Income Tax Deduction on Donation

Donations made to certain specific charitable institutions and relief funds are fully or partially exempt from taxation. Donations made to political parties are also available for exemption. The article will give you a brief on how one can claim income tax deduction on donation to reduce tax liability.

Income Tax Deduction on Donation made to Institutions and Funds

An assessee can claim a tax deduction on donation under section 80G of the Income Tax Act 1961. According to this section, one can either claim 100% or 50% of the total amount donated as a deduction subject to the ‘with’ or ‘without’ upper limit. As stated earlier the government notifies/updates the institutions and funds where any donation is fully or partially exempt from taxation.

Deduction on Donation with Upper Limit

For institutions or funds where the ‘with upper limit clause’ is applicable, a deduction of either 50% or 100% of 10% of the adjusted gross total income can be claimed. This percentage is also specified by the government for every institution and fund. The donations made towards the following institutions will fall under this category:

  • Donation by an organization towards Indian Olympic Association
  • Money donated to the local authority or the government for the purpose of family planning promotions.
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Deduction on Donation without Upper Limit       

If one donates to funds or institutions where ‘without upper limit’ is applicable, one can claim a flat 50% or 100% of the donation amount. The Prime Minister National Relief Fund and National Defence Fund are some of the funds where the condition of claiming 100% of the donation amount as a deduction is applicable. Some of the many Trust Funds where 50% of the donation amount is available for deduction are Jawahar Lal Nehru Memorial Fund and Prime Minister’s Drought fund.

Mode of Payment

  • One will be able to claim the deduction if the donation is made via cheque, digital payment method, or cash
  • The maximum deduction that one can avail of if the payment is done via cash is INR 2000
  • There is no maximum limit on the deduction amount if the payment is made via cheque or digital payment methods
  • Donations made in kind like those in the form of clothes, food rations, and so on, cannot be claimed as deductions under this section.

Income Tax Deduction on Donation made to Political Parties

Donations made to political parties can be claimed as a deduction under section 80GGC and 80GGB of the Income Tax Act, 1961. Individual taxpayers can claim the deduction under section 80GGC and companies can claim a deduction under 80GGB. There is no maximum upper limit specified and so any amount that has been contributed can be claimed as a deduction.

It is important to note that the donation made in the form of cash are not eligible for a deduction.

FAQs

If I donate clothes to a charitable institution can I claim deduction under 80G?

No, donations made in kind like clothes or food rations cannot be claimed under section 80G

Do I need to show receipt of the donation made to a political party?

Yes, as proof of the donation, the political party will issue a receipt. It will contain the name and address of the party, the amount donated and the PAN and TAN of the party. This receipt will be needed.

Fund of Funds – Meaning, Types and Benefits

When an individual invests in fund of funds they at once get the benefit of a diversified investment portfolio. Investing in fund of funds gives investors exposure to various asset classes that too at a lower risk. This article will help you understand various aspects related to funds of funds.

What is Fund of Funds?

A fund of funds also known as a multi-manager investment is a pooled investment fund that invests in other types of funds. In simpler terms, a fund of funds is a mutual fund that invests in various other mutual funds present in the market.

The most important feature of these types of mutual funds is that these funds are managed by highly trained professional portfolio managers who can accurately predict the market condition to minimize the chances of loss. Fund of funds are mutual funds that have different kind of portfolio depending upon the main aim of the fund manager. For example, if the aim is to earn higher returns and yields, then the target will be mutual funds that have higher NAV. Similarly, if the aim is stability, then mutual funds that are low-risk will be the target.

These fund of funds mutual funds can invest in both domestic and international funds. This gives them the benefit of diversification and helps in improving the yield of the fund.

Types of Fund of Funds

Following are the various type of fund of funds prevailing in India:

Asset Allocation Funds

Asset Allocation Funds are balanced mutual funds where the investment is done in diverse securities like equity, debt, gold, etc. Investing in a diverse asset pool helps the asset allocation funds to perform better and generate higher returns at a low-risk level.  

Gold Funds

In gold funds, the fund of funds invests in mutual funds that are primarily trading in gold securities. Depending upon the asset management company, this category of fund of funds can invest in mutual funds or gold trading companies directly.

International Fund of Funds

International fund of funds is those funds that invest in mutual funds that are operating in foreign countries. These funds allow the investors to yield higher returns via the best-performing stocks and bonds of different countries.

Multi Manager Fund of Funds

The most common type of fund of funds is a multi-manager fund of funds. These funds include various professionally managed Mutual Funds having a different portfolio concentration. Such fund of funds has more than one manager, with each handling a specific asset of their expertise.

ETF Fund of Funds

ETF fund of funds are mutual funds that invest in shares in the stock market making it a higher risk fund as they are subject to market risk. If one wants to invest directly invest in ETFs they require a Demat trading account while investing in ETF fund of funds have no such limitations. Hence, investing in an ETF via a fund of funds is a more sought out option than a direct investment in this instrument.  

Advantages of Fund of Funds

There are several benefits of investing in Fund of Funds;

High Diversification

Fund of funds gives the opportunity to a higher degree of diversification as these funds invest in multiple schemes that in turn invest their corpus in various underlying assets.

Low Investment Amount

The amount of investment in a fund of funds is less as compared to other investment instruments. Hence, investors with limited finance can also benefit from multiple assets under the same roof.

Experience Fund Managers

Fund of funds mutual fund schemes is managed by highly professional personnel who perform thorough market research to yield higher returns.

Drawbacks of Fund of Funds

Following are the limitations of investing in fund of funds;

High Expense Ratio

Just like any other mutual funds, a fund of funds also incurs expenses. However, unlike funds of funds incur additional costs. Apart from the usual management and administrative expenses, they also have to incur costs of the underlying funds that they invest in.

Tax Implication

Tax will be levied on the fund of funds during the time of redemption of the principal amount. Fund of funds will attract long-term or short-term capital gains as per the holding period of the funds. It is to be noted that the dividend received on this investment is not taxable, as the burden is borne by the issuing fund house.

Difference between ETF and Fund of Funds

Category Fund of Funds ETF
NAV vs Market Value Units of FOF are bought or redeemed at NAV ETF is traded on a stock exchange at the Market price of each lot of share or fund 
Expense Ratio  High Low
Liquidity Might take few hours to days to get the money Bettter liquidity compared to FOF 
Taxation FOF are taxed same as Debt Funds ETFs are taxed as per their asset allocation

Income Tax on Gold in India

One can receive gold in several forms; in physical forms such as jewelry and coins; Or digital form through mobile wallets; Or in paper form by investing in gold mutual funds, gold exchange-traded funds (ETFs), and sovereign gold bonds (SGB). When one buys or sells gold it is important to know how it taxed on the hands of the taxpayers. This article will give an idea of how the tax on gold is computed in India.

Different Forms of gold and its Tax Treatment

Following are the ways in which different forms of gold are taxed:

Physical Gold

Physical Gold is the most common way of buying gold i.e. in the form of jewelry, gold bars and/or coins. The income arising from this form of gold falls under capital gains and the calculation of tax depends on the period of holding the gold jewelry/coins.

STCG: If the holding period (difference between buying and selling) of this form of gold is less than three years (36 months) then it will be classified as short-term capital gains. Such capital gains will be added to your income and taxed at the applicable interest rates.

LTCG: If the period of holding (difference between buying and selling) this form of gold is more than three years (36 months), it will be long-term capital gains. These capital gains will attract a 20% tax rate along with a surcharge if applicable and a 4% cess.

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Paper Gold

Paper Gold is another way of buying gold i.e. in the form of investing in gold mutual funds, gold exchange-traded funds (ETF) and/or sovereign gold bonds (SGB). This form is treated the same way physical gold is treated in terms of taxation.

STCG: If the difference between the date of investment and the date of redemption is less than three years, it is STCG. These gains will be added to your income and taxed at applicable tax rates.

LTCG: If the period of holding this form of gold is more than three years, it will be classified as LTCG. These gains will be taxed at 20% in addition to cess along with indexation benefits.

Individuals investing in SGB will earn an interest of 2.5% per annum and this earing will be classified as income from other sources. The taxation on returns from SGB is different from that of paper gold. The returns one acquires after 8 years of investment in SGB are tax-free but if one decides to withdraw pre-maturely then the returns are taxed at different tax rates. In addition to this, SGB has a 5 year lock-in period, any capital gains arising from the sale of these bonds after 5 years will be LTCG. This LTCG will be taxed at 20% with indexation including cess.

Digital Gold

Digital Gold is the latest form of owning gold in India. Various mobile wallets like Paytm, Google Pay and PhonePe have tied up with MMTC-PAMP or SafeGold to sell gold, starting from a minimum value of INR 1.

The tax treatment of digital gold is similar to paper and physical gold where the holding period decides the applicability of tax.

STCG: If the holding period is less than three years, returns are not taxed directly. They are added to the gross income and taxed at applicable tax rates.

LTCG: If the holding period is more than three years then a 20% tax on returns is to be paid, along with a surcharge and 4% cess. 

How to Save Taxes on LTCG from Investment in Gold?

The Income Tax Department provides provisions that can help in reducing the tax burden of paying 20% on LTCG from gold investments. Section 54F of the Income Tax Act provides tax exemption on the entire long-term earnings from the gold investment if the amount is reinvested into a residential property. Under Section 54EC, if the returns are invested in eligible bonds, then one can claim a tax exemption.

What is the Tax on Gold Received as Gift or Inheritance? 

In India, gifting gold or receiving gold in inheritance is considered a tradition. Therefore, apart from knowing the tax treatment of investing in gold, it is important to know the tax on gold received as a gift or in inheritance.

Tax on Gold received as Gift

If one receives gold as a gift from relatives i.e. parents, siblings or children then one does not have to pay tax on that. If one receives such a gift from someone who is not a close relative then it is considered income from another source. It is important to note that such a gift will only be taxable if its value exceeds INR 50,000.

In addition to this, if one sells the gold received as a gift then it will attract taxes as per the gains i.e. LTCG or STCG just like physical gold.

Tax on Gold received in Inheritance

If one inherits gold from their bold relative then one does not have to pay tax on that. If the gold is inherited by someone other than a blood relative then one has to pay the tax if the value of the gold is more than INR 50,000.

Here also, if one sells the inherited gold, LTCG or STCG will apply. In order to determine the holding period, one needs to consider the date of acquisition of the original owner of the items.

FAQs

How is gold ETF taxed in India?

If you are purchasing gold ETF and selling it at a profit within 36 months then it will be taxed as STCG and if sold after three years it will be considered LTCG and taxed at 20%.

I received a gold jewelry from my mother will that be taxable?

No, gold received as gift from you mother is not taxable.

Vivad Se Vishwas Scheme

Latest Extended Due Date

The deadline for filing declaration under the direct tax dispute resolution scheme ‘Vivad se Vishwas’ is extended to 30th June 2021.

What is Vivad Se Vishwas?

The Vivad Se Vishwas scheme provides for settlement of disputed tax, interest, penalty, or fees in relation to an assessment or reassessment order on payment of 100% of the disputed tax and 25% of the disputed penalty or interest or fee.

The taxpayer is granted immunity from levy of interest, penalty and institution of any proceeding for prosecution for any offence under the Income-tax Act in respect of matters covered in the declaration.

CBDT said it had received requests from taxpayers, tax consultants, and other stakeholders to extend time-barring dates in view of the severe COVID-19 pandemic raging unabated across the country.

Steps to File a Declaration under Vivad Se Vishwas

  1. Login to the Income Tax Portal

    Firstly, login to the portal and click on the Vivad se Vishwas option.

  2. Prepare and Submit DTVSV Form

    Select the year and the filing type.

  3. Fill out the Form

    Firstly, fill Form-1 correctly.
    Fill Form-2 as a final submission.
    File the required documents properly. File them with DSC or EVC accordingly.

FAQs

Can VSV form be revised?

It has been clarified in the CBDT Circular that, the Declaration in Form 1 can be revised any number of times, before the Designated Authority i.e. the PCCIT issues a Certificate of final tax amount payable under the Vivad se Vishwas Scheme.

Is Vivad SE Vishwas scheme extended?

The Central Board of Direct Taxes (CBDT) on Friday further extended the due date for filing declaration under the ‘Vivad Se Vishwas’ (VSV) scheme till 31st June 2021.

Partition of HUF

Hindu Undivided Family, commonly known as HUF is a separate entity from its members for the purpose of Income Tax. It is is treated as a ‘person’ under section 2(31)​ of the Income-tax Act, 1961 . The term is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. So basically a Hindu Undivided Family is not created by any Act but by status. Partition means ending the status of Joint Hindu family. Partition of HUF can be of two types under Hindu Law i.e. total and Partial.

Meaning of Partition

Partition means division of property. Under Hindu Law the Joint Family status comes to an end when there is division of property among the members and joint ownership of property comes to an end. The division will be such as that the share of each member will be determined physically. Further, a division of income from any property, without physical division of such property does not amount to partition.

Types of Partition

Partition under Hindu Law, can be total or partial.

  • Total or Complete Partition: Assets of HUF are physically divided. Further, all the members cease to be members of the HUF. And all the properties cease to be properties belonging to the said HUF.
  • Partial Partition: Partition could be partial also with regards to the persons constituting the HUF, or the properties belonging to the HUF, or both. It may be partial vis-à-vis members, where some of the members go out on partition and other members continue to be the members of the family. Partial partition can be specific too where the property is divided between members and the rest of the property continues to be the HUFs property.
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Right to claim Partition of HUF

Under the Hindu law, the partition of a joint Hindu family may take place at the instance of the following persons:

  • A coparcener*
    • Co-parceners refers to two or more persons sharing an inheritance or joint heirs of a property. These coheirs are called “Co-parceners”.
    • HUF consists of co-parceners (who are family members) and the distant relatives, called members of HUF (e.g. brother-in-law, sister-in-law, etc.,).
    • Co-parceners are the family members and it consists of four levels of lineal descendants including the first male ancestor.
  • A son in the womb of his mother at the time of partition of the property
    • A son in his mother’s womb is treated in law in existence and is entitled to re-open the partition to receive a share equal to that of his brothers.
  • Female sharers cannot demand a partition. However, are entitled to get their share when the joint family property is actually divided on partition.
    • Mother gets equal share if there is partition among sons after death of father,
    • Wife gets a share equal to that of a son at the time of partition between father and sons.
  • Daughters have the same rights as sons to reside in and to claim for partition of the parental dwelling house.
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Procedure and Assessment after Partition of HUF

Partition of HUF takes place on the date the properties are physically divided. There must be physical division of the properties. Physical division of income without physical division of properties does not amount to Partition. The following procedure is prescribed under section 171 of Income Tax Act for partition and assessment of HUF:

  • HUF shall be considered as undivided unless where a finding of partition has been given under this section in respect of HUF.
  • Where it is claimed by the members that a partition has taken place to AO at the time of making assessment u/s 143 or 144. Then, the AO shall make an inquiry after giving notice of inquiry to all the members of the family.
  • On the completion of the inquiry, the AO shall record a finding mentioning the total or partial partition of the joint family property. And the date on which it has taken place

Responsibility to pay Tax

  • Where a finding of total or partial partition has been recorded by the AO. And the partition took place during the previous year than:
    • The total income of HUF for the period up to the date of partition shall be assessed as if no partition had taken place; and
    • Each member or group of members shall be jointly and severally liable for the tax on the income so assessed in addition to any tax for which he/she may be separately liable
  • The partition took place after the end of the previous year, the total income of the previous year of the joint family shall be calculated as if no partition had taken place. Each member of group of members shall be jointly and severally liable for the tax on the income so assessed.
  • The several liability of any member or group of members shall be according to the portion of the joint family property allotted to him/her at the partition, whether total or partial.
  • The above provisions shall, also apply in relation to the levy and collection of any penalty, interest, fine or other sum in respect of any period up to date of the partition, whether total or partial.

Notwithstanding anything contained in this section, if the AO finds after completion of the assessment of a HUF that the family has already effected a partition, whether total or partial. The AO shall proceed to recover the tax from every person who was a member of the family before the partition. Further, every such person shall be jointly and severally liable for the tax on the income so assessed.

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Partition of assets of the HUF property

As per the Hindu Law, part distribution of some of the assets of the HUF, i.e. partial partition of the HUF, either in respect of certain assets or in respect of some of the members is fully valid. However, income tax law does not recognize such partial partition of the HUFs’ assets. The income tax laws require that partition of HUF should be full. So in case of partial partition of some assets, the income in respect of such assets, shall be clubbed and included in the income of the HUF. Even if such assets are received by the member/members.

Nature of the property received on partition

The nature of the joint family property on partition shall be of joint family property when the recipient person is married. Hence the character of the property shall remain that of the joint family property. Such property shall be considered as individual property, until the recipient is unmarried or is reduced to a single person. Thus individual property shall continue to be individual property on inheritance. Further, HUF property on partition shall be that of the joint Hindu family subject to the existence of family during the relevant assessment year

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FAQ

Whether the sum received by a member as and towards his share as coparcener of HUF, on its partition is taxable as income?

The sum received by a member as and towards his share as coparcener of HUF, on its partition cannot be brought to tax as income. As partition is not considered as a transfer.

What will be the treatment of assets after partition, as per Income Tax Act?

Treatment of capital gains on distribution of assets on partition of HUF shall be as under:
– Section 47: No capital gains shall arise to HUF on distribution of assets on partition of HUF.
– Section 49(1): Cost of acquisition of such assets to the member shall be the cost of acquisition of such asset in the hands of HUF.
– Period of holding of assets of transferor shall also be considered for computing the period of holding of assets in the hands of transferee.

Can HUF receive gift from its members?

Earlier HUF could not give or receive gift to or from its members beyond a sum of INR 50,000/-without making the donor liable to tax u/s 56(2). However Finance Act, 2012 extended the definition of a relative to include gift from any member of an HUF to HUF. Thus an HUF can now receive a gift from its member exceeding INR 50,000/- without any liability to pay tax u/s 56(2) of Income Tax Act.

LTC Cash Voucher Scheme

Finance minister, Nirmala Sitharaman, made an announcement on October 12, 2020 of LTC cash voucher scheme for the central government employees. The Income Tax Department, via a press release issued on October 29, 2020, then extended the benefits of the LTC Cash Voucher Scheme to non-central government employees as well, i.e., those employed in the private sector, public sector units, and the state government. The Leave Travel Concession (LTC) cash Voucher scheme was notified by the government in Budget 2021.

Objective of LTC Cash Voucher Scheme

This scheme was announced to boost consumer demand and to provide tax benefit to individuals who are unable to claim the usual LTC tax benefit due to Covid-related travel restrictions. The LTC Cash Voucher scheme aims to provide other expenditure options to the employees to avail the benefits. It would definitely entail tax savings to the individuals who are getting LTA or LTC from their respective employers. The employees have the option to receive a cash equivalent benefit of LTC fare and related leave encashment without traveling under the LTC scheme.

Who are Eligible?

The LTC cash voucher scheme will be available for central government and PSU employees. However, the finance minister extended this scheme to non-central government employees as well, i.e., those employed in the private sector, public sector units, and the state government.

Conditions to claim benefit under the Scheme

To claim the benefit under the LTC cash voucher scheme, an individual is required to fulfil the following conditions:

  • The amount both on account of leave encashment and fare shall be admissible if the employee spends:
    • an amount equal to the value of leave encashment and
    • an amount 3 times of the cash equivalent of deemed fare
    • on the purchase of goods/services attracting GST of 12% or more,
  • Purchases must be made during the period between October 12, 2020 and March 31, 2021.
  • The payment for the goods/services is mandatorily required to be made through a digital mode including cheque, UPI, etc.
  • Invoices must be furnished to an employer containing details of the vendor, GST number and GST amount paid. Invoices in the name of family members can also be submitted.

You will be able to claim the benefits under the scheme only if you fulfill all the above mentioned conditions.

Deemed LTC Fare

The deemed LTC fare for this purpose is as follows:

  • Employees who are entitled to business class of airfare: ₹36,000 (per person Round Trip)
  • Employees who are entitled to economy class of airfare: ₹20,000 (per person Round Trip)
  • Further, the employees who are entitled to Rail of any class: ₹6000 (per person Round Trip)

For example: A maximum tax benefit of LTC fare is INR 36,000 is available per person in case of business class air travel. Thus, for a family of four, the maximum tax benefit that can be claimed is INR 1.44 lakh. Further, to claim the maximum tax benefit, an individual taxpayer will be required to spend INR 4.32 lakh (INR 36,000 X 4 X 3).

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How Does LTC Cash Voucher Scheme Work?

The cash voucher scheme is in lieu of the LTC benefit. So, before you go on to file the claim you should know that this would only apply to you in the following circumstances:

  • The scheme applies to your LTC benefit for the block of 2018 – 2021
  • You have not exhausted the LTC exemption for the current block is 2018-21
  • The cash voucher scheme is available for the money spend on any family member(s) eligible for LTC benefit
  • LTC Cash Voucher scheme is available in the old tax regime. Further, This scheme benefit is not available to an employee who has exercised an option to pay income tax under new income tax / concessional tax regime.
  • Further, the benefits of this special cash voucher scheme will be settled within the current financial year provided the invoices of purchases of goods/services are submitted on time.

Should you opt for it?

This scheme is totally optional and the employees can either choose avail the scheme or opt for the regular LTC in the subsequent years in the block. The benefit is only to the extent of reimbursement in cash of the maximum amount of LTC eligible to them. Those employees who were not planning to avail or have not been able to avail of the the LTC owing to current situation due to Covid-19, have an opportunity to claim LTC cash voucher scheme.

Tax Benefits of LTC Cash Voucher Scheme

Besides getting the reimbursement of purchases, the employees also benefit from LTC scheme in terms of tax savings. Although TDS is applicable on leave encashment, but amount which is related to the cash reimbursement of LTC fare in lieu of deemed actual travel shall be allowed as exemption as per existing provisions. Therefore, TDS provision is not applicable on the amount of LTC fare, which is being reimbursed by employer. However, there are still some uncertain or unclear things in terms of the income tax applicability. IT department also issued clarification regarding various queries received relating to this scheme

FAQ

Can an employee avail of partial benefits of LTC cash voucher scheme?

An employee can avail of the scheme in partial, i.e. of the LTC of part of the eligible family. In such situations, LTC scheme benefits will be applicable to the fare left unutilized during the current block year starting from 2018 to 2021.

An employee incurs the expenditure on or before 31/3/2021 based on the invoice. Actual product or service received in April 2021?

The reimbursement is based on the production of an invoice with details of GST. As far as possible, the claim should be made and settled well before 31st March 2021 to avoid any last-minute rush and resultant lapse.

Do employees need to make a single purchase to get reimbursement under the LTC scheme?

There is no such prescribed format. The employees only need to submit an application to convey the desire to avail the LTC scheme benefits. If they need an advance for the purchase, the same is to be mentioned in the application.

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

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

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

What are the Tax Implications?

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

  1. Tax on Dividends
  2. Capital Gains Tax

Tax on US Equity Dividends

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

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

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

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

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

Capital Gains Tax on US Equity

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

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

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

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

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

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

Country Dividends Capital Gains
India Taxable Taxable
US Taxable Not Taxable

Disclosure in ITR

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

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

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

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

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

FAQs

How to claim foreign tax credit?

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

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

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

Is it mandatory to disclose foreign assets ITR?

Yes it is mandatory to to disclose foreign assets ITR.

How many methods are there to claim DTAA tax relief?

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

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

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

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

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

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

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

Income Tax on Interest Income

Interest-bearing investments such as savings accounts, fixed deposits, and recurring deposits are go-to options for risk-averse investors. Just like any other income, interest income also attracts income tax. Interest income from these investments is taxable as income from other sources. Lets take a look at some of the most popular interest-bearing investments and how they are taxed in India-

Savings Bank Account – Interest Income

Every quarter bank credits interest to your savings account. Interest that gets accumulated in your savings bank account is considered as your taxable income under the head “Income From Other Source.” And it must be declared in your tax return. Saving account interest is taxable at your slab rate. Do note that bank does not deduct TDS on savings bank interest. While incomes from the fixed deposit and recurring deposit are taxable, interest from the savings bank account and post office deposits are tax-deductible to a certain extent.

How is savings interest taxable?

  • The interest component which is earned on saving account is considered as ‘Income from other Sources’.
  • This interest income will be declared in your Income Tax Return and will be taxable as per the applicable slab rate.
  • As per Section 19A of the Income Tax Act, 1961, TDS is not to be deducted on interest on a savings account.
  • For NRIs, tax is deducted at source (TDS) at 30% on interest on Non-Resident ordinary accounts. No tax applies to interest on Non-resident External (NRE) accounts.
  • Savings interest income of up to INR 10,000 in a financial year is eligible for tax deduction under Section 80TTA of the IT Act.
  • Interest on a savings account up to INR 10,000 is technically treated as a deduction. For example, if your gross total income is INR 10 lakh and you have savings account interest of INR 25,000 a deduction of INR 10,000 will be made from your gross total income.

Deduction Under Section 80TTA

Section 80TTA of the Income Tax Act was introduced in order to allow a deduction of up to INR 10,000 on savings interest. 80TTA deduction was introduced to encourage taxpayers to generate more savings. It is available to individuals and HUFs other than senior citizens.  Section 80TTB is applicable in the case of a senior citizen.

If interest income from all the saving accounts is less then INR 10,000 then the entire amount is deductible. If total interest from saving accounts exceeds INR 10,000 then the maximum of INR 10,000 will be deductible and the remaining amount will be taxable

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FD Interest Income

Fixed deposits have been a popular investment option for many investors, it allows you to exploit complete potential of Section 80C to deduct ₹1.5 lakh from your taxable income. However, interest received on FD is taxable. Income tax on interest on fixed deposit is chargeable under the head ‘Income from Other Sources‘. Hence, the income is added to the total income of the taxpayer.

How is Interest Income from Fixed Deposit Taxable?

Interest received from Fixed Deposits is fully taxable and the tax liability is as per the income tax slab. Add it to your total income under the head ‘Income from Other Sources’ in your Income Tax Return. Tax is Deducted at Source by the bank at the time they credit the interest to your account, and not when the FD matures. You will receive the amount net of tax. You then have to add the gross amount to your income and adjust TDS against your final tax liability.

How income tax on interest on Fixed Deposit is calculated?

Many taxpayers got messages and emails from Income Tax Department regarding a mismatch in the interest income data available with the tax department and what was shown in the Income Tax Return (ITR) filed by taxpayers. Therefore you need to add your interest income to your total income and calculate your tax liability accordingly to avoid any such notices. You can follow the following steps to calculate tax liability on interest on FD to your ITR:

  • Add the interest income under the head Income From Other Sources.
  • See which tax slab rate you fall into.
  • Match it with the yearly TDS deduction in your Form 26AS.
  • Bank does not deduct TDS for annual FD interest below INR 40,000
  • The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
  • Even when no TDS is deducted include the interest income in your total income and pay tax on it.

Suppose you wait until the maturity of your FD when interest is actually received– your total interest income may push you up to a slab and you may end up paying the higher tax.

Let us understand this by way of an example:

Anish falls in the 20% tax bracket. He has 2 FDs with a bank of INR 1,00,000 each for a period of 3 years at 8% interest per annum. In the first year, Anish’s interest income is INR 8,000 from each of the FDs, total interest accrued is INR 16,000 in the first year. Bank does not deduct TDS for annual FD interest below INR 40,000.

Another example: Arjun has a fixed deposit of INR 8 lakh at an interest rate of 8% p.a. He receives an annual interest of INR 64,000. The bank deducts TDS on the whole of INR 64,000. The prescribed rate of TDS is 10%. However, for the FY 2020-21 (from 14 May till 31 March 2021) the TDS is deductible at 7.5%.

When to pay income tax on interest on Fixed Deposit?

If there is any tax liability after the inclusion of your interest income in your total income tax on that should be paid before 31st March of that FY i.e. before the end of the Financial Year. You may also be liable to pay quarterly advance tax, if your total tax liability is more than INR 10,000

ITR Form to File to Report Income from FD Interest

Taxpayers must file ITR 1 and report the income from FD interest under the income from other sources head. This is in the case where the taxpayer is only receiving income from FD interest.

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TDS in relation to FDs

  • When does the bank not deduct TDS
    • If total interest income from all FDs with a bank is less than INR 40,000 in a year, the bank cannot deduct any TDS.
    • The limit is INR 50,000 in case of a senior citizen aged 60 years and above.
    • Prior to Budget 2019, the limit of TDS on interest income was INR 10,000.
  • When does the bank deduct TDS @ 10%
    • When the interest income for the year from all the FDs with the bank exceeds INR 40,000 (INR 50,000 in the case of senior citizens) there would be a 10% TDS deduction from such interest income .
  • The TDS Deduction will be 20% if you don’t provide your PAN to the particular bank. So do make sure that the bank has your PAN details.
  • However, if your income is below the exempted limit, you can file Form 15G/15H to avoid TDS. Form 15H for senior citizens and 15G is for other than senior citizens. Submit these forms at the beginning of each financial year to avoid additional TDS deduction and subsequent refund from the IT Department.

Interest Income of senior citizens

Senior citizens receiving interest income from FDs, savings account and recurring deposits can claim a deduction of up to ₹50,000 annually under Section 80TTB. If the senior citizen’s interest income from all FDs with a bank is less than ₹50,000 in a year, the bank cannot deduct any TDS.

FAQ

How will I receive the interest amount?

If you have deposited your money under the traditional scheme, the interest is credited to the given Savings Account on a monthly or quarterly basis.
If you have opted for the reinvestment scheme, a compounded interest is added to the principal amount every quarter and this is reinvested.
You can choose to receive the interest amount on a monthly, quarterly or annual basis.

What is the exemption limit for FD?

If an individual opts for old/existing tax regime, then under Section 80C of the Income-tax Act, you can claim deduction for investments up to INR 1.5 lakh in a financial year by investing in tax-saving fixed deposits (FDs)

How much money can I lock in a Fixed Deposit?

The lower limit and upper limit vary according to the bank.

Corporate Actions – Meaning & Taxation

When a company issues a corporate action, it has a direct effect on the securities issued by that company. If an individual holds stocks in such a company or is a potential investor then it becomes essential to understand how will a corporate action affect the company. This article will give a clearer idea of some common types of corporate actions and how they can affect shareholders.

What is Corporate Action?

A corporate action is an activity that brings material change to an organization and impacts its stakeholders that includes the shareholders of the firm. A corporate action is initiated by the board of directors and approved by the shareholder of the firm.

Corporate Actions For Equity Shareholders

‌Income Tax on Buy Back of Shares

‌A buyback is a company’s method to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. However, the buyback of shares is an important corporate restructuring method.‌

The company buys back shares from existing shareholders at an issue price. Thus, an existing shareholder sells shares to the company at the issue price.‌

Example:

Listed company ABC Ltd repurchased 1,000 shares at the market price of INR 700 and issue price of INR 100.‌

  • Unlisted Companies Exempt from tax in the hands of the investor since FY 2013-14
  • Listed Companies: Up to 05/07/2019 Buy-Back of Shares is treated as a sale of shares and thus capital gains income in hands of the investor. LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A STCG is taxed at 15% under Sec 111A. After 05/07/2019 Buy-Back of Shares is treated as a sale of shares and thus capital gain income in hands of the investor. LTCG & STCG are both Exempt Income for the investor since the company pays buyback tax at 20%.

‌Corporate Actions for Dividend

‌A dividend payout is when the company shares its profit with the shareholders. It can be in the form of cash or stock, which is issued at a specified interval of time i.e. quarterly, semi-annually, or yearly.‌

Income Tax for Dividend

  • Dividend from Foreign Company: Such dividend is taxable at Slab Rates under the head IFOS (Income From Other Sources)
  • Dividend from Domestic Company: Up to FY 2019-20, this was exempt up to INR 10 lacs. FY 2020-21 Onwards, this dividend is taxable at Slab Rates under the head IFOS. TDS under Section 194 is deducted at the rate of 10% if the aggregate dividend during the financial year exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%.
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Corporate Action for Dividend on Preference Shares

Dividend on preference shares is the dividend distributed by a Company on each preference share held by the investor. ‌

Income Tax on Dividend on Preference Shares

  • Dividend from Foreign Company: Such dividend is taxable at Slab Rates under the head IFOS (Income From Other Sources)
  • Dividend from Domestic Company: Up to FY 2019-20, this was exempt up to INR 10 lacs. FY 2020-21 onwards dividend on preference shares held by customers is taxable at Slab Rates under the head IFOS. TDS under Section 194 is deducted at the rate of 10% if the aggregate dividend during the financial year exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%.

Corporate Action for Amalgamation

An amalgamation is the combination of two or more companies into a larger single company.‌

  • Mergers (one survivor) – purchasing company buys the selling company’s assets
  • Acquisition (two survivors) – purchasing company acquires more than 50% of the shares of the acquired company

Example:‌

Under the Merger of IDFC Bank and Capital First, Akash had purchased 10 shares of Capital First in 2011 and is still holding the stock. The companies have agreed to a swap ratio of 139:10. Hence, Akash will get 139 shares of IDFC Bank in exchange for his 10 Capital First shares.‌

Income Tax for Amalgamation

Issue of new shares in exchange for old shares is not treated as a transfer and is thus not taxable.‌

  • Sale of Shares of New Company: LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A. STCG is taxed at 15% under Sec 111A. Cost of Acquisition = Original Purchase Price * Quantity. The benefit of grandfathering scheme is not available for new shares received in exchange for old shares. Thus, the Grandfathering Rule as per Sec 112A does not apply even if the new shares were allotted before 31st January 2018.
  • Sale of Shares of Old Company: LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A and STCG is taxed at 15% u/s 111A. Grandfathering Rule as per Sec 112A applies if the new shares were allotted before 31st January 2018.

Corporate Action for Bonus Issue

Company issues Bonus Shares to existing shareholders as an alternative to paying dividends. The company issues bonus shares to existing shareholders as on record date in a decided ratio‌.

Example:

Listed company ABC Ltd announces bonus issue of shares of 1:5. Thus, a shareholder will receive 5 new shares for each share held.‌

Income Tax on Bonus Issue

  • On the Issue of Bonus Shares: bonus shares at the time of issue are not taxable.
  • On Sale of Shares: LTCG is taxed at 10% in excess of INR 1 lac and STCG is taxed at 15%. The Period of Holding is calculated separately for original shares and bonus shares. The Capital Gains are calculated separately for original shares and bonus shares. The Cost of Acquisition in the case of Bonus Shares is NIL.

Corporate Action for Right Issue of Equity Shares

With an objective to raise fresh capital, company offers right shares to existing shareholders as on record date in a decided ratio.‌

Example:

Listed company XYZ Ltd announces a right issue of shares of 1:5 at an issue price of INR 200 with a market price of INR 350. Thus, a shareholder can buy 5 new shares at INR 200 for each share held.‌

Income Tax on Right Issue of Equity Shares

  • On Issue of Right Shares: The issue of right shares is not taxable.
  • On Sale of Shares: LTCG is taxed at 10% in excess of INR 1 lac and STCG is taxed at 15%. The period of holding is calculated separately for original shares and right shares. Capital Gains are calculated separately for original shares and right shares. Cost of Acquisition in the case of Right Shares is a price paid for acquiring the right shares. Amount paid to acquire the rights entitlement can be added to the purchase value to arrive at the total cost of the acquisition for computing capital gains.

Corporate Action for Spin Off

Spinoff refers to the dissolution of a subsidiary business entity from its parent company to form a new smaller independent organization. In a spinoff, a particular section of the parent company is separated from the main business. The spun-off company gets its own unique identity different from the parent company. In a spinoff, the existing shareholders of the parent company receive shares of the spin-off company as special dividends.‌

Example:‌

Shareholder has 100 shares of company A, Rs10 per share. Company A spins-off one of its divisions into Company B. Company A says that for each 10 shares of Company A that you own, you will be given 3 shares in Company B. It also says that Company B made up 30% of its total value so the value of Company A’s shares will be reduced by 30%.‌

Company A’s value becomes 700 post reduction and also gets Company B’s 30 shares (300 value) leading up to 1,000 (original value)‌

Income Tax on Spin Off

  • Spin-Off When the shareholders of the parent company are allotted the new shares in a resulting company after the spin-off, there would be no tax implication.
  • Sale of Shares: LTCG is taxed at 10% in excess of 1 lac and STCG at 15%. To calculate the Period of Holding for computing Capital Gains, the acquisition date of new shares would be the same as the acquisition date of original shares.

Corporate Action for Stock Split

Stock Split is a division in the shares of the company thus increasing the number of shares keeping the market cap the same.‌

Example:

Listed company XYA Ltd announces a stock split from INR 10 face value to INR 2 face value. Thus, a shareholder having one share of INR 10 face value would now hold 5 shares of INR 2 face value.‌

Income Tax on Stock Split

  • In Stock Split, the transaction of the stock split is not taxable.
  • Sale of Shares: LTCG is taxed at 10% in excess of 1 lac and STCG at 15%. To calculate the Period of Holding to compute Capital Gains, the acquisition date of split shares would be the same as the acquisition date of original shares To calculate Capital Gains, the Cost of Acquisition would be proportionately divided between the original and split shares.

FAQs

How will I know about any corporate action taken by the company?

The companies always communicate any corporate actions that they have taken to their shareholders. If one is not a shareholder, one can visit the official websites of NSE and BSE, and look at corporate announcements.

What is the meaning of voluntary and mandatory corporate action?

In a voluntary corporate action, shareholders have the choice to participate or not to. In a mandatory corporate action, shareholders have to compulsorily participate.