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Notice for excess tax deductions, excess payment, and clarifications u/s Section 133(6)

September 21, 2023

In the last few months, we have seen numerous cases where income tax notices have been issued by the income tax department. Out of these notices, two notices are most common: (1). 148A – Income Escapement Notice; (2) 133(6) – Power to Call for Information notice. In this article, we would be understanding in details about the 133(6) notice. Section – 133(6) – Power to call for Information by Income Tax Authorities. Notice u/s 133(6) of Income Tax Act,1961 pertains power to income tax authorities to require any person to furnish information or documents relevant to a tax inquiry or proceeding from the taxpayer himself as well as third parties such as banks, employers or other relevant sources, to gather details about a taxpayer’s financial transactions. This notice aims to ensure accurate reporting of income & prevent tax evasion. Tax authorities can use this information to cross-verify the taxpayer’s claims & identify any discrepancies between reported & actual financial activities. In the recent days, the department has mostly use this section for asking documentary evidences for claiming excess/bogus deductions, exemptions, claim fake expenses, clarification about making excess credit card payments etc. Here are the few samples of the notices: Some of the important points to be considered in Section – 133(6) notice are as follows: Information collected here by the Income Tax Authorities can be used for assessing or reassessing the income of a taxpayer, determining tax liability or for any other purpose related to taxation. Notice u/s 133(6) can be issued only after obtaining the PRIOR APPROVAL of Principal CIT/ CIT/ Principal DIT/ DIT. Notice u/s 133(6) is generated by ITD system. Hence, AO do not require to issue the handwritten notice. Also, reply to the notice by the assessee under verification can be done only through Online mode only. Officer may during the course of an inquiry or proceeding issue a written notice to any person requiring assessee to provide specific information or documents. This notice should clearly state the purpose for which the information is required. It is MANDATORY to submit REPLY for all or any information asked u/s 133(6). Generally, the TIME LIMIT to submit reply to information asked in the notice is up to 15 days from the date of serving of notice u/s 133(6). If an assessee who receives a notice under this section, fails to furnish the required information then penalty u/s 272A(2)(c) may be imposed which may be up to Rs 10,000. The assessee on whom the penalty is proposed to be imposed must be given an opportunity of being heard in the matter by IT authority, only after that order shall be passed of imposing penalty by IT authority. The information can be called for checking irrelevant of the fact that whether or not any proceeding is pending before the IT authorities or not. Notice u/s 133(6) can be given to assesses asking for information relating to:a) any EXEMPTION (u/s 10(14)(i), u/s 10(14)(ii), 10(13A), 10(10AA)) or DEDUCTION (u/s 80C, 80D, 80CCD (1B), 80DDB, 80GG, 80U etc.) claimed by assessee. b) any rental income, FD, RD, any interest income, Share market transaction such as Sale of Shares & MF, Sale of Land or Building or Both which has been reflecting in AIS Statement of the assessee but he/she has NOT filed the ITR return or has filed the return showing less income than appearing in AIS Statement. c) SOURCE of INCOME in respect of any purchase of land or immovable property, heavy amount spend on CREDIT CARD TRANSACTION, any large amount of CASH DEPOSIT has been made in Saving or Current account by the assessee. Here are the detailed examples of this:   (I). Example – 1 –   Mr. A has filed his ITR for the FY 2022-23. In his ITR, his Salary Income is Rs 28,50,000 from which he has claimed exemption u/s 10(14)(i) of Rs 2,51,250 & u/s 10(14)(ii) of Rs 2,04,650 & u/s 10(13A) of HRA of Rs 1,42,000. Mr. A has also claimed deduction u/s 80C of Rs 1,50,000, u/s 80D of Rs 75,000, u/s 80DDB of Rs 1,00,000, u/s 80GG of Rs 60,000 & u/s 80U of Rs 70,000. Now, here income tax authorities can issue notice u/s 133(6) asking for information of exemption claimed u/s 10(14)(i), 10(14)(ii) & 10(13A) of amount as mentioned above. Also, income tax authorities can ask of deduction proof such as payment made, document evidence of deduction claimed u/s 80C, u/s 80D, u/s 80DDB, u/s 80GG & u/s 80U. Mr. A need to give the proper explanation of exemption claimed & payment & document proof of deduction claimed. If he failed to give proper explanation & evidence proof of exemption & deduction claimed then it will be deemed that he has falsely claim the exemption & deduction & it will be disallowed. Penalty for misreporting of exemption & deduction can be imposed by income tax authority.   (II) Example – 2 –   Mr. Basu has filed his ITR return for FY 2022-23 for Rs 10 Lakhs as his total income by showing it as Business Income (Gross Receipt or Turnover = Rs 40 lakhs) under the head PGBP. However, in his AIS statement as updated on Income Tax Portal, it is reflecting that he has DEPOSITED CASH of Rs 80 Lakhs in his saving account. Also, he had sold some shares & MF amounting to Rs 7.5 Lakhs. Now, here income tax authorities can issue notice u/s 133(6) asking for information about the SOURCE of INCOME  of differential amount of EXCESS CASH DEPOSIT of Rs 40 lakhs & also about the Sale of shares & MF of Rs 7.5 lakhs & why this SALES from shares & MF has not been shown in the ITR filed by Mr. Basu.   Mr. Basu need to give the proper explanation of about the SOURCE of INCOME of EXCESS CASH DEPOSIT of Rs 40 lakhs had been made which is coming in his AIS Statement & also about NOT showing SALES from

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10 Important Cash Transactions Limits as per Income tax Act, 1961

September 21, 2023

In this article we will discuss about the certain cash transaction limits, as per income tax Act, 1961. As per the Income Tax Act in India, cash transactions above a certain limit are not allowed. The limit varies depending on the type of transaction. The government has set various limits on various limits on cash transactions to tackle black money. Paying or receiving cash in excess of these limits can be punishable with penalty of up to 100 percent of amount paid or received. In this article, we will be understanding 10 such transactions which have been restricted in the income tax act specifically. Here are the details:   1.   For Cash Receipts:   As per Section 269ST of the Income Tax Act, no individual can receive an amount of Rs. 2 lakh or more in cash from a single person in a day or in relation to a single transaction or event. Non-compliance of the Section 269ST of the Income Tax Act, 1961 attracts a penalty that is equal to the transaction amount that resulted in violation. This means that if you pay ₹2,65,000 in cash under any of the provisions of Section 269ST, you may be liable to pay a penalty of ₹2,65,000.   2.  For Cash Payments:   As per Section 40A(3) of the Income Tax Act, any expense incurred by a business in cash exceeding Rs. 10,000 in a single day is not allowed as a deduction for tax purposes. Any payment or receipt made in cash above this amount needs to be made through electronic means such as NEFT, RTGS, IMPS, or by cheque. When it comes to self-employed taxpayers, they cannot claim any expenditure over ₹ 10,000 if it’s paid in cash to a single person in a single day. Note: The law establishes a higher threshold of ₹ 35,000 for payments given to a transporter.   3.  For Specific Expenditure:   In case expenditure is allowed in respect of any liability incurred by a person in earlier years on accrual basis & if such expenditure is subsequently paid in cash/cross cheque/bearer cheque exceeding Rs 10,000 in a day then the deduction allowed earlier will be disallowed & payment will be chargeable to tax as income of the subsequent year as per Section 40A(3A) of the income tax act. 4.  For Loan or Property Transactions:   As per Section 269SS of the Income Tax Act, no person can take or accept a loan or deposit or any payment towards immovable property of Rs. 20,000 or more in cash, either from a single person or in aggregate from a single person on a single day. If the cash transaction is done beyond the limit, then a penalty of an amount equal under Section 271D of Income Tax Act will be imposed on a seller who accepts cash or refund of advance is made in cash by the seller of the property.   5.  For Repayment of Loans or Property Transactions:   Cash transactions above Rs. 20,000 are not allowed for the repayment of loans. Any repayment made above this amount needs to be made through electronic means or by cheque. However, this provision will not apply if amount accepted from government, any banking company, Post office or co-operative bank, any other institution, association or bodies which the CG may specify.   6.  For Gift in Cash:   If you receive any cash amount in gift and the value of such gift is Rs. 50,000 or more, then such gift shall be taxable as Income From Other Sources u/s 56(2)(x). Also, if the Gift amount is going beyond Rs. 2 Lacs then it would also become a violation of Section 269ST and 100% penalty u/s 271DA shall also be levied.   7.  For Capital Expenditure   Section 43 of the Act disallows the capital expenditure incurred in cash. Cash transactions above Rs. 10,000 for the purchase of assets are not allowed. This includes assets like property, machinery, and vehicles. As per this section,, any expenditure incurred by the assessee for acquisition of any asset in respect to which a payment or aggregate of payments made to a person in a day, otherwise than by banking means, equals or exceeds ten thousand rupees, such expenditure shall be ignored for the purposes of determination of actual cost of such asset. It simply means, if an assessee makes a payment of any amount equal to or exceeding Rs. 10,000/- in cash to any person in a single day for any expenditure towards acquisition of any asset, then such sum shall not be included in the cost of the asset, and the assessee will not be able to claim depreciation on such amount. Therefore, now an assessee cannot make a payment of any sum of Rs. 10,000 or more in a day towards purchase of any fixed asset.   8.  For Donations   Cash donations above Rs. 2,000 is not allowed u/s 80G. Any donations made above this amount need to be made through electronic means or by cheque only.   9.  For Donations for Political Parties   If you made cash donations to political parties, then even if  Rs. 1 is donated in cash, that will not be allowed. NO DEDUCTION at all shall be allowed u/s 80GGB and 80GGC for cash donations.   10. Health insurance premium paid in cash:   Any payment made in cash on account of premium of health insurance policy will NOT be allowed as deduction under Section 80D.   It is important to note that violating these limits can result in penalties and prosecution under the Income Tax Act. Therefore, it is advisable to conduct transactions through non-cash modes such as cheques, bank transfers, or digital payments.   Happy Readings!   Disclaimer: The information contained in this website is provided for informational purposes only, and should not be construed as legal/official advice on any matter. All the instructions, references, content, or documents are for educational purposes only and do not constitute legal advice. We do not accept any liabilities

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Bonds Investments

Taxation on Gains from Bond Investment in India

April 10, 2023

  In India, bonds are financial instruments that are used to raise capital by companies, financial institutions, and government entities. They are essentially debt instruments that provide a fixed rate of return to the investor. Under the Indian Income Tax Act, the interest income earned on bonds is treated as taxable income and is subject to tax at the applicable rate. The interest income earned on bonds is added to the total income of the individual or entity and taxed accordingly. However, there are certain types of bonds that are exempt from tax under the Income Tax Act. For example, interest earned on government securities, such as the National Savings Certificate (NSC), Kisan Vikas Patra (KVP), and Public Provident Fund (PPF), are exempt from tax. In this article, we will discuss about Taxation on Gains from Bond Investment in India.   Taxation on Gains from Bond Investment in India   Bond investors check many parameters while investing in bonds, such as a coupon, frequency of coupon payments, maturity & yield. Important factor to be considered in bond investment is “taxation on gains from bond investment. Few important points that need to be considered before taxation on gain from bond are:   Bonds provide coupon payments and return principal amount on maturity. Firstly, the coupon payments are the gains from bond investment; hence they are taxable. Secondly, you may sell bonds in the secondary market before maturity, or you may hold bonds till maturity. In either of the cases, if there is capital gain, then the gains are taxable.   The bonds listed on the National Stock Exchange are Listed Bonds, and bonds that are not listed on the National Stock Exchange are called Unlisted Bonds.   Short Term Capital Gain Tax is applicable if you sell listed bonds before 12 months (it is 36 months in the case of unlisted bonds).   Long Term Capital Gain Tax is applicable if you hold listed bonds for more than 12 months or hold unlisted bonds for more than 36 months.   TDS will not be deducted on interest received from Listed Bonds & Debentures.   Slab system defines the tax rate applicable to individuals considering age and income. Individuals can be Resident or Non-Resident or HUF or Association of Person (AOP) or Body of Individual (BOI) or any other Artificial Juridical Person (AJP). The applicable tax rate is called the slab rate.   Taxation of bonds in India as follows   1.  Regular Taxation of Bonds in India – Interest earned from Bonds is taxed as per marginal slab rate, and the maximum slab rate is 30 %. Appreciation of the bond price is considered as capital gain and taxed accordingly. If these bonds are held for the long term (more than 12 months for listed bonds and more than 36 months for unlisted bonds), the capital gain tax will be 10 %. Short-term capital gain tax can be 5% to 30%. Example – Mr. Suresh is a senior citizen aged 65. He has invested Rs. 10 lakhs in listed bonds. The coupon rate, i.e., interest rate, is 10% paid annually. His annual income is 9 lakhs. So, he comes under the 20% slab rate Investment amount – 10,00,000 Coupon rate -10% Annual Interest income – 1,00,000  Tax on interest income:- 1,00,000 * 20% = Rs 20,000 Suresh has to pay Rs. 20,000 taxes on interest income every year till maturity or till he resells bonds STCG Tax – Suppose after 10 months, if he sells bonds for Rs.10,50,000, then the capital appreciation is Rs.50,000 Tax on STCG – 20% X 50,000 = Rs 10,000 LTCG Tax – Suppose after three years, if he sells bonds for Rs. 13,00,000, then the capital appreciation is Rs. 3, 00, 000 Tax on LTCG – 10% X 3,00,000 = Rs 30,000 Note – i) Indexation benefits can be availed only in the case of inflation-indexed bonds or capital indexed bonds. ii) The income should be listed under the ‘income from other sources’ section in your income tax forms   Tax Free Bonds   In the case of Tax- free bonds, the interest earned from bonds is not taxed, but price appreciation of the bonds during maturity (or sale) is considered as capital appreciation. Hence capital gain taxes are applicable. Considering the holding period, either LTCG or STCG, will be applicable.   Tax Saving Bonds   Section 54EC Bonds are Capital Gain Tax Exemption Bonds that provide 100% tax exemption on the long-term capital gain earned by selling any property. These bonds are the best options to save tax after the property sale. But conditions apply, such as the time gap between property sale and bond investment cannot exceed six months. Also, the investment limit in Section 54EC Bonds is 50 lakhs. Section 54EC Bonds do not provide any exemption on short term capital gains. Note – i) Interest earned on tax exemption bond will be taxable as per the slab rate of the individuals. Income should be listed under the ‘income from other sources’ section in your income tax forms. ii) There is a lock-in-period of 5 years on these exempted 54EC bonds from the date of purchase of bonds, if these bonds are sold before 5 years from date of purchase then the LTCG exempted earlier will be taxable in the hands of assessee. Even if any loan or security is taken against these bonds will be treated as redemption & LTCG exempted earlier will be taxable.   Example – An immovable property is sold at Rs. 85 lakhs after a period of 42 months from the date of acquisition. The indexed cost of acquisition is 52 lakhs and indexed cost of improvement is Rs. 13 lakhs. Calculate the capital gain that is taxable after claiming exemption under Section 54EC if investment amount is Rs. 22 lakhs invested in NHAI bonds within 6 months from date of sale of immovable property Particulars Amount (Rs) Sale Consideration 85,00,000 Less: indexed cost of acquisition 52,00,000 Less: indexed cost of improvement 13,00,000 Long Term Capital Gain 30,00,000 Less: Investment in NHAI

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leave travel Allowance

Leave Travel Allowance (LTA) Tax Exemption, Eligibility, Rules & Claims

April 10, 2023

  LTA or leave travel concession is the allowance paid by your employer to cover your travel expenses, while you go on leave with or without your family. LTA forms a part of your cost to company (CTC) and is given as a yearly benefit but can be availed of monthly. In this article, we will discuss about Leave Travel Allowance (LTA) Tax Exemption, Eligibility, Rules & Claims.   The Income Tax Act, 1961 provides various exemptions to salaried class. Exemption means exclusion from total taxable income. Such exemptions enable the employers to structure Cost to Company (CTC) of employees in a tax efficient manner. One of such exemptions available to salaried class under the law and also widely used by employers is Leave Travel Allowance (LTA) /Leave Travel Concession (LTC). LTA exemption is also available for LTA received from former employer w.r.t travel after the retirement of service or termination of service. LTA is a type of allowance which is provided by the employer to his employee who is travelling on leave from work to cover his travel expenses LTA is an important component of the salary of the employee as it is eligible for income tax exemption as per section 10(5) of the IT Act, 1961 LTA received by the employer will not be a part of his net income of the year Value of LTA provided to High Court (HC) or Supreme Court (SC) Judge & members of his family are completely exempt from tax without any conditions.   The eligible criteria/condition for claiming LTA   1.  LTA can only be claimed on actual travel cost. Actual journey is a must to claim the exemption. All the mediums of the travel i.e. road, rail or air are claimable under LTA. However, employee must submit a valid proof of cost to claim the LTA.   2.  LTA can be claimed only on travel expense. Food or stay or any such expenses excluding travel cannot be part of it. LTA is exempt from tax   3.  LTA can only be claimed on domestic travel expenses. You cannot claim LTA on the expenses incurred during the international trip (if any) of the employee   4.  Employee cannot claim LTA in every financial year. LTA can be claimed only for two journeys in a block of 4 calendar years. The block years for LTA purposes are decided by government. The current running block for claiming LTA is calendar years 2018-2021. The last running block for LTA was 2014-2017   5.  LTA can only be claimed when the employee has been on leave from work for travelling purpose, the employee should mark the period as “leave”. For example – Sanju went on a holiday to Manali with his family and friends. He received Rs 50,000 as LTA from his employer. However, he spent Rs 30,000 for the air tickets of his family. The total LTA exemption he can claim is Rs 30,000, an amount he spent. The balance amount of Rs 20,000 received as LTA will be added in his taxable income.   Expenses that can be included in LTA   Tax benefits are available only on actual travel expenses incurred on rail, road or air fares only subject to the following condition:- Travel by Air – The air fare of the economy class of the national carrier (Air India) by the shortest route or the actual expenditure incurred, whichever is less, can be claimed as tax exemption.   Travel by Train – If the place of origin & destination is connected by rail & journey is performed by any mode of transport other than air, then the first class AC rail fare by the shortest route or the actual expenditure incurred, whichever is less, can be claimed as tax exemption.   Travel by Other Modes a)If the place of origin & destination of the journey are not connected by rail but a recognized mode of transport exists for the route then the first class or deluxe class fare for the shortest route for the recognized mode of transport or the actual expenditure incurred, whichever is less, can be claimed as tax exemption. b) However, if there is no recognized mode of transport for the route, then the amount equivalent to the first class A.C. rail fare of the distance covered assuming that the journey has been performed by rail can be claimed as tax exemption.   Procedure of claiming LTA   It is generally employer specific. Every employer announces the due date within which LTA can be claimed by the employees & may require employees to submit proof of travel such as tickets, boarding pass, invoice provided by travel agent etc along with the mandatory declaration. It is not mandatory for employers to collect proof of travel, it is always advisable for employees to keep copies for his/her records & also to submit to employer based on LTA policy of the company/to tax authorities on demand.   Carry Forward of the unclaimed LTA of a block year to the next block year   If the employee has not claimed LTA in the last running block or just claimed it once, he can still claim one additional LTA in the next block of calendar years under the carry over concession rules under which an employee can claim LTA tax break on 3 journeys made in current block of years. However, in order to utilize the carry over concession facility, one LTA exemption with respect to journey must be claimed in first calendar year of next block. For example – If an employee had just claimed one tax exemption under LTA in last block of year i.e. between 2014-2017. Now, he is  eligible to make LTA claims up to 3 journeys in current block i.e. between 2018-2021. However, his first claim must be made in first calendar year of current block i.e. 2018.   Who are included in the travel cost claimed for tax benefit under LTA?   LTA tax exemption claim can

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Income tax Rules

Changes in the income tax rules effective from 1st April, 2023 (For Financial Year 2023-24)

April 8, 2023

In this article, we will discuss about the difference between Financial Year (FY) & Assessment Year (AY) & changes made in the income tax rules effective from 1st April, 2023 (For Financial Year 2023-24).   Difference between Financial Year (FY) & Assessment Year (AY)   From Income Tax point of view, FY is the year in which income is earned by assessee. AY is the year following the financial year in which assessee need to evaluate the previous year income and pay taxes on it. For Example – If assessee financial year is from 1st April 2022 to 31st March 2023 (i.e., FY 2022-23), then assessment year is the period which will begin after the financial year ends (i.e., AY 2023-24 from 1st April 2023 to 31st March 2024).   A taxpayer should file an income tax return (ITR) in the assessment year (AY), which is the year following the completion of a financial year. Taxpayer should calculate his/her income for full FY & calculate tax on such income, if any.He/she need to file ITR when his/her total income exceeds Rs 2.5 lakh after claiming deductions & exemptions allowed under income tax act. He/she can claim credit for advance tax, TDS & TCS paid during the financial year at the time of filing his/her ITR return.   Changes in the income tax rules effective from 1st April, 2023 (For Financial Year 2023-24)   1  New Income Tax regime to be default regime   From 1 April 2023, the new tax regime will be the default tax regime. If any assessee chooses new tax regime, then he/she will not have to invest in any investment tools such as PPF, NPS, LIC, ELSS etc. to claim deduction u/s 80C, 80D, 80CCD(1B). However, assessee will still be able to choose the old regime tax.   2.  Tax rebate limit is increased to Rs 7 Lakhs   Tax rebate limit under new tax regime has been increased to ₹7 lakh from ₹5 lakh in earlier income tax slab. Tax-free limit for salaried taxpayers under old regime is Rs 5.5 lakhs & under new tax regime is Rs 7.5 lakhs. So, it means that an individual with a salary of less than this tax-free limit under new tax regime will not have to make any investments to claim deductions. Also, no TDS will be deducted if the salary income is within the tax-free limit.   3.  New Income Tax Slab Regime for Salaried persons & pensioners including family pensioners   Up to Rs 3,00,000                                           – Nil Above Rs 3,00,000 & up to Rs 6,00,000   –  5% Above Rs 6,00,000 & up to Rs 9,00,000   – 10% Above Rs 9,00,000 & up to Rs 12,00,000  – 15% Above Rs 12,00,000 & up to Rs 15,00,000 – 20% Above Rs 15,00,000                                         – 30% Note – The new tax regime will be the default choice, but assessee can still opt for the old tax regime.   4.  Standard Deduction & Family Pension deduction   There is no change in standard deduction of Rs 50000 under old tax regime for employees. For Salaried persons & Pensioners, the benefit of standard deduction under the head salary of Rs 50,000 & family pension deduction of Rs 15,000 will now be allowed under new tax regime also.   5.  No LTCG tax on debt mutual fund   Investments in debt mutual funds will be taxed as per the income tax slab rate of the assessee from 01.04.2023. Earlier, if debt mutual funds were held for > 36 months, then it will be treated as LT capital assets & Long-Term Capital Gain @ 20% with indexation benefit was allowed but now it has been removed.   6.  Taxation on Life Insurance Policy   Any sum received from life insurance policy having premium annually in a financial year is more than Rs 5 lakh would be taxable from 1st April 2023. This Income tax rule will not be applicable on ULIP policy. Any amount received on the death of the person insured will still be exempt from tax.   7.  Tax on Online Gaming   As per the new Section 115BBJ, tax on winnings from online games i.e., all forms of winnings such as cash, kind, vouchers or any other benefit from online gaming will be liable to tax at a flat 30%, which will be deducted at source immediately at the time of receiving the winning amount. No Threshold limit has been prescribed on deducting tax on winning from online games.   8.  Conversion of Physical gold into Digital gold & vice-versa to be tax-free   Any Conversion of physical gold into digital gold receipts (EGRs) & vice versa from April 1, 2023 will be exempt from capital gain tax. It will boost the digital gold market in India & make gold investment opportunities available to Indian investors.   9.  Gifts received by Resident but not-ordinarily residents (RNOR) will be taxable   Any gift received by an RNOR over and above Rs 50,000 will be taxable in their hands.   10.  Deduction claims under section 54 & 54F will be restricted   Taxpayers who sell their house property or any other capital asset & invest the sale amount in a new house property can claim a deduction under sections 54 and 54F. Now from 1st April, 2023, deduction under sections 54 and 54F will be restricted to Rs 10 crores. Any long- term capital gain (LTCG), if the period of holding is more than 24 months will be taxed at 20% with indexation benefit under section 112.   11.  Senior Citizens Savings Scheme   Senior citizens can now deposit up to Rs 30 lakh under the senior citizens savings scheme from 1st April, 2023. Earlier, the deposit limit was restricted to Rs 15 lakhs. The maximum

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Debentures

Debentures Meaning, Types, Features, its advantage & disadvantage

April 8, 2023

In this article, we will discuss Debenture, its feature, types, advantage & disadvantage.   What are Debentures?   A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness & reputation of the issuer for support. Both corporates and governments frequently issue debentures to raise capital or funds.   Similar to most bonds, debentures also pay periodic interest payments called coupon payments. Like most bonds, debentures are also documented in legal contract between the bond issuer and the bondholders. Some debentures can be converted into equity shares while others cannot.   The contract specifies features of a debt offering such as maturity dates, the timing of interest or coupon payments, the method of interest calculation & other features. Only Corporates & Governments can issue debentures. Governments typically issue long-term debentures—those with maturities of longer than 10 years & are generally considered as low-risks investment.   Debentures of corporates are unsecured. They have the backing of only the financial viability & creditworthiness of the underlying company. These debentures pay an interest rate & are redeemable or repayable on a fixed date. A company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders.   It is advantageous for companies since they carry lower interest rates & longer repayment dates as compared to other types of loans and debt instruments.   Features of Debentures   Interest Rate – Coupon rate is determined, which is the rate of interest that the company will pay the debenture holder or investor. This coupon rate can be either fixed or floating. A floating rate might be tied to a benchmark such as the yield of the 10-year treasury bond and will change as the benchmark changes.   Credit Rating – Company’s Credit Rating & debenture’s credit rating impacts the interest rate that investors will receive. Credit-rating agencies measure the creditworthiness of corporate and government issues. These entities provide investors with an overview of the risks involved in investing in debt. Any debt instrument receiving a rating lower than a BB is said to be of speculative grade.   Maturity Date – For non-convertible debentures, the date of maturity is also an important feature. This date dictates when the company must pay back the debenture holders. The company has options on the form the repayment will take. Most often, it is as redemption from the capital, where the issuer pays a lump sum amount on the maturity of the debt. Alternatively, the payment may use a redemption reserve, where the company pays specific amounts each year until full repayment at the date of maturity.   Debentures Risks to Investors   Debenture holders may face inflationary risk. Here risk is that the debt’s interest rate paid may not keep up with the rate of inflation. For example – Inflation causes prices to increase by 5%. If the debenture coupon pay interest at 4%, the holders may see a net loss, in real terms.   Debentures may carry credit risk & default risk. These are only as secure as the underlying issuer’s financial strength. If the company struggles financially due to internal or macroeconomic factors, investors are at risk of default on the debenture. A debenture holder would be repaid before common stock shareholders in the event of bankruptcy.   Example of a Debenture   Example of a Government Debenture would be Government Treasury Bond (T-Bond). T-bonds help finance projects and fund day-to-day governmental operations.   Some T-Bonds trade in the secondary market. In the secondary market through a financial institution or broker, investors can buy and sell previously issued bonds. T-bonds are nearly risk-free since they’re backed by the full faith and credit of the government. However, they also face the risk of inflation and interest rates increase.   Advantage & Disadvantage of Investing in Debentures   Advantage Disadvantage Debentures are debt instruments issued by the company that promises a fixed interest rate on the due date Payment of interest and principal becomes a financial burden for the company in case of no profits Issuing debentures is one of the most effective ways to raise funds for a company compared to equity or preference share Debenture holders are the creditors of the company. They cannot claim profits beyond the interest rate and principal amount These instruments are liquid and can be traded on the stock exchange During the recession, the company’s profit declines, and it becomes difficult to pay interest Debenture holders do not have voting rights in the company meetings. Thus, it does not dilute the interest of equity shareholders Debenture holders have no voting rights. Hence, they do not have control over management decisions During inflation, issuing debentures can be advantageous as they offer a fixed interest rate During redemption process of debenture, there is a large amount of cash outflow The holders bear minimum risk because interest is payable even in case of loss of the company Default payment has adverse effects on the creditworthiness of the company   Types of Debentures   Registered v/s Bearer – Registered debentures are registered to the issuer. The transfer or trading in these securities must be organized through a clearing facility that alerts the issuer to changes in ownership so that they can pay interest to the correct bondholder.  Bearer debenture are not registered with the issuer. The owner (bearer) of the debenture is entitled to interest simply by holding the bond.   Redeemable v/s Irredeemable – Redeemable debentures clearly indicates exact terms and date by which the issuer of the bond must repay their debt in full. Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in full by a certain date. Because of this, irredeemable debentures are also known as perpetual debentures.   Convertible v/s Non-Convertible   1  Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. These are hybrid

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common mistakes in investment

Common Investment Mistakes Investors should avoid while making Investment

April 8, 2023

In this article, we will discuss about common investment mistakes investors should avoid while making investment.   Common Investment Mistakes Investors should avoid while making Investment are   1   Not Investing   Of all of the mistakes that a beginner investor might make on their investing journey is not investing. Retirement is expensive & unfortunately, most of us won’t be able to save enough without a lot of help from the stock market. If you had invested that money in the stock market and it was allowed to compound, meaning you earned interest on your interest. The same amount of money contributed throughout your life would be significantly higher by investing in the stock market instead of any fixed or low return investing instruments.   2.  Using money you can’t afford to risk   When you invest money that you cannot afford to risk, your emotions and stress levels get higher, which can lead to poor and impulsive investment decisions. When evaluating stocks, consider your risk tolerance, which is your willingness to lose a portion or all of your original investment in exchange for higher returns. When determining your risk tolerance, evaluate the securities or asset classes you’re comfortable with, such as growth stocks v/s bonds v/s fixed savings instruments. Don’t invest money you can’t afford to lose, such as your emergency funds. You will make much better investment decisions by investing money that you can afford to risk.   3. Being driven by Impatience   Another investing mistake is a lack of patience. If you’re investing for the long term, stocks may not experience the desired gains right away. If a company’s management team unveils a new strategy, it may take months or several years for that new approach to play out. Too often, investors will buy shares & then immediately expect the shares to rise at highest level. What often makes investing profitable is the magic of compounding. Compounding takes time to really work, which is why those who start saving at young age (in their early 20s) often see the best returns.   4. Learning about shares & stock knowledge from the wrong places & following the crow   Getting stock, shares tips or information from the wrong sources is another common and costly investing mistake. Following the crowd is an investing mistake since it doesn’t involve research but instead mirrors what other investors are doing. Many people only hear about an investment after it has already performed well. If certain stocks double or triple in price, the mainstream media tends to cover those moves as hot takes. Television, Newspaper & the Internet (including social media) can push stocks higher into excessively overvalued territory. There is no shortage of experts in the stock market who are willing to offer their opinions while presenting them as if they are educated and endlessly correct. Even stock analysts that work for investment firms get it wrong and usually have a solid grasp of the company and the industry they cover. In other words, even if they’re qualified to render an opinion, they can still be wrong. Generally, government-backed reliable sources is a good place to start for general investment advice or guidance. You could also consult a financial advisor to guide you through the process. Not even the most experienced and successful investor can predict the future. If an investment professional guarantees a certain outcome on your investment, consider it a red flag.   5. Not doing your due diligence   Not performing due diligence when investing can be a costly mistake. With a proper due diligence strategy Investors are more likely not to be blindsided and make well-evaluated investment decisions. An individual investor should perform proper due diligence especially with highly speculative and volatile penny stock shares. The more due diligence, the better your investing results. If you’ve reviewed the company, including any warning signs and potential risks, you’re much less likely to be negatively surprised by an event.   6. Investing without goal & understanding of your risk profile   Setting goals is extremely important. Once you set a goal, you are determined and focused to achieve it. Goal-setting restructures your brain cells in order for you to be more successful in achieving them. Your brain tries to bring down all possible obstacles that keep you away from achieving these goals. Once you set a goal, like buying a house or going on vacation to your favorite destination, you are less likely to miss your SIPs or tamper with your savings. Because, suddenly, you feel like these goals matter to you the most. As important as it is to set a goal, understanding your risk profile is equally important. Different investment options have different risk profile. Understanding the risk of investing in different categories of investments will allow you to understand your risk profile in a better way. An equity-oriented portfolio will have more risk than a debt-oriented portfolio or a fixed investment portfolio.   7. Try to time the market   Market timing is generally prevalent amongst stock market investors, where they make buying and selling decisions based on their predictions about the future market price movements. Many investors also try to time the market. They try to sell off their investment when they feel the market is going to crash. These predictions might not always be true. Many researchers and experts say it’s impossible to time the market. Moreover, trying to time the market leads to your goals not getting realized. The reason being, by redeeming your investment from time to time, whenever you feel, the market is going to crash, you are missing out on opportunities like the benefit of compounding that lets you reach your goal faster.   8. Reshuffling your investments too often   By looking at the returns or a promising headline, makes a lot of investors sway towards doing the same thing. Many investors make the mistake of falling into this trap too often. Based on the predictions based on headlines

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Capital gain exemptions

Section 54, 54EC, 54F: Capital Gain Tax Exemption, Deposit in Capital Gain Account Scheme

April 8, 2023

In this article, we will discuss about Section 54, 54EC & 54F of Capital Gain Tax Exemption.   Section 54, 54EC, 54F: Capital Gain Tax Exemption   Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds. Seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains (LTCG) Tax. Following exemptions can be claimed on the sale of a Long-Term Capital Asset i.e. on sale of an asset which was held for more than 2 years: Section 54:  Asset Sold – Residential Property, New Asset Purchase – Residential Property Section 54EC: Asset Sold – Any Asset, New Asset Purchase – Specified Bonds Section 54F: Asset Sold – Any Asset, New Asset Purchase – Residential House Section 54:  (Asset Sold – Residential Property, New Asset Purchase – Residential Property)   Under this section – Any LTCG arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the following manner:   Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or   Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property. Note – 1  Provided that the New Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition.   2. Then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier.   3. The capital gain arising from this transfer will always be a short term capital gain (STCG).   Quantum of Deduction under Section 54   Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house.   If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt.   If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption   Number of Houses that can be purchased for claiming Section 54 Exemption:   Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house, irrespective of the no. of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house – then capital gains exemption can be claimed.   An exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only.   Capital Gains Account Scheme    In Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.   To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme (CGAS).   The amount of Capital Gain which is not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the CGAS, before the due date of furnishing of ROI.   The details of deposit i.e. the Date of Deposit & amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. In this case, the amount already utilized by the assessee for the purchase/construction of the new house shall be eligible for exemption.   In case, the assessee deposits the amount in the CGAS but does not utilized the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilized shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset & it will be LTCG of that financial year.   Other Important Points   Allotment of a flat by DDA under the Self-Financing Scheme shall be treated as construction of the house. Similarly, allotment of a flat or a house by a co-operative society, of which the assessee is the member, is also treated as construction of the house.   The assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit.   Where the assessee made substantial payment within the prescribed time limit & acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period, exemption u/s 54 is allowed.   House Property does not mean a complete Independent House. It includes residential units also, like flats in a multi-storeyed complex.  

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Life Insurance Policy rules

Life Insurance Policy Taxation Rules

April 8, 2023

In this article, we will discuss about Life Insurance Policy Taxation Rules. Important points that need to be considered in case of taxability of Life Insurance Policy   1.. Deduction under Section 80C 2. Exemption under Section 10(10D) on maturity of policy 3. TDS on the life insurance policy 4. Tax implication of single premium life insurance policies   Buying a life insurance plan is very important for people who have dependent family members. The policy will help you protect the financial future of your parents, spouse & children. Payment of premium on life insurance policy not only gives insurance cover to a taxpayer but also offers tax deduction u/s 80C of Income Tax Act.   Deduction under Section 80C   Any premium paid towards a Life Insurance Policy is allowed as deduction. A taxpayer, being an individual or a Hindu Undivided Family (HUF), can claim deduction u/s 80C in respect of premium on life insurance policy paid by him during the year. However, the LIC Premium is allowed on ACTUAL PAYMENT BASIS only (not on due basis). It will be allowed even if the premium payment is made in cash. In case of an individual, deduction is available in respect of policy taken in the name of taxpayer or his/her spouse or his/her children. No deduction is available in respect of premium paid in respect of policy taken in the name of any other person, other than as mentioned. In case of a HUF, deduction is available in respect of policy taken in the name of any of the members of the HUF. Limit of Deduction u/s 80C – Overall deduction u/s 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs. 1,50,000.   Minimum holding period   Minimum holding period in case of Life Insurance Policy is 3 years. In case policy is terminated/surrender before the minimum holding period then the deduction allowed in earlier years would be deemed as income of the previous year of termination. Further, no deduction will be allowed in respect of payment made towards such policy which is terminated during the year of termination.   Exemption under Section 10(10D) on the maturity benefit   Section 10(10D) of the Income Tax Act allows any amount received such as maturity proceeds, bonus amount, survival benefits or surrender value on life insurance policy as exempt if premium paid on the policy must not be more than 20% of sum assured for policies issued before April 1, 2012 & 10% of sum assured for policies issued after April 1, 2012.   In case of policy taken on or after 1-4-2013 in the name of any person suffering from disability or severe disability u/s 80U or suffering from disease or ailment given u/s 80DDB, limit will be 15% of sum assured.   Benefits of section 10(10D) also apply to any gains arising out of ULIPs & Single Premium Life Insurance Policies (if the conditions mentioned in section 10(10D) are met).   Deductions are applicable to both foreign as well as Indian life insurance companies.   TDS on the life insurance policy   In case life insurance policy is taxable, TDS u/s 194DA will be applicable if the amount received is more than ₹1 lakh. TDS rate will be 5% on the income component (amount received – total premium paid in the tenure of the policy). Any amount received under life insurance policy is taxable under the head “Income from other sources” as per the applicable income tax slab rate, if not exempt u/s 10(10D).   When will be the amount received as maturity proceeds, bonus amount, survival benefits or surrender value on life insurance policy is taxable ?   There are certain situations when Section 10(10D) does not apply, If the premium paid towards the life insurance policy is more than 10% of the sum assured for policies issued after April 1, 2012 & for policies taken before April 1, 2012, if premium paid more than 20% of sum assured, then tax benefit is not available.   Also, as per Finance Budget 2023, any sum received from life insurance policy having premium annually in a financial year is more than Rs 5 lakh would be taxable from 1st April 2023. If a policyholder already has a life insurance policy with premium exceeding Rs 5 lakhs in a financial year, then it will be exempt from tax, if all the other conditions u/s 10 (10D) are satisfied. The new tax law is applicable only to the policies purchased on or after 1st April, 2023.   This Income tax rule will NOT be applicable on ULIP policy. Any amount received on the death of the person insured will still be exempt from tax.   For ULIP plans, the tax exemption limit is limited to Rs 2.5 lakhs annual premium payment in a financial year.   Tax implication of single premium life insurance policies   For a single premium payment life insurance policy, the premium paid is often more than 10% of the sum assured. Hence, the maturity benefit of the policy will be taxable under the head “Income from other sources” as per the applicable income tax slab rate. TDS u/s 194DA @ 5% will apply on the income component (amount received – total premium paid in the tenure of the policy) if the amount received is > ₹1 lakh. For example, if a policy is taken on 12 July, 2013 with a maturity value of ₹3.5 lakh, the single premium amount will be approximately ₹95,000, which is over 10% of the sum assured. Suppose, if assessee surrendered the policy on 16 July, 2019 & he/she received Rs 1,50,000 then the insurance company would deduct TDS @ 5% on Rs 45,000 (income component). Rs 1,50,000 received as surrender value will be taxable under the head “Income from other sources” as per the applicable income tax slab rate.   Comparison of Old Regime & New Regime tax (under section 115BAD) for investing in life insurance policies  

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Summary of Income tax notice issued under section 148A & 148 for not reporting income in ITR & its Procedural requirement

April 8, 2023

In this article, we will discuss Summary of Income tax notice issued under section 148A & 148 for not reporting income in ITR & its Procedural requirement.   Reason for Income Tax Notices issued by the department    1   Non – Filing or Late Filing of ITR – Every taxpayer having Gross Total Income (GTI) before claiming deduction is > basic exemption limit, then he/she is required to file ITR within due date, failing to which they may receive a notice from the department. Also, if ITR is not filed for a particular year, department can issue a notice even after several years.   2.  Differences in Income & TDS Details – If the department find any difference between the income declared in the ITR & income reflected in other documents such as Form 26AS, AIS, TIS or Form 16, then they may issue a notice to the taxpayer. Furthermore, if the TDS claimed by taxpayer doesn’t match the TDS details mentioned in form 26AS, then also they may receive a notice from department.   3.  Non-disclosure of Income or Investments – If department suspect that taxpayer has not disclosed all their income or investments detail, then they may issue a notice to the taxpayers for non-disclosure of income or investments to the taxpayer.   4.  Tax Dues or Refund Adjustments – If a taxpayer has any outstanding tax dues or any interest, fees or penalty pending, then also department may issue a notice to recover the dues pending. Moreover, If a taxpayer has claimed any refund in his ITR then also department may adjust the refund against any outstanding dues & issue a notice for balance tax to the taxpayer.   5.  High Value Transactions – High value transactions include purchase or sale of property, investments in stocks, mutual funds, bonds, FD, TD etc. Taxpayer must report these transactions in their ITR & pay the required taxes applicable on it, otherwise if department find any differences or non-reporting of these transaction income, they may issue a notice.     Asking for Explanation under section 148A & issue of notice under section 148 by the department    As per Section 148A of the Income Tax Act, if income tax officer has information that the taxpayer has escaped income for any assessment year on which tax is payable in that case, the officer will provide a chance to the taxpayer to explain their case before issuing notice. The assessee gets a chance of opportunity of being heard by the officer.   AO will give assessee not less than 7 days but not more than 30 days for furnishing his/her explanation.   After seeing the taxpayer’s reply, the AO shall decide whether it is a fit case to issue notice for income escaping assessment under section 148. If the AO decides to reopen the case, a copy of the order & a notice under Section 148 must be issued to the taxpayer.   If the AO is dis-satisfied with the submissions filed by the assessee, then he shall pass an order u/s 148A & thereafter issue a notice u/s 148 for the relevant assessment year (RAY), directing assessee to file return of income for the RAY.   After receiving the order u/s 148A & notice u/s 148 the assessee needs to file the return of income for the RAY within time prescribed in the notice u/s 148 and proceedings for assessment will start.   Time Limit for issuance of notice under Section 148A   As per Section 148A, a notice can be issued within 3 years from the end of the relevant assessment year. However, notice can be issued beyond 3 years but up to 10 years from the end of the relevant assessment year, only if there is evidence that the taxpayer has escaped taxable income of at least Rs 50 lakhs.   AO shall obtain the approval of specified authority (Principal Chief Commissioner or Chief Commissioner) before conducting any such enquiries, also providing an opportunity of being heard to the taxpayer before passing order u/s 148A. However, this provision is not applicable in search or requisition cases.   Difference between Section 148A & 148 of the Income Tax Act   Section 148 provisions from 1 April 2021 have some amendments making it mandatory to follow the procedures specified u/s 148A, before issuing of notice u/s 148.   From 1st April 2021, the AO under the new provision u/s 148A requires to conduct an inquiry or provide the taxpayer with an opportunity to be heard in relation to the information that indicates that the income chargeable to tax has escaped assessment, which requires the assessee to explain his case & to get the proceedings dropped with the satisfaction of the AO. AO must obtain prior approval of specified authority before issuing such notice u/s 148A.   It is obligatory for the AO to issue notice u/s 148A(b) to the assessee, containing the information along with material evidence which has escapement of income, which can be countered by the assessee by way material and evidences available with him.   This is a major change from the old provision of Section 148 in which the information of reason for re-opening of case and satisfaction recorded by the AO was made available to the assessee only after issuance of notice u/s 148 in the old rule and after filing of return of Income by the assessee.   Section 148 requires that the AO issue a notice to the taxpayer if there is a ‘reason to believe’ by the AO that the taxpayer has escaped reporting any income in the RAY.   After issuing the notice, the AO may assess or reassess or re-compute the total income for such a year u/s 147 of the Income Tax Act.   Happy Readings!   Disclaimer: The information contained in this website is provided for informational purposes only, and should not be construed as legal/official advice on any matter. All the instructions, references, content, or documents are for educational purposes

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