Tax implications on income from other sources

It is absolutely necessary for a taxpayer to remember that there are several heads under which his income is divided under the income tax act. The income earned from salary, house property, profession, business, and capital gains are the main heads under which taxpayers are supposed to show their earnings. However, there are certain kinds of income that do not fall under these heads and are categorized under a separate head called 'income from other sources'. Some of them are completely taxable and must be mentioned while filing the income tax return if earned. Failure to do this can lead to imposition of penalty under the Income Tax Act. Examples of such incomes are as follows:

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Winning lotteries, contests, or games: Sometimes, an individual may win a lottery, a horse race, or a game of any sort, and unexpectedly get a large amount of money. Any income thus derived is taxable under the head 'income from other sources'. The tax rate of 30% (plus 3% cess) is applicable to such an income, irrespective of the individual's taxability.

Income from dividends: Dividend income: The term 'dividend' is clearly defined under Section 2(22) of the act. The definition given by this section covers debentures issued to shareholders, distribution of a certain amount in case of a company's liquidation, and bonus shares allotted to preference shareholders. Dividends coming from a domestic company and mutual funds are not taxed, but dividends coming from a foreign company are taxable under the Income Tax Act under the head ‘income from other sources’.

Money received as gift from unrelated individual: A sum of money received in excess of Rs. 50,000 by a person without consideration is taxable. Section 56 (2) of the Income Tax Act states that gifts from unrelated persons are taxable, including those from foreign sources and property.

Pension received by heirs of deceased: The amount of pension payable to a retired person is given to the legal heir or heirs after his or her death. For the legal heir or heirs, this becomes an income and it is taxable under the head 'income from other sources'. However, the legal heir or heirs can claim a deduction of 33 1/3 % or Rs. 15,000 whichever is lesser according to Section 57 of the Income Tax Act.

Interest received from investment in securities: While the Income Tax Act does not define a 'security' specifically, it is generally considered as a secured acknowledgement of a claim or debt. Central or State Government securities, bonds, and debentures issued by companies provide interests to the investor. Since the earned interest is considered as 'income from other sources', it is a taxable income. It is taxed at 30% (plus 3% cess), irrespective of the individual's tax slab.

There are certain incomes that do not fall under the four heads of income, which make them taxable under the head, 'income from other sources'. Interest on loans, insurance commissions, rent from a vacant land, interest on bank deposits or deposits with companies are some of the examples of such incomes. They must not be ignored by any individual while filing the Income Tax Returns.

Second Home and Income Tax

here are many individuals who wish to buy a second home for certain benefits associated with it. Most apparent of the benefits is its value appreciation over a period of time. Other advantages of owning a second home include a regular income in the form of rentals and its use as a holiday home. It is absolutely essential for an individual planning to buy a second home to know the tax implications associated with it. Under the provisions of Income Tax Act, 1961, if a person owns more than one house for his or her use, then the second house is treated as a let-out and a notional rent is computed, which becomes a taxable income.


In case of an individual owning a second home and the same being let-out to a tenant, the actual amount of rent received is considered as taxable income, subject to certain conditions.

Income tax paid to a municipal corporation or local authority is allowed as deduction in the year for which the amount is being paid. It is necessary for the individual to keep a record of the municipal taxes paid and claim the deduction. A sum equal to 30 per cent of the property's value is allowed as deduction towards repair and maintenance. This is a fixed percentage, irrespective of whether the individual incurs more or less. Another amount that is allowed as deduction is the actual interest paid on the housing loan, whether the second home is considered as let-out or is actually let-out.

If the purchased property is self-occupied, a deduction of Rs. 2, 00,000/- is allowed per year. In case of a property under construction, the interest on home loan is allowed as tax deduction till the completion of construction. Under Section 80C of the Income Tax Act, the principal paid for loan repayment is eligible for deduction up to a maximum of Rs. 1, 50,000/- along with other investments or expenses that are specified. If you sell the house after 36 months, the amount received is treated as long-term capital gains. Exemption can be claimed if the gains are invested to buy another house under section 54.

The gains resulting from the sale of property are required to be deposited in the Capital Gains Account Scheme available in certain banks, if they are not used to buy a new property before the due date of filing income tax return. The funds deposited under the Capital Gains Account Scheme must be used within the due date of return filing to be eligible for exemption. Whether the second house is used as a weekend home, holiday home or a retirement home, the tax implications remain the same.

Hence a second home can be a tax saving opportunity and a great investment as real estate can give you quite good returns. However one should make sure to avail all the tax deductions that a let out property can give you since most of the times a second home is let out and is eligible for huge tax deductions.

Equity Linked Savings Scheme (ELSS): Best for Tax-free Earnings

Millions of people in India look out for ways to save tax, and are often overwhelmed with options like insurance policies, the Public Provident Fund (PPF), and several others. Most of these schemes seem attractive to individuals who are willing to wait longer for returns. For those who wish to save tax and earn good returns within a short period of time, they can be a big turn-off. The individuals who do not want to wait for too long to earn their returns can have the best option in the form of an Equity Linked Savings Scheme (ELSS). It not only helps in getting tax benefits, but also offers them a great chance to profit from the equity markets. It qualifies under Section 80C of the Income Tax Act, 1961, for tax exemption; and at the same time, gives investors the double advantage of tax-savings and value appreciation. An ELSS also carries the following benefits:

Equity growth potential: As it is evident from its name, an Equity Linked Savings Scheme invests a major portion of the fund in equity markets and products associated with it. This increases the earning potential of the investors, as there is a corresponding increase in return with the profit that the fund makes from equity markets.

No tax on dividends: Dividends that investors receive under the ELSS are exempted from income tax. Upon choosing the option of dividends, the ELSS investors get their share of profit earned by the fund on a particular date. They can also prefer the option of dividend reinvestment, in which, the dividends declared are reinvested on the investor's behalf.

Tax exemption on long-term capital gains: If an investor chooses the growth option in ELSS, the Net Asset Value (NAV) of the fund increases with the profit that it earns. The investor does not earn any dividend during the lock-in period of the fund, but he or she can have long-term capital gains that are exempted from tax upon selling the holdings.

Lowest lock-in period: This is a major benefit of an Equity Linked Savings Scheme as compared to the other tax saving schemes. An ELSS has a lock-in period of three years, while it is fifteen years in case of Public Provident Fund (PPF) and six years in case of National Savings Certificate.

While it is true that the returns in ELSS are based on the performance of the equity markets, it also gives the flexibility of monthly investments through Systematic Investment Plan (SIP). A minimum investment specified in the scheme can be made every month on a pre-decided date, which makes it an attractive investment scheme to the small investors. Under the Income Tax Act of 1961, an individual can avail a deduction of up to one lakh rupees from the Gross Total Income for the investment made in an Equity Linked Savings Scheme. Owing to such attractive benefits, the ELSS is gradually becoming a preferred option for investment among many individuals in India, and the numbers are bound to increase in the years to come.

Tax Benefits related to Research & Development expenses under Income Tax Act

Research and Development is one of the most important contributors to the growth of the company. It’s because of such continuous research and development, ISRO was able to successfully undertake Mars Orbiter Mission, aka “MangalYaan.” Indian Government has always appreciated and encouraged people to undertake research and development in their business.

Encouragement is not just by words but by providing special provisions under Section 35 of Income Tax Act. The special provision states that expenditure incurred for the research and development by the businesses can be deducted while calculating the Income tax.

We will help you understand what actually Section 35 of the Income Tax Act is all about

Deduction under section 35 of income tax act has specifically been provided for people who are engaged in research and development related to the businesses. Such involvement in scientific research may be directly or indirectly

·         Direct involvement includes incurring expenditure on own research and development process.

·         Indirect involvement includes making contributions or donations made to universities or institutions conducting research programs.

Direct Involvement

Deduction is allowed for

1.       Research & Development expenditure before commencement of business

2.       Research & Development expenditure during the running of business

Expenditure before commencement of business includes-

         i.            Revenue expenditure [Section 35(1)(i)]

Revenue expenditure is allowed as deductions only if such research is directly related to business and the amount allowed as deduction include any expenditure related to research including raw materials cost & wages paid incurred within 3 years prior to the commencement of the business in the year which the business commences

       ii.            Capital expenditure [Section 35(2)(ia)]

Even capital expenditure is allowable as deduction only if the research and development is related to the business. However it doesn’t matter if the asset is used for the said purpose within the previous year. Expenditure incurred within 3 years prior to the commencement of the business is allowed as deduction in the year which the business commences.

Other important point is to note that any purchase and acquisition of land is not allowed as deductions under this section. Also, no separate deduction for depreciation is allowed

Expenditure during the running of business include

i.            In house research expenditure [Section 35(2AB)]

a)      In-house research expenditure can be allowed as deduction if the organization has an in-house facility for research and development.

b)      Allowable deductions include all expenditure which is directly related to research and development.

c)       To avail these deductions, company setting up research centers must be involved in manufacturing or production of computers or drugs or any product as notified by the Central Board of Direct Taxes.

d)      Only expenditures recognized as related to scientific research under section 35 (2AB) can be claimed for deductions.

e)      Research and development work should be related to scientific research only.

The business centres conducting in-house R&D have to fulfill below mentioned conditions to claim income tax deduction under section 35 of Income tax Act for expenditure on scientific research

Ø  Should be approved by DSIR

Ø  Should be exclusively conducting scientific research in the areas or products as notified by Central Board of Direct Taxes (These notified areas include drugs, pharmaceuticals, electronic equipments, computers, chemicals etc.)

Ø  Research centre must be located in a separate area provided exclusively for R & D.

Ø  Must have separate manpower

The total deduction available under this section is two times the amount of expenditure incurred on the research and development activity.

Indirect involvement -

Any contributions or expenses incurred by business to any approved scientific research association or universities or institutions. It shall be allowed weighted deduction of 125% of the expenses incurred or contribution made under Section 35(1)(ii)/(iii), Section 35(2)(iia) and Section 35(2AA)

Conditions to claim Deduction under section 35(1) (ii)/ (iii)

·         Deduction allowed is only for revenue expenditure.

·         The payment is made to the approved organization, universities, institutions or associations.

·         The main objective of the organization or association to which contribution is made should either be scientific research or research for social sciences.

·         Purpose of scientific research or research for social sciences may or may not be related to the business. Also, it need not be approved by any authority.

·         125% deduction shall be allowed as deduction for the amount of revenue expenditure incurred for the purpose of research.

Conditions to claim Deduction under section 35(1) (iia) of Income Tax Act

·         Deduction allowed is only for capital expenditure.

·         The payment is made to the approved organizations, universities, institutions or associations are registered in India.

·         The main objective of the organization or association to which contribution is made should either be scientific research or research for social sciences.

·         Purpose of scientific research or research for social sciences may or may not be related to the business. Also, it need not be approved by any authority.

·         125% deduction shall be allowed as deduction for the amount of capital expenditure incurred for the purpose of research.

  Deduction under section 35(2AA)

Deduction is allowed if the payment is made to the below notified institutions:

·         National Laboratory

·         Universities

·         Indian Institute of Technology

·         Specified persons as approved by the prescribed authority

One has to make sure that the contributed amounts are used for scientific research approved by prescribed authority.

The organizations, universities, institutions or associations approved under section 35 of Income Tax Act for receiving contributions are required to file their return of income under section 139(4).

Any unabsorbed expenditure can be carried forward to set off with the further income for an infinite period of time. By such provisions business houses are motivated to invest heavily in Research and Development which in turn helps humanity with latest technologies.

Section 80C: Buying a property to save tax!

We all are aware that interest on home loan is a popular deduction that many are aware of. The principal amount repayment as well as the stamp duty and registration charges are another payments that are also eligible deductions under section 80C.

Let us try to understand this better through a case study.

Amol has recently married and intends to invest in house property in Pune. The property rates in Pune are well above his budget, but he intends to bridge the gap by taking a home loan for almost 60% of the cost of his property. He has zeroed in on a property that costs Rs.65,00,000. He has savings of Rs.20,00,000 and intends to take a loan of the remaining Rs.45,00,000. The deal for the property is going to be signed in June 2015. Amol is quite happy that finally he is going to fulfil his dream of buying a home but has a few doubts about the tax implications and his future outgo of money in form of installments. Although he is aware that he will receive a huge deduction from tax for the interest repayment, he is interested in knowing whether his property deal might give some more eligible deductions. 

He visits a tax expert and gets his doubts cleared. His tax expert explains him that buying a property and taking a home loan for it has many positive tax implications. Although housing loan repayments will take away a large chunk from the monthly income, there are a lot of tax savings opportunities that a home loan offers. Real estate and property have always been costly and with the rising property costs, loan seems to be the only way out for most people to own a house. Hence the Income Tax department has offered a lot of tax relief to home loan borrowers. The first deduction that Amol will get when he signs the property deal is that of the stamp duty and registration charges. These can be claimed under section 80C of the Income Tax Act. These can be claimed by Amol in the year when these payments are made by preserving a copy of the Index II and receipts as a proof of payment. Apart from this, section 80C also offers a deduction of up to Rs.1,50,000 for principal repayment every year till the repayment is complete. These deductions will give Amol a scope to save taxes even if he has to make huge repayments for home loan in addition to the interest repayment deductions of up to Rs.2,50,000 that he can claim u/s 24. If the interest repayment deductions are also added then the total deductions available to Amol will be as follows -

Amount of home loan – Rs.45,00,000

Interest rate - 10.50%

Details	Total repayment(Rs)	Deduction available (Rs)
Interest repayment in year 1	4,69,198	2,00,000 u/s 24
Principal repayment in year 1	69,927	69,927 u/s 80C
Stamp duty and registration	4,55,000	*80,073

*Rs.1,50,000 – Rs.69,927 = Rs.80,073

The total deduction under Section 80C is Rs.150,000 hence the stamp duty can be claimed only up to Rs.80,073 after claiming Rs.69,927.

In this case the house property is assumed to be self-occupied and hence the deduction is limited to Rs.200,000 for interest. In case the house is vacant or let-out then the deduction is available without any limit of Rs.200,000. Hence if Amol lets out the property then the entire interest amount of Rs.4,69,198 is available as deduction. 

Calculating Indian Income Tax of an Individual - A Brief Review

 

For the Financial year 2015-16, Indian Finance Minister, Mr. Arun Jaitley has announced that an individual can claim exemption from income tax up to Rs 4,44,200.

The above line would mean nothing to majority of people in India. As most of them don’t know how Indian Income Tax works. Here we will explain how income tax is calculated for an individual in a most simple and easy way.

Let us understand what Income is- The Indian Income Tax Act, 1962 has segregated Income of an individual into different categories namely:-

·         Income from salaries

·         Income from house property

·         Profits and gains of business or profession

·         Capital gains

·         Income from other sources

·         Agricultural Income

A point to be noted here is that agricultural income is not subject to tax. Agricultural income includes income earned from

Ø  Rent received or derived from land situated in India used for agricultural purposes.

Ø  Income derived from the usage of land by agriculture operations including sale of agricultural produce.

The sum total of all the income from above mentioned categories except Agricultural Income will ascertain Gross Total Income of the individual.

There are certain deductions allowed by the Government under Sections80 C, Section 80 D to the tax payer. You can check all the types of deductions here.

After discounting permissible deductions from the Gross Total Income, we get our Taxable Income. Taxable Income are taxed as per tax slabs which remain unchanged from the year 2014-15

Tax slabs for the financial year 2015-16

For Individuals below the age of 60

Income Tax Slabs	Income Tax Rates
Where Total Income is less than Rs. 2,50,000	NIL
Where the Total Income is more than Rs. 2,50,000 but doesn’t exceed Rs. 5,00,000	10% of the Amount by which it exceeds Rs. 2,50,000
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

For Senior Citizens above 60 years to 80 years of Age

Income Tax Slabs	Income Tax Rates
Where Total Income doesn’t exceed Rs. 3,00,000	NIL
Where the Total Income is more than Rs. 3,00,000 but doesn’t exceed Rs. 5,00,000	10% of the Amount by which it exceeds Rs. 3,00,000
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

For all Senior Citizens above 80 Years of Age

Income Tax Slabs	Income Tax Rates
Where Total Income doesn’t exceed Rs. 5,00,000	NIL
Where the Total Income is more than Rs. 5,00,000 but doesn’t exceed Rs. 10,00,000	20% of the Amount by which it exceeds Rs. 5,00,000
Where the Total Income is more than Rs. 10,00,000	30% of the Amount by which it exceeds Rs. 10,00,000

Your taxable amount will be taxable as per the rates in which you fall. Say if you are under 60 years of age and your Taxable Income is 600,000, your tax amount would be 20% of (600,000-500,000) which is Rs 20,000/

Education Cess @ 2% and SHEC @ 1% is levied on the tax calculated using the Income Tax rates mentioned above. In other terms you can say it as tax on tax.

So in the above example, your total tax payment would be Rs.20,000 plus 2% Education Cess on Rs.20,000 plus 1% SHEC (Secondary and higher education cess) on Rs.20,000 which would be Rs.20,600.

IPL fever drives income tax lever

IPL and taxes seems like an odd combination. However think about it a little. IPL is a business of cricket, isn’t it? So where there is business, there is income and where there is income, there is income tax.

IPL spells ‘money’. The amount of money that churns out during a season is probably enough to feed an entire nation! No doubt then, that the income tax department loves the season since it expects a lot of income tax inflow from these players. Not only players but the entire machinery of BCCI, team owners, organizers, broadcasters, commentators, TV anchors, umpires all end up with heavily filled pockets. Such events give rise to a huge potential tax income for the IT department.

The bouncers and hit wickets, the parties and celebrations, the celebrities and star value all sum up to only one single thing – MONEY. The magic weaver Lalit Modi did some real number crunching a few years back and created the IPL franchise – a great combination of entertainment, game and business. Naturally then this raised alarm bells with the income tax collectors and they started sniffing every opportunity to impose and extract tax liabilities.

The IPL tournament leads to huge tax payments in the form of TDS to the tax department. Let us talk about our warrior on field and off field too – Yuvraj Singh. A whopping 16 crore deal with the Delhi Daredevils, makes him the most priced player with Dinesh Karthik closing second at 10.5 crores. The taxes that they might pay in form of TDS @ 10% will be 1.6 crore for Yuvi and 1.05 crore for Dinesh. These are huge amounts. Moreover certain players who do not have an India PAN card may also end up paying 20% TDS on their earning. This will be the case with most foreign players. However some of these players may get some tax relief if we have a double tax avoidance agreement – DTAA with the countries from where they come. But even then, these players will be shelling out huge amounts in taxes, giving the Income Tax department a big reason to rejoice. Income tax return filing for these players and finding their tax liability is going to be an interesting exercise for tax filers.

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