Agricultural Income – Tax Treatment

In India, agricultural income refers to income earned from sources that include farming land, renting agricultural land and selling agricultural  produce. As India is basically an agrarian economy, several incentives and perks are there, for those making a living through agriculture. Farmers are, for instance, exempt from paying any tax on their agriculture income under the income tax laws in India. However, not all income generated from agricultural land, qualify as agricultural income. Therefore, it’s pertinent to know the difference between incomes that fall in the agricultural category and the non-agricultural category

What is Agricultural Income?

Agricultural income as per section 2(1A) of the Income Tax Act, 1961 is as follows.

According to this Section, agricultural income generally means:

  • Rent or revenue derived from land:
    • Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
  • Income derived from such land by agriculture operations:
    • The meaning of agriculture though not covered in the Act has been laid down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where agriculture has been explained to consist of two types of operations:
      • Basic operations – The basic operations would include cultivation of the land and consequently sowing of seeds, planting, etc wherein human effort involved in producing crops
      • Subsequent Operations – The subsequent operations are operations for growth and preservation of the produce like weeding, digging soil around the crops grown etc. Also, those operations make the produce marketable like tending, pruning, cutting, harvesting, etc
  • Income from sale of agricultural produce:
    • Where the produce does not undergo ordinary processes to become marketable, the income arising on sale would generally be partly agricultural income and part of it will be non-agricultural income. The Income Tax has prescribed rules to bifurcate agricultural and non agricultural produce for various products
  • Income derived from saplings or seedlings:
    • Any income derived from saplings or seedlings grown in a nursery shall be agriculture income too. Moreover, No tax liability arises on the income generated through sale of products grown in a nursery provided:
      • Assessment of land revenue by the local
      • The land should not be within the jurisdiction of a municipality or a cantonment board where the revenue is not not subject to local rate
  • Income attributable to a farm house
    • Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
      • The building should be on agricultural land or in immediate vicinity of the agricultural land, or
      • The land should not be located within the following region:
Aerial distance from municipality* Population as per last preceding census
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > INR 10,00,000

*Municipality includes municipal corporation, notified area committee, town area committee, town committee and cantonment board.

Note: Even where the local population is < 10,000, the land should also not be situated within the jurisdiction of the local municipality or cantonment board.

Non-agricultural income

As mentioned earlier, certain agriculture-related works and the income thus generated, is categorized as non-agricultural income and is taxable.

  • Heavy processing: 
    • When an agricultural produce undergoes a process to become marketable, the final product is categorised as non-agricultural. For example, the production of tea, coffee, rubber, etc. Also, if a farmer sells processed items without carrying out any agricultural or processing operations, the income would be categorised as business income
  • Breeding of livestock: 
    • This includes dairy animals, fishery and poultry farming on agricultural land
  • Tree plantation: 
    • Trees grown on farmland only to be used as timber, fall in the non-agriculture category, as no active agricultural business has been concluded in the entire process
  • Trading: 
    • Those who earn their income by trading agriculture produce, have to pay standard taxes on their income
  • Export: 
    • Income earned from the export of agriculture produce, could be exempt from IT if certain conditions are met

Tax Calculation with Agricultural Income

Income from agriculture is exempt from tax under section 10(1) of the Income Tax Act, 1961. However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as the partial integration of agricultural income with non-agricultural income. This method is applicable when the following conditions are met:

  • Income from agriculture should be more than INR 5,000.
  • Also, Total income for the financial year, excluding agriculture income, should exceed INR 2,50,000. This limit will increase to 3,00,000 in case of individual who is above 60 and less 80 and will be 5,00,000 for individual who is above 80.

Calculation of Agricultural Income

In case, Agriculture income exceeds INR 5,000 and there are other sources of income too, then, the tax liability for that year is to be calculated following the procedure as under:

  • Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
  • Compute income tax on sum of amount of basic exemption limit plus agriculture income as per the prevailing income tax rates.
  • Now, Compute (1) – (2) to arrive at the tax liability for the year.

Example

Suppose, taxpayer has 4,00,000/- as interest income and 90,000/- as agriculture income for the assessment year 2019-20. The computation shall be as follows:

  • Calculate tax on total income of INR 4,90,000
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 2,40,000 @ 5% 12,000
Total Tax 12,000

 

  • Calculate tax on basic exemption limit + agriculture income i.e.
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 90,000 @ 5% 4,500
Total Tax 4,500*

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. INR 12,000 – INR 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose

Section 54B of the Income Tax Act, 1962, provide relief to individuals who sell their agricultural land and buy another agricultural land from that sale. The following conditions must be met in order to claim benefit under section 54B:

  • This benefit can only be claimed by individuals or HUF.
  • The agricultural land must be used specifically for agricultural purpose.
  • The individual or his/her parents must use this land for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In the case of HUF, any member of the HUF must use this land for agricultural purpose.
  • After selling agricultural land, the assessee will have to buy another agricultural land within two years from the date of selling.
  • In case of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. 
  • The entire amount of capital gains must be utilized for the purchase of agricultural land if not then the difference will be termed as capital gains and the tax will be computed accordingly.
  • The new agricultural land must not be sold within the period of 3 years from the purchase.

Which ITR is applicable for Agricultural Income

If the aggregate agricultural income of the assessee is up to Rs. 5,000 disclose the agricultural income in the income tax return (ITR) 1. But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies

Moreover, Agricultural income exceeding Rs 5 lakh is to be reported separately for each agricultural land under the ‘exempt income schedule’ along with additional details such as the name of the district with pin code, measurement of land, whether owned or leased, and whether irrigated or rain-fed.

FAQs

Is agricultural income wholly exempt from income tax?

If income of assessee is less than 5000 and total income, excluding agriculture income is less than the basic exemption limit then only agricultural income exempt from income tax.

What is not considered as agricultural income in India?

Following are not considered as agriculture income
1. Breeding of livestocks
2. Dairy farming
3. Fisheries
4. Poultry farming

Does the income from business of growing tea is an agriculture Income?

In case of growing of tea 40% income is taxable as business income and balance will be exempt as agriculture income.

DTAA – Double Taxation Avoidance Agreement : Definition, Types, and Benefits

For NRIs who are working in other countries, the DTAA (Double Taxation Avoidance Agreement) helps to avoid paying double taxes on income earned in both their country of residence and India. Its key objective is that tax-payers in these countries can avoid taxation for the same income twice. India has 85 active agreements. The basic objective of DTAA is to promote and foster economic trade and investment between two Countries by avoiding double taxation. You can check the DTAA entered into by India with other countries from the income tax department’s website through this link Notification of Government.

What is DTAA?

DTAA means a Tax Treaty between two or more countries to avoid taxing the same income twice. When a person is residing in one country and earning income in some other country they are covered under DTAA. This means that involved countries have agreed upon tax rates and jurisdictions for income arising from their country.

For example, Mr. Arjun is an Indian residing in the UK. He has made investments in India on which he earns returns. Now, this Income can be taxable in both India and the UK. But because of DTAA, Mr. Arjun will not be taxed in both countries for the same income.

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Types of DTAA

Relief from Double Taxation can be provided in two ways:

  • Bilateral Treaties: When there is an agreement of DTAA between the Two countries relief is calculated according to mutual agreement between such two countries. Bilateral relief can be granted by either of the following methods:
    • Exemption method: Under this method, income is taxed in only one country
    • Tax credit:  Income is taxed in both countries. Relief is granted in the country in which the taxpayer is the resident.
  • Unilateral Relief: The home nation provides relief when there is no mutual agreement between the countries 

Nature of DTAA

  • Comprehensive: Comprehensive DTAA’s are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.
  • Limited: Limited DTAA’s are those which are limited to certain types of incomes only.

Advantages of DTAA

  • The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation.
  • This relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
  • Reducing the possibility of tax evasion in both or either of the signatory countries
  • Tax rate concessions
  • Lower Withholding Tax: Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty, or dividend incomes in India.

Treatment of Double Taxation Avoidance Agreement

There are two ways of implementing DTAA:

  1. By either exempting the income earned abroad in its entirety
  2. By providing credit to the extent of tax already paid in the other country

Continuing the example, as Mr. Arjun is covered under DTAA. And the agreement states that the UK will exempt his entire income earned on investments made in India then he has to pay taxes only in India and not the UK. Only one particular country will charge his income.

Now, let’s say that the agreement states that India and the UK both will charge taxes on that income. In that case, Mr. Arjun will get a credit of the taxes paid by him in the UK which will be deducted while paying taxes in India. So he will end up paying taxes in both countries but at lowered rates.

The Governments of different countries enter into Double Taxation Avoidance Agreements to provide reliefs to the tax-payers and encourage more investments.

How can NRI claim benefit of DTAA?

Non resident Indians residing in any of the DTAA countries can avail of tax benefits provided under DTAA by timely submission of the following documents every financial year within the due dates:

  • TRC (Tax Residency Certificate): You need to submit TRC to claim benefits under DTAA. To obtain a TRC, you can approach the tax/government authorities of your current residence country, where you would get TRC certified, upon downloading form 10F.
  • Form 10F: You need to submit form 10F to avail benefits under DTAA.
  • PAN number: You also need to submit your PAN (Permanent Account Number) along with the above documents to get tax benefits.
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How to apply for DTAA?

The process of application of DTAA involves a series of steps, involving the different types of provisions.

  • Determine whether the issue is within the scope of the convention.
  • Check that the treaty applies to the tax in issue – is it a tax listed in Article 2 (or a tax substantially similar to such a tax).
  • Thirdly, check that the treaty is in force for the taxable period in issue.

How is Double Taxation Avoidance Agreement relief calculated?

In case there is DTAA with the Country, then Tax Relief can be claimed u/s 90. Steps to compute Double Taxation relief:

  1. Calculate Global Income i.e. aggregate of Indian income and Foreign income;
  2. Compute tax on such global income as per the slab rates applicable;
  3. Calculate the average rate of tax (i.e. Global income divided by the amount of tax);
  4. Compute an amount by multiplying Foreign income with such average rate of tax;
  5. Compute Tax paid in Foreign country

The amount of relief shall be lower of (4) and (5).

In case there is No DTAA, then Tax Relief can be claimed u/s 91. Steps to compute relief:

  1. Compute tax payable in India
  2. Compute lower of Indian rate of tax and rate of tax in Foreign country
  3. Multiply the rate obtained in Step 3 by the doubly taxed income.

Relief will be the amount as computed in Step 3.

List of countries that have DTAA with India

India has signed a Double Tax Avoidance Agreement with most major nations where Indians reside. Following is the list of some of the major countries:

Country DTAA TDS rate
United States of America 15%
United Kingdom 15%
Canada 15%
Australia 15%
Germany 10%
South Africa 10%
New Zealand 10%
Singapore 15%
Mauritius 7.5% to 10%
Malaysia 10%
UAE 12.5%
Qatar 10%
Oman 10%
Thailand 25%
Sri Lanka 10%
Russia 10%
Kenya 10%

FAQ

Who is covered under DTAA?

Individuals who are residing in one country and earning any income from another country are covered under the Double Taxation Avoidance Agreement (DTAA).

How do I take DTAA benefits?

Individuals who are NRIs are covered under DTAA. They are required to submit their “Tax Residency Certificate (TRC)” to the deductor (Bank) along with Form-10F & PAN No.

How many countries have DTAA with India?

India has Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries out of which 86 are presently in force.

What are the details should contains in TRC?

TRC should contain the following details:
– Name of the assessee.
– Status of the assessee (Individual, Firm, Company Etc.)
– Nationality
– Country
– Assessee Tax Identification or Unique Identification number of the relevant Country
– Residential status for the purpose of tax
– Validity Period of the certificate
– Address of the applicant

Capital Gain Exemption

Capital Gain Tax arises on the sale of a Capital Asset by the taxpayer. The Income Tax Act has laid down a list of exemptions under Capital Gains. These provisions allow a total or partial exemption from Capital Gain and minimise tax liability for individuals. However, the Capital Gains Tax Exemption amount can not exceed the total amount of Capital Gain. Following is a list of all capital gain exemption:

The individual can claim the capital gain exemption while filing ITR for the financial year. An individual taxpayer having income from capital gains should file ITR-2 on the income tax website on or before the due date of 31st July.

List of Capital Gain Exemption

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden. Here is a summary of the exemptions laid down by the Income Tax Department.

Income Tax Section Description Applicability Deduction Amount
54 Sale of Residential House Property (LTCA) by Individual/HUF Purchase or Construction of Residential House Property Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property
Constructed within 3 years from the sale of a property
54F Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF Purchase/Construction of New House Property Cost of new asset * Capital Gains / Net Consideration
Purchased 1 year before or 2 years after the sale of a property
Constructed within 3 years from the sale of a property
54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset
The investment amount can not be more than Rs. 50 lakhs
54B Sale of Agricultural Land (LTCA/STCA) by Individual/HUF Purchase of new Agricultural Land Lower of
Cost of New Agricultural Land 
OR
Capital Gains
Purchased within 2 years from the sale of land
Land sold must be used for agriculture purposes for 2 years prior to sale
54D Compulsory acquisition of land and building (LTCA) used in an industrial undertaking Purchase of land or building for shifting or re-establishing the industrial undertaking Lower of
Cost of New Asset
OR
Capital Gains
Purchase within 3 years from the date of receipt of compensation
Land/Building acquired must be used for industrial undertaking purposes for 2 years prior to transfer
54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc
An investment made within 6 months from the sale of an asset
54EE Sale of any LTCA by any taxpayer Investment in units of a notified fund to finance startups Lower of
Cost of Investment 
OR
Capital Gains
The investment amount can not be more than Rs. 50 lakhs
An investment made within 6 months from the sale of an asset
54G Sale of plant, machinery, land,  building to shift industrial undertaking from urban area to rural area Purchase of new plant, machinery, land, building to shift industrial undertaking to rural area Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets
The asset sold can be LTCA or STCA
54GA Sale of plant, machinery, land,  building to shift industrial undertaking from urban area to rural area Purchase of new plant, machinery, land, building to shift industrial undertaking to SEZ Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets
The asset sold can be LTCA or STCA
54GB Sale of residential house property or residential plot of land (LTCA)  by individual or HUF Subscription in equity shares of eligible company or startup Cost of new asset * Capital Gains / Net Consideration
Eligible company or startup should utilize the amount of subscription for purchase of new assets

 

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CGAS Scheme i.e. Capital Gains Account Scheme is an option for the taxpayers to temporarily park their funds before making an investment in the specified assets as per the relevant section to claim the capital gain exemption. The taxpayer who has income from capital gains and wants to reduce the capital gains tax by making a specified investment has an option to create a CGAS account. If such taxpayer is unable to utilise the sale consideration for buying the new asset before the due date of filing ITR, he/she must create a CGAS account and deposit the funds there to claim the capital gain exemption. The benefit of CGAS Scheme is available for Section 54, Section 54B, Section 54D, Section 54EE, Section 54F, Section 54G, Section 54GA, Section 54GB of Income Tax Act.

FAQs

How to claim exemption if we wish to buy the house property next year?

Taxpayer can claim exemption u/s 54, 54F depending on asset sold. An exemption can be claimed by putting the amount in Capital Gains Account Scheme (CGAS) before the due date of filing of ITR in the year of sale. And claim the same as exemption while filing ITR.

Can we claim exemptions on sale of Short Term Capital Asset(STCA)?

The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

Section 54B of Income Tax Act : Capital Gains Exemption on Sale of Agricultural Land

When a farmer shifts from one agricultural land to the other, the intention is not to earn income out of it but to acquire another suitable land. If such a farmer is liable to pay income tax on the capital gains on the sale of agricultural land, there would be a hardship for him. Thus, the income tax department has laid down a list of Capital Gain Exemption on the sale of specified assets by the taxpayer. The taxpayer on fulfilling certain conditions can claim such exemptions to reduce their Capital Gains Tax. Exemption under Section 54B of the Income Tax Act is available on Capital Gains on the sale of one agricultural land and purchase or construction of another agricultural land. The amount of Exemption under Section 54 will be lower of:

  1. The cost of new agricultural land
  2. The capital gains on the sale of old agricultural land

Who can Claim an Exemption Under Section 54B of the Income Tax Act?

A taxpayer can claim exemption u/s 54B if he/she fulfills all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The agricultural land that the taxpayer sells is a Long Term Capital Asset i.e. land sold after 24 months or Short Term Capital Asset i.e. land sold within 24 months
  3. The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer.
  4. Taxpayer purchases new agricultural land within 2 years from the sale of the old agricultural land
  5. The new agricultural land should be in India
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
Tip
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.

The taxpayer can claim the Capital Gains Exemption under Section 54B while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the Amount of Exemption available Under Section 54B of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54B will be least of the following:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

Example: Palak sold agricultural land in FY 2021-22 for Rs. 60,00,000. He had purchased in FY 2016-17 for Rs. 30,00,000. And she purchased a new agricultural land worth Rs. 45,00,000. Palak will be able to claim deduction under section 54B as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 23,97,728
Refer Index Cost from here.
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What Happens to Exemption in the case of sale of Agricultural Land?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54B of income tax act. And the following situations can arise:

Situation 1

When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption under Section 54B is withdrawn. And the total sales value of agricultural land will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2

When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption under Section 54B is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54B) while calculating capital gains.

Situation 3

When the taxpayer sells the new agricultural land after 3 years from the date of purchase or construction.

Consequences: The exemption u/s 54B is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Long Term Capital Gains on agricultural land sold.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase or construction of new property till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of amount already spent on construction or purchase of property along with the amount deposited in CGAS.

However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.

FAQs

Can I claim an exemption if I buy new agricultural land in the name of my spouse?

No. In order to claim exemption u/s 54B, the land purchased has to be in the name of the seller. The exemption is not available if new land is purchased in the name of the spouse.

Can NRI claim exemption u/s 54B on land purchased?

Yes, NRI can claim exemption u/s 54B of the Income Tax Act. Provided the agricultural land sold and purchased is situated in India.

Is capital gain exempt in the case of compulsory acquisition of agricultural land by the government?

Yes. Capital gain arising from compulsory acquisition of agricultural land under any law and the consideration of which is approved by the central government or RBI received on or after 01/04/2004 is fully exempt from tax. It is exempt u/s 10(37) of the income tax act.

Section 54 of Income Tax Act : Capital Gains Exemption on Sale of House

When a taxpayer shifts from one residential house to the other, the intention is not to earn income out of it but to acquire a suitable house. If such a taxpayer is liable to pay income tax on the capital gains on house sale, there would be a hardship for him. Thus, the income tax department has laid down a list of Capital Gain Exemption on the sale of specified assets by the taxpayer. The taxpayer on fulfilling certain conditions can claim such exemptions to reduce their Capital Gains Tax. Exemption under Section 54 of the Income Tax Act is available on Capital Gains on the sale of one residential house property and purchase or construction of another residential house property. The amount of Exemption under Section 54 will be lower of:

  1. The cost of new residential house property
  2. The capital gains on the sale of house property

Who can claim an exemption under Section 54 of Income Tax Act?

A taxpayer can claim an capital gain exemption on sale of house property under Section 54 if he/she satisfies all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm
  2. The asset sold is a Long Term Capital Asset i.e. house property sold after at least 24 months
  3. The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property
  6. The new residential house should be in India
  7. If the taxpayer purchases or constructs more than one house, the taxpayer can claim an exemption for one house property only
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.
Tip
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.

The taxpayer can claim the Capital Gains Exemption under Section 54 while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the amount of exemption available under Section 54 of Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54 will be least of the following:

  1. Cost of the new residential house property OR
  2. Capital Gains arising on the sale of old residential house property (including amount deposited in (Capital Gains Account Scheme)

Example: Ravi sold a house property in FY 2021-22 for Rs. 60,00,000. He has purchased the property in FY 2016-17 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim a deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 23,97,728
Refer Index Cost from here.
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What happens to Section 54 exemption if the taxpayer sells the new house property?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54 of income tax act. And the following situations can arise:

Situation 1:

When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.

Consequences: The exemption under Section 54 is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2:

When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is more than Capital Gains.

Consequences: The exemption under Section 54 is withdrawn. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating capital gain on sale of house property. The taxpayer must pay income tax on capital gains at the rate of 20%.

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CGAS Scheme for claiming exemption under Section 54

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase or construction of new property till the due date of submission of ITR, he.she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of amount already spent on construction or purchase of property along with the amount deposited in CGAS.

However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.

FAQs

Can I claim an exemption if I buy a new property in the name of my spouse?

No. In order to claim exemption u/s 54, the property that the taxpayer purchases must be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.

Can NRI claim exemption under Section 54 on purchase of a House Property?

Yes, NRI can claim exemption under Section 54 of the Income Tax Act. However, it is mandatory that the old house property sold and new house property purchased is situated in India.

Is exemption allowed if the builder of a property fails to hand it over within 3 years?

Yes. The taxpayer can claim the exemption under Section 54 even when the builder of a property fails to hand over the possession of the property.

Form 61A : Annual Information Return (AIR)

Some individuals need to file Form 61A to justify their High-Value Transactions. One can track the status of this filing on the TIN-NSDL website. Entities such as Banks and other Financial Institutes are responsible to furnish certain transaction details through Form 61A (Annual Information Return). Hence, with an aim to curb black money and track high-value transactions, the government has implemented new reporting guidelines. The “High valued transactions” of Individuals and Businesses are monitored u/s 285BA of the Income Tax Act.

Form 61A contains details of the transaction and reportable account maintained by the specified persons during the Financial Year. The Income Tax Department using AIR monitors these High valued transactions.

Who should file Form 61A (AIR)?

According to Section 285BA of the Income Tax Act, 1961, “Specified persons” must record and report “High-value financial transactions” of individuals and file Form 61A, upon receipt of the notice. For instance, these specified persons can be:

  • Individuals and Taxpayers
  • Banks
  • Mutual funds
  • Institutions issuing bonds and registrars or sub-registrars

Detailed information on who should file Form 61A (AIR) as per the Tax Information Network (TIN) is as follows:

Class of Person

Nature and value of the transaction

Clarification by Central Board of Direct Taxes vide circular

A Banking Company to which the Banking Regulation Act, 1949 applies

Cash deposits of any person totaling INR 10,00,000 or more in a year in the savings account of any bank

The total of all the cash deposits in the savings account of a person should be reported as one single transaction. However, the date of the transaction should be the last date of the financial year

Banking Company to which the Banking Regulation Act, 1949 applies or any other Company or Institution issuing the credit card

If credit card payments against a person are INR 2,00,000 or more in a financial year

The total of all the payments by a person to the credit card company should be reported as one transaction. And hence the date of the transaction is to be the last date of the financial year

A trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be duly authorized by the trustee in this behalf

This is if you are acquiring any units of fund amounting to Rs. 2,00,000 or more in a financial year

The amount actually received from the transacting party and not the amount relating to the allotment is to be reported

Company or Institution issuing bonds or debentures

This is if you are acquiring any bonds or debentures amounting to Rs.5,00,000 or more in a financial year by the Company or institution

The amount actually received from the transacting party and not the amount relating to the allotment is to be reported

Company issuing shares through public or rights issue

If you are acquiring any shares of a company amounting to Rs. 1,00,000 or more

The amount actually received from the transacting party and not the amount relating to the allotment is to be reported

Registrar or Sub Registrar appointed under section 6 of the Registration Act, 1908

If you are purchasing or selling any immovable property that values Rs.30,00,000 or more in a financial year

Certain situations where the transaction of property valued at Rs. 30,00,000 involves joint parties and value for one or more parties is less than Rs. 30,00,000.

In such situations, all such transactions are to be reported even though the value of transaction in the hands of one or more of the joint parties is less than the threshold limit

An officer of the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 who is duly authorized by the Reserve Bank of India on this behalf

This is applicable if you are acquiring any bonds issued by the RBI amounting to Rs. 5,00,000 rupees or more in a year

The total of all the receipts from a person is required to be reported as one transaction and the date of the transaction is to be mentioned as the last date of the financial year

Circumstances under which Form 61A is rejected

The tax authority can reject the Annual Information Return i.e. AIR for the following reasons:

  • Filers have to mention the filer’s name, TAN, PAN, Form number, and the Current Financial Year. Any mismatch with the form and file submitted will end up in rejection.
  • If the return file provided on Computer media is not generated by the AIR FVU.
  • When you don’t file Form 61A (Part A) in the physical paper format along with the AIR file.
  • If the authorised signatory has not signed and verified Form 61A (Part A)
  • The authorised signatory has not approved the overwriting on Form 61A (Part A)
  • When you use more than one computer to file the AIR. Also, when computer media finds your submission corrupted or with any viruses.
  • If you compress the AIR file using any other compression utilities than Winzip 8.1 or ZipItFast 3.0 or higher version.
  • Mismatch of the total in Form 61A with the total of SAM (Statement Acceptance Module) at the TIN Facilitation Centre.

Consequences of not submitting AIR in time

Tax authorities of India, under section 285BA(5) can issue a notice to a specified person asking them to file Form 61A (Annual Information Return) within a period of 30 days from the date of receiving the notice. If they fail to file the statement within the allotted time then they will face a penalty of INR 1,000 per day after the date mentioned in the notice for furnishing the statements.

Steps to File Form 61A (AIR)

  1. Visit the TIN-NSDL website

    Download your AIR Return Preparation Utility (RPU) available on NSDL

  2. Next, you download your AIR RPU

    This is how your the AIR RPU form will look

  3. Further, you need to fill in the required details in the given sheets under the downloaded excel file

    Post downloading the form

  4. Next, you need to download the E-AIR FVU application

    To do this you need to download the latest JAVA software

  5. After setting up the application, you can now upload your excel sheet there

    If your file has any errors, the application will generate errors through the error file path. All errors need to be cleared in order to have the file accepted.

  6. Your accepted file needs to be copied on a CD or a Floppy

    Lastly, you need to visit the TIN-NSDL AIR section and skip to the 5th step and download Part A of Form 61A

  7. Next, visit your nearest TIN Facilitation Center (TINFC) and file your AIR return

    Now that you have your file on a CD or a Floppy and have your Part A of Form 61A filled.

Track Form 61A Filing Status

  • Visit the Tax Information Network Portal and click on services and select Annual Information Return from the dropdown
  • Select “AIR status view for filers
  • Enter your PRN i.e. Provisional Receipt Number and valid TAN

FAQs

What is File Validation Utility (FVU)?

FVU created by NSDL is a program to verify the format of AIR that the filers submit and to measure its accuracy.
FVU will accept AIR submissions only if it is error-free. If there are any errors in the details, the screen shall display the error code, error description, and details about the error.
You can resubmit your form after correcting the errors. If there remains no error in filing AIR then the “File Validation Successful” message pops up.

How does the Income Tax Department (ITD) come to know about my “High-value Transactions”?

If any Individual/Business makes a Financial Transaction that is a “High-value Transaction”, then the Bank and other Financial Institutes are responsible to report the transaction to the ITD, along with the registered PAN of that Person. Hence, ITD can come to know about your “High valued Transactions”

What are the Forms required for AIR?

AIR can be furnished through Form 61A (Part B) in a digitized form in a CD/Floppy. While Form 61A (Part A) in a paper format duly signed.

Income Tax Intimation under section 143(1)

Intimation under Section 143(1) is not a Notice but a communication received from the income tax department. Once the assessee files his income tax return, the income tax department does a preliminary assessment. This includes verifying arithmetical errors, any incorrect claim in the return, the difference in tax calculation, verification of tax payment, etc. This letter basically matches the calculations in the Income Tax Return filed with the calculations computed by the income tax department.

Intimation u/s 143(1)

The intimation is a communication that the income tax department sends to the taxpayer after processing the income tax return. It comprises the calculations as per the return filed by the taxpayer with the calculations as per the computation of the income tax department. If both the calculations match, the taxpayer need not worry and can wait for the refund if any. However, if there is a mismatch in the calculation, the taxpayer should take relevant action to resolve the same.

How will I receive Intimation u/s 143(1)?

Communication on Email

  • The system auto-generates the intimation u/s 143(1) and communicates to the assessee on the email entered while filing the income tax return
  • The sender of these email is CPC i.e. Central Processing Centre and the sender’s email is intimations@cpc.gov.in
  • The subject of the email is ‘Intimation U/S 143(1) for PAN BCFxxxxx8D AY:2019-20‘. The PAN and AY (Assessment Year) would be different in each case
  • The intimation is an attachment to the email in a pdf format. It is password protected. The password to open is PAN in lower case and the date of birth in ddmmyyyy format. Eg: aagpr1212a02101980 for PAN: AAGPR1212A and DOB: 02/10/1980

Communication on SMS

  • The system auto-generates the intimation u/s 143(1) and communicates to the assessee on the mobile entered while filing the income tax return
  • The sender of the message is CPC i.e. Central Processing Centre and the sender’s name is VM-ITDCPC

Steps to download Intimation under Section 143(1)

  1. Login to the e-filing portal

    Login to the income tax website using valid credentials.

  2. Navigate to View Filed Returns

    Go to e-file > Income Tax Returns > View Filed Returns

  3. Click on View Details

    For the relevant Assessment Year, click on View Details

  4. Download Intimation Order under Section 143(1)

    On the next screen, the taxpayer can view details of each step of ITR filing. If the status is ‘Processed’, there is an option to download a copy of the intimation. Click on Download Intimation Order.

  5. Open Intimation Order under Section 143(1)

    The intimation order is password protected. The password to open is your PAN in lower case and the date of birth (DDMMYYYY) without any space. Eg: PAN is AAAPA1234A and the date of birth is 01/01/2000. The password would be aaapa1234a01012000.

Time Limit for issue of Intimation u/s 143(1)

Effective 1st April 2021, there was a revision in the rules for the time limit to issue intimation under Section 143(1). The income tax department must issue intimation u/s 143(1) within 9 months from the end of the financial year in which the taxpayer files the return. Earlier, this time limit was within one year from the end of the financial year in which the taxpayer files the return.

Example

Taxpayer files ITR for FY 2020-21 in July 2021
End of financial year in which return is filed – 31st March 2022
Nine months from the end of the financial year – 31st December 2022
Therefore, the ITD can send intimation for ITR of FY 2020-21 up to 31st December 2022

If a taxpayer does not receive any intimation within such period, it means that there are no adjustments and changes to the ITR filed. There is no change in tax liability or refund. Thus, the Income Tax Return filed is deemed to be intimation u/s Section 143(1).

Action to be taken against Intimation u/s 143(1)

Action Reason
No Action required Calculation in the ITR filed matches with the calculation as per income tax i.e. No Demand & No Refund
No action required. Refund would be credited to your bank account Tax payable as per ITR filed is more than the tax payable as per income tax calculation i.e Refund
File Revised Return u/s 139(5) If you observe any mistakes in the ITR filed
Pay Demand and File Response (within 30 days) Tax payable as per ITR filed is less than the tax payable as per income tax calculation i.e. Outstanding Demand – If you Agree
File Rectification Request u/s 154 Tax payable as per ITR filed is less than the tax payable as per income tax calculation i.e. Outstanding Demand – If you Disagree

FAQs

There is no mismatch, no additional demand, and no refund in the intimation u/s 143(1), what should I do?

The income tax department has successfully processed the income tax return. You can simply ignore the notice. Taxpayer need not take any further action.

Is income tax notice u/s 143(1) different from notice u/s 143(1)(a)?

Communication u/s 143(1) is just an intimation and not a notice. Under this intimation, there is a preliminary check whether the calculations as per ITR match with the calculations as per tax department.
If there is any mismatch in the data, the department issues a notice for adjustment u/s 143(1)(a) The taxpayer needs to respond to this notice within 30 days.

Two months have passed since the e-verification of my ITR for F.Y. 2020-21, but I have not received the Intimation u/s 143(1). What should I do?

You can check your ITR status online on Income Tax Portal. In case, it has been processed then you can request for reissue of intimation online and you will receive it in your mail after request. If your ITR has not been processed by the department till now then either wait for the ITR to be processed or submit a grievance. Sometimes the department takes longer to process the return.

What happens if I do not respond to the intimation within 30 days of receiving the intimation?

In case, if we do not respond within 30 days (thirty days) of the issue of this intimation, the return of income will be processed after making the necessary adjustment(s) u/s 143(1)(a) of Income Tax Act, 1961 without providing any further opportunities in this matter.

What is the password to open Intimation under Section 143(1)?

The password to open Intimation is your PAN in lower case followed by the date of birth (DDMMYYYY) without any space. Eg: PAN is AAAPA1234A and the date of birth is 01/01/2000. The password would be aaapa1234a01012000.

Form 10BA : Claim Deduction under section 80GG

What is Form 10BA?

Form 10BA is a declaration to be filed by a taxpayer who wants to claim deduction under section 80GG for rent paid on rental property. In order to claim deduction u/s 80GG following two conditions should be satisfied:

  1. ​The taxpayer should not be receiving HRA from an employer AND,
  2. ​The taxpayer, his spouse, minor child or if the assessee is a member of HUF, then the HUF should not own any self-occupied residential accommodation.

If both the above conditions are satisfied, then the taxpayer can submit a declaration in Form 10BA. A taxpayer should submit Form 10BA before filing ITR.

Other important ITR documents include: Form 16, Form 26AS, Form 12BB, Form 15G & Form 15H.

  • Taxpayer’s Name and PAN,
  • Address of rental property,
  • Rent paid,
  • Name and Address of Landlord.
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Example

During FY 2019-20, Arun was employed for the first 6 months and after that, he started doing freelancing work. Arun stayed at rented premises during the entire year. During his employment he received HRA. He does not own any self-occupied house property.

In the above scenario, Arun is eligible to claim deduction under section 80GG and can file Form 10BA for the last 6 months’ rent paid by him. Since he was not receiving any house rent allowance during that time and he did not own any self-occupied property.

How to submit Form 10BA?

A taxpayer has to submit the form online from his/her e-filing account on IT Department website.

  1. Go to the Income Tax e-Filing Portal

    Log in to the e-filing account from the e-filing portal.

  2. Navigate to e-file > Income Tax Forms

    It is right next to the My Account tab.

  3. Select FORM NO. 10BA from the drop-down, select the relevant Assessment Year

    Select Submission Mode as Prepare and Submit Online and click Continue.

  4. Enter the details like Name of Landlord, Details of Rent Paid etc.

    Preview and submit

What are the details required in Form 10BA?

Following details are required:

It is advisable to submit Form 10BA before filing income tax return and claiming deduction under section 80GG.

FAQs

Can I claim a deduction on rent paid if House Rent Allowance forms part of my salary?

No. As per primary conditions, you can not claim a deduction on rent paid if you receive an allowance from your employer. In this case, only HRA is allowed as deduction.

I am a freelance and I stay in rented premises, can I claim a deduction under section 80GG and file Form 10BA?

Yes, you can file Form 10BA. Provided you, your spouse, a minor child or your HUF does not own any self-occupied residential accommodation.

When can I claim deduction under section 80GG?

You can claim deduction u/s 80GG while filing your ITR. However, Form 10BA needs to be filed before filing ITR.

Income Tax for NRI and Foreign Income

Definition of NRI

Income Tax for NRI will depend upon his Residential Status for the year. It is important to determine the residential status of an individual before determining their taxability. The criteria to determine your residential status is as follows:

You are an Indian resident for a particular financial year:

  1. If you are in India for at least 182 days (6 months) during the financial year or
  2. You lived in India for at least 60 days (2 months) during the previous year and have lived for at least 365 days (a year) during the last four years.

However, only the first condition is applicable if you are an Indian Citizen working abroad or a member of a crew working on an Indian ship. So if you spend at least 182 days in India during the financial year, you are a resident India.

A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, were born in undivided India.

However if you do not meet any of the above conditions, then you are an NRI.

The residential status will help us determine the taxability of the income.

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If your status for the previous year is “Resident“, your global income will be taxable in India. If your status is “NRI“, only the income which is earned or accrued in India will be taxable in India. Some of the examples of Incomes earned or accrued in India are Salary received in India, professional fees received in India, rent Income from House Property in India, capital gains on transfer of assets situated in India, interest income on fixed deposits or savings bank account in India, etc.

All these incomes are taxable in India for an NRI. So any income which is earned by an NRI outside India will not be taxable in India, for an eg. his Salary Income abroad or interest earned on NRE account or deposits abroad, etc.

Please note that interest income on the NRE account is completely tax-free whereas interest earned on NRO account will be applicable to TDS at the rate of 30.9%.

Taxable Incomes for NRI Include

Salary: As discussed earlier, any income which is earned or accrued in India will be taxable in India. So if the salary is earned or received in India by an NRI or by someone else on behalf of the NRI then it will be taxable in India. This salary income will be taxable at the slab rates applicable to individuals.

For Eg. Ravish is an employee of an Indian company and he has been deputed to Dubai to look after the company’s work there. He has been working in Dubai for the past two years. During his deputation in Dubai, Ravish’s salary was deposited to his designated bank account in India. Since his salary is received in India, it will be taxable in India.

Salary received by the diplomats and ambassadors is completely exempt

House Property Income: If an NRI owns a property which is situated in India, then any income from such property will be taxable in India.

The income from such house property will be calculated as if it is calculated normally in case of a resident Indian. The NRI will be allowed all the deduction including the standard deduction of 30% and the deductions for the interest and principal repayment in case a home loan is taken. This income will be taxed at the slab rates.

It is important to note that the rental income received by an NRI is applicable to 30.9% TDS. So when a tenant pays rent to the owner of the property who is NRI, he has to deduct TDS @ 30.9% from such rent.

Income from Business and Profession: Any Income from a Business that is set up in India or controlled from India is taxable in the hands of the NRI.

Income from Other Sources: Any income earned by NRI by way of interest on any deposits or balance in the savings bank account will be taxable in India. It is to be noted that the interest income on the NRE account and the FCNR account are completely exempt in the hands of the NRI however the interest earned on the NRO account is applicable to TDS @ 30.9%.

Income from Capital Gains: Any Capital Gains from the transfer of a capital asset situated in India is taxable in India. Even if an NRI invests in shares and securities India then capital gains on the transfer of such shares and securities will also be taxable in India.

Any NRI can claim exemptions available under section 54 & 54EC, from the capital gains arising on sale of residential house property.

Deductions and Exemptions for NRI

Here is a summary of deductions and exemptions which are / not allowable for NRI:

Deductions/ Exemptions Allowable Not allowable
Section 80C Life Insurance Premium Payment Investment in PPF
Children’s Tuition Fee Payment Investment in NSCs
Principal Repayment on Loan for purchase of House Property Post Office 5 year Deposit Scheme
Investment in ELSS Senior Citizen Saving Scheme
Investment in Unit Link Insurance Plan  
Section 80CCG Investment under RGESS
Section 80D Premium Paid for Health Insurance
Section 80DD Expenditure on Maintenance including medical treatment of a handicap dependent
Section 80DDB Expenditure towards medical treatment of a differently abled dependent
80E Interest paid on education loan
80G Donations for charity (social) causes
80TTA Interest income from savings bank account
80U Deduction available to differently abled individuals
80U Deduction available to differently abled individuals
Deductions from House Property Income Standard deduction
Property taxes paid
Interest paid on home loan
Exemption on sale of Long term property Section 54: On sale of long term house property
Section 54F: On sale of any long term asset other than house property
Section 54EC: On sale of any property and reinvestment in bonds of National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC)

How to Avoid Double Taxation?

One of the most common questions amongst NRI is that “Do I have to pay taxes in both the countries i.e country of resident and India?”

The NRI can save themselves from double taxation by availing the relief from the Double Taxation Avoidance Agreement (DTAA) which is an agreement between India and foreign countries.

Different agreements with different countries may vary in terms of tax relief. But broadly, the benefit is provided in two ways:

  • Exemption from double taxation: When the agreement provides for the exemption, the NRI will be taxed in only one country and they will not have to pay any taxes in the other country. Say Manali is a non-resident Indian and she is working in the US as a Certified Accountant. She earns some interest income from fixed deposits in India. Now if India and the USA have entered into an agreement and have provided the exemption, Manali’s interest income will be taxed only in India and the same income shall be exempt from tax in the USA.
  • Tax Credit (Relief): When the agreement provides for relief, the incomes will be taxed in both the countries, however, tax relief will be allowed to the NRI in the country of their residence. Say Paritosh is a non-resident Indian and is working as a content writer for a newspaper company in Australia. He has rental income from his residential flat in India. If India and Australia have entered into an agreement and have provided relief from the double taxation by way of the tax credit, the rental income will be taxed both in India and Australia. However, Paritosh will be allowed to take the tax credit in Australia for the taxes which he has paid in India.

Changes for NRIs According to the Budget 2020

The budget 2020 announced by the Finance Minister Nirmala Sitharaman on the 1st of February had the following major changes for the Non-Resident Indians (NRIs):

Criteria for Determining Residential Status

The Primary condition of 182 days for determining Residential Status has been changed to 120 days in the Union Budget 2020. Hence, an Indian National will be deemed a resident of India if they have stayed in India for at least 120 days in a Financial Year.

Resident – Not Ordinary Resident

Previously, an individual had to be a resident for 2 out of the 10 previous years and had to be staying in India for up to 729 days in order to be deemed as an R-NOR. After the announcement made in the Budget 2020, the requirement for being a resident was increased to 4 out of the previous 10 years.

Section VI (IA) – New Clause

The new clause announced by the Finance Minister states that, if an individual is not a resident of any other country, then he/she will be deemed a resident of India by default. Furthermore, once the person is deemed a citizen of India, he/she becomes liable to disclose all their assets and finances they possess. These finances and assets can be either from India or from any foreign country.

Dividend Distribution Tax – DDT

According to the current tax regime, the DDT is deducted by the companies on the dividend paid to its shareholders. However, under the new tax regime, the dividend is no longer taxable at the hands of the shareholders. Therefore, the companies will deduct the TDS on the dividend distributed. Furthermore, TDS will be deducted u/s 195 in the case of NRI shareholders and dividend income will be taxed at slab rates.

Source of Income Resident Not Ordinary Resident None-Residents
Income earned in India Taxable in India Taxable in India Taxable in India
Any income received in India Taxable in India Taxable in India Taxable in India
Income earned outside India but received in India Taxable in India Taxable in India Taxable in India
Income earned and received outside India Taxable in India Taxable in India Not Taxable in India
Any income earned outside India for a business or profession controlled in or from India Taxable in India Taxable in India Not Taxable in India
Income earned outside India from any source other than business or profession controlled from India Taxable in India Not Taxable in India Not Taxable in India

 

FAQs

What are the Incomes taxable in India?

For NRIs, the incomes which are earned in India will be taxable in India. For Indian Residents, global incomes i.e incomes earned in India and also the foreign incomes will be taxable in India.

Do I have to pay tax on my foreign income, in India?

If you are an NRI then you are not required to pay taxes on your foreign income. You will have to pay taxes on the income which you have earned in India. On the other hand, if you are an Indian Resident than all your Global incomes will be taxed in India. However, if you have paid taxes on such foreign incomes in the same country, then you can claim the relief as per the Double Taxation Avoidance Agreements (DTAA)

Do I have to declare my foreign assets and incomes in India?

For NRIs, one does not need to declare foreign assets and foreign incomes in Indian Income Tax Return except the incomes which are earned or received in India as they would be liable to Indian Income Tax.
For Indian Residents, one needs to declare all the foreign assets and foreign incomes. The foreign incomes will be subject to Indian Income Tax (subject to Double Taxation Avoidance Agreement) as for a Resident Indian, global incomes are subjected to Indian Income Tax.

Is there any tax relief available to NRIs?

If any of the Incomes earned by NRI is taxable in India and the same income suffers from another tax levy in the country of residence of NRI, individual will be allowed to take the benefit of DTAA (Double Taxation Avoidance Agreement) so as to save the income from suffering double taxation. 
However, if no income of NRI is subject to the tax levy, the need to claim relief does not arise.

How to pay tax in India if I don’t have a NetBanking account in India?

For filing Income Tax Return (ITR), you need to have an Active Bank Account with any of the Indian Banks. Hence, for payment of Income Tax or claiming Income Tax Refund, you are required to have a bank account in India. However, for payment of Income Tax, anybody (if not you) can pay the tax on your behalf from his/her bank account. So NRIs can pay tax through any of their friends or family members who have an active Bank account in India.

I am an NRI. Do I have to file an Income Tax return in India?

​Whether you are an NRI or not, if your income exceeds Rs. 2,50,000 then you are required to file an Income Tax Return in India. On the other hand, even if your income is less than Rs. 2,50,000, you will have to file a return if:
​1. You want to claim a refund &/or
​2. You have a loss that you want to carry forward

What is the last date for filing the Income Tax Return for the NRI?

31st July is the last date to file the Income Tax Returns in India for the NRI

I am an NRI. Do I have to pay Advance Tax?

Whether you are an NRI or not, if your total tax liability exceeds Rs. 10,000 in a financial year, you are required to pay the Advance Tax. Interest under section 234B and 234C will have to be paid in case of failure to pay the Advance Tax.


What is Pre-construction Interest?

The pre construction period is from the day of approval of home loan until the day of completion of the construction of house property. The interest deduction is not allowed while the property is still under construction. However, the interest paid during the pre construction, namely the Pre-construction Interest, is allowed as a deduction in 5 equal installments starting from the year in which the construction of the property is completed.

How to calculate Pre construction Interest?

  1. Calculate the Pre construction period of constructed house property.

    It is from the year of home loan taken till the year in which construction is completed. However, the interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.

  2. Calculate the interest paid during the pre-construction period from the interest certificate issued by the bank.

    Each year the lending bank issues an annual home loan certificate which provides details of total EMI paid along with Interest and Principal Repayment.

  3. Divide the total pre construction interest in 5 equal installments.

    Claim the deduction of pre-construction interest from the financial year of completion of construction while filing ITR on the Income Tax e-Filing portal under the head “Income from House Property”.

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Example

Kunal has taken a loan for the construction of house property in Pune. Here are the loan details:

Loan amountRs. 30,00,000
Loan taken inNovember 2017
EMIRs. 25,000
Construction completed inDecember 2019

Right after the completion of construction, Kunal was able to find a tenant and so he gave the property on rent right away. Kunal wants to know how much tax deduction he can claim for this home loan while filing his return for the FY 2019-20.

As discussed earlier, the homeowner can claim interest deduction from the year in which the construction of the property is completed. Hence Kunal will be able to claim deduction on Pre-construction interest from the FY 2019-20.

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Calculation of EMI payments for FY 2019-20

  • Total EMI payments in FY 2019-20 = Rs. 25,000 x 12 = Rs. 3,00,000. Out of this Rs. 3,00,000, Rs. 1,35,000 is towards principal repayment
  • Hence Rs. 1,35,000 is allowed as a deduction under section 80C of the income tax act.
  • So total interest payment for the FY 2019-20 comes to Rs. 1,65,000 and since the property is rented out, Kunal can claim the deduction for the entire interest amount u/s 24(b) while filing ITR.

Calculation of amount paid for Pre-construction interest

  • As explained above, the pre construction interest will be allowed in five equal installments from the year in which the construction is completed
  • The interest will be allowed from the date of loan taken till the 31st March before the financial year in which construction is completed.
  • In this case, the construction is completed in December 2019 so the pre-construction interest will be calculated for 17 months for the period November 2017 till March 2019.
Financial yearPeriodEMI calculation
2017-18November 2017 to March 2018Rs. 25,000 x 5 = Rs. 1,25,000
2018-19April 2018 to March 2019Rs. 25,000 x 12 = Rs. 3,00,000
Total
= Rs. 4,25,000
  • Out of this Rs. 4,25,000, Rs. 1,91,250 is towards principal repayment.
  • So the remaining part of Rs. 2,33,750 (Rs 4,25,000 – Rs. 1,91,250) is the pre-construction interest which can be claimed in five equal installments of Rs. 46,750 starting from FY 2019-20.

So Kunal will be able to claim Rs. 1,65,000 + Rs. 46,750 = Rs. 2,11,750 as deduction towards home loan interest in FY 2019-20.

FAQs

What is pre construction period in income tax?

The period from borrowing money until construction of the house is completed is called the pre construction period. Interest paid during this time can be claimed as a tax deduction in five equal installments starting from the year in which the construction of the property is complete.

What is the maximum limit of interest on housing loan exemption?

Under Section 24 of the Income Tax Act, an individual can claim tax deduction of the interest payment on the housing loan up to a maximum amount of Rs. 2,00,000. However, there is no limit on the interest payment deduction of the property is rented.

Can the husband and wife both claim interest on the housing loan?

Each joint owner/ co-owner and a borrower can claim Rs 2 Lakhs interest deduction – In case of a joint home loan for self-occupied house property, each of the owners can claim Rs 2 Lakhs in their tax return. The total interest is allocated between them based on their share of ownership.

Which ITR needs to be filed for claiming pre construction interest?

The taxpayer can file ITR-1 if no co-owner is present. Otherwise, you need to file ITR-2.