winnings from lottery, crossword puzzles, card games and other similar incomes
  • Section 194BB – Payer should deduct TDS at 30% on horse race income
As per section 206AA if the deductee fails to provide the PAN to deductor then he would suffer deduction at higher of the rates of deduction as: At the rate specified in the relevant provision of the Act, or, At the rate or rates in force, i.e., the rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20), or At the rate of 20%
Tip
As per section 206AA if the deductee fails to provide the PAN to deductor then he would suffer deduction at higher of the rates of deduction as: At the rate specified in the relevant provision of the Act, or, At the rate or rates in force, i.e., the rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20), or At the rate of 20%

Incomes under Sec 194B & 194BB

Following are the types of payments as per Section 194B & Section 194BB:

  • Winning from Lottery
  • Crossword Puzzle
  • Races including Horse Race
  • Card Games
  • Gambling
  • Betting
  • Game Shows
  • Any other income of similar nature

When & Who shall deduct TDS u/s 194B & 194BB?

TDS is required to be deducted at the time of payment of the prize. If the payer makes payment in instalments, they must deduct TDS at the time of actual payment of each instalment.

Person liable to distribute the prize for winning from lottery, crossword puzzle, card game, horse race, etc should deduct TDS from the payment and pay the balance amount to the winner. TDS should be deducted only if the winning amount exceeds INR 10,000.

The Deductor should deposit the TDS with the government and file a TDS Return on TRACES.

TDS Rate u/s 194B & 194BB

The payer shall deduct tax at the rate of 30% under Sec 194B from the money paid for winnings from lottery,  crossword puzzle or card game and other similar game if the amount exceeds INR 10,000.

The payer shall deduct tax at the rate of 30% under Section 194BB from the money paid for winnings from a horse race or income from wagering or betting in any racecourse if the amount exceeds INR 10,000.

Due Date to deposit TDS u/s 194B & 194BB

Particulars Time Limit to deposit TDS
If the amount is credited in the month of March
  • On or before 7th April for Government Deductor
  • On or before 30th April for Other Deductor
If the amount is credited in the month other than March Within 7 days from the end of the month in which deduction is made

TDS Certificate

Deductor i.e. prize distributor shall issue a TDS Certificate to the deductee i.e. winner in Form 16A for TDS deducted on income from winning a lottery, crossword puzzle, card game, gambling, betting u/s 194B or income from horse race u/s 194BB.

TDS Return (26Q) for Non-Salary Payments (Annual)
CA Assisted TDS return filing plan for employers, firms and companies making payment of Professional fees, Rent, Contracts, Commission, etc.
[Rated 4.8 stars by customers like you]
TDS Return (26Q) for Non-Salary Payments (Annual)
CA Assisted TDS return filing plan for employers, firms and companies making payment of Professional fees, Rent, Contracts, Commission, etc.
[Rated 4.8 stars by customers like you]

TDS Return

The Deductor i.e. prize distributor is liable to deduct tax under section 194BB or Sec 194B of Income Tax Act. They shall file quarterly return in Form 26Q within the following due dates:

Quarter Due Date
April to June 31st July
July to September 31st October
October to December 31st January
January to March 31st May

FAQs

Will tax be deducted if I withdraw my winnings on Dream11?

Income on Dream 11 is a betting income. The income tax rate on such income is 31.2% (30% plus 4% cess). If your net winning from a contest exceeds INR 10,000, they would deduct TDS at 30% and credit the remaining amount to your account. You can then withdraw the funds without paying any additional tax.

If the prize is paid in cash or kind, how should TDS be calculated?

The income tax on prize money from winning lottery, puzzles, card games, etc is a flat rate of 30%. For any prize in kind such as car, jewellery, holiday trip, etc you must calculate tax on the market value of the prize. Thus, the payer should deduct TDS at 30% of the aggregate amount of prize in cash and market value of prize in kind.

I have received TDS Certificate for my winnings from playing poker online. How can I claim TDS Credit?

The income tax rate on income from playing online games is a flat rate of 30%. If the winning amount exceeds INR 10,000, the poker platform would deduct TDS at 30%. They would deposit TDS with the government, file TDS Return and issue TDS certificate to the winner. The taxpayer i.e. winner should file ITR, report such income as taxable income and claim the TDS Credit. However, the taxpayer cannot claim any refund of the TDS deducted on such income.

Income Tax on winning lottery, crossword puzzles, game shows, horse race

Income from winning awards and prizes such as lottery, puzzles, online gaming or TV game shows, card games etc are considered as income from other sources under the head IFOS of Income Tax. The winner may receive such income in cash or kind. The tax rate is flat 30% as per Section 115BB of the Income Tax Act.

  • Winning from Lottery
  • Crossword Puzzle
  • Races including Horse Race
  • Card Games
  • Gambling
  • Betting
  • Game Shows
  • Any other income of similar nature

Income Tax on Awards & Prizes

Such incomes may be earned in form of cash or kind in forms of awards or prizes. The tax treatment depends on multiple factors.

  • Awards
    • If the Award of public interest is approved by the Government, it is exempt from tax. Awards such as National awards, Nobel prize, Arjuna award, Bharat Ratna award, etc notified by the government under Sec 10(17A) is exempt from tax in the hands of the receiver.
      Awards such as filmfare, ICC Cricket awards, etc are taxed as IFOS income since they are not approved by the Government
  • Prizes
    • Prizes earned are taxable in the hands of the winner as Income from Other Sources income (IFOS) as per Sec 56(2) of the Income Tax Act. Income from betting, gambling, sports events, horse race etc are all taxable incomes

Tax Rate on winning lottery, puzzle, game show, horse race

Tax on lottery winning, crossword puzzles, card games, etc is at flat rate of 30%. After adding the health & education cess of 4%, the effective tax rate is 31.2%. The income would be taxed at flat 30% without considering tax slab rates. If the prize is received in kind, tax is calculated at the market value of the item received.

Example

Divya won a lottery and received INR 5 lakh in cash and a diamond ring worth INR 1 lakh. She also has Fixed Deposit Interest income of INR 1 lakh. She has invested INR 1.5 lakhs in Section 80C and also paid INR 25,000 as medi-claim. Calculate the tax liability.

Particulars Amount (INR)
Income from Other Sources  
Fixed Deposit Interest  1,00,000
Winning from Lottery 6,00,000
Gross Total Income 7,00,000 
Deductions under Chapter VI-A (1,00,000)
Total Income 6,00,000
Tax at slab rate NIL
Tax at special rate (30%) 1,80,000
Total Income Tax 1,80,000
Health & Education Cess @4% 7,200
Total Tax Liability 1,87,200

TDS on prizes & winnings

TDS under Section 194B is applicable on income from lottery, betting, gambling etc. If the income exceeds INR 10,000 during the financial year, the prize distributor is liable to deduct TDS at 31.2% at the time of making the payment.

TDS under Section 194BB is applicable on income from activity of owning and maintaining horse races. If the income exceeds INR 10,000 during the financial year, the horse race organiser is liable to deduct TDS at 31.2% at the time of making the payment.

ITR Form & Due Date

  • ITR Form: Winnings from lottery, puzzles, betting etc is treated as Income from Other Sources. The taxpayer should file ITR-1 (if income is upto INR 50 lacs) or ITR-2 (if income exceeds INR 50 lacs) on the Income Tax Website.
  • Due Date – 31st July of the Assessment Year. For eg: Due Date to file ITR of FY 2020-21 (AY 2021-22) is 31st July 2021.

Special Provisions for tax on winning lottery, puzzle, game show, horse race

If a taxpayer has income from winning a lottery, puzzle, card game, gambling, etc, here are important provisions applicable:

  • The taxpayer cannot claim deductions under chapter VI-A such as Sec 80C, 80D, 80G etc for such income
  • The taxpayer cannot claim any expenses against such income
  • Income Tax on such income is at a flat rate of 31.2% and thus the taxpayer cannot claim benefit of basic exemption limit and slab rates
  • The taxpayer cannot claim any refund of the TDS deducted on such income
  • Loss from owning and maintaining horse race cannot be set-off against any income except horse race income. Taxpayer can carry foward the remaining loss for 4 years

FAQs

I have won a lottery. Should I pay taxes on lottery income?

Income from winning a lottery, card game, competition, betting, gambling etc is a special rate income. Tax rate on such income is 31.2% as per Section 115BB of Income Tax Act. Taxpayer cannot claim benefit of slab rates or the basic exemption limit. The prize distributor would have deducted TDS at 30% before making the payment to winner.

If the prize is paid in cash or kind, how should tax be calculated?

Income Tax on winning lottery, puzzles, card games, etc should be calculated at 31.2% (30% plus 4% cess) of the total prize money. If the prize is paid in kind such as car, jewellery, holiday trip, etc the tax should be calculated on the market value of the prize.

Do I have to pay tax if I withdraw my winnings on Dream11?

Income on Dream 11 is considered as a betting income. Dream 11 tax is calculated at 31.2% (30% plus 4% cess). If your net winning from a contest exceeds INR 10,000, they would deduct TDS at 30% and credit the remaining amount to your account. You can then withdraw the funds without paying any additional tax.