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.

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.