Monday, November 5, 2012

How is the annual value of a house property calculated?

Under the Income Tax Act what is taxed under the head ‘Income from House Property’ is the inherent capacity of the property to earn income called the Annual Value of the property. The above is taxed in the hands of the owner of the property.
Computation Of Annual Value
(i) GROSS ANNUAL VALUE(G.A.V.) is the highest of
(a) Rent received or receivable
(b) Fair Market Value.
(c) Municipal valuation.
(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever is higher).
It may be noted that if the let out property was vacant for whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause(a) above, then the amount actually received/receivable shall be taken into account while computing the G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4 of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing the G.A.V.
(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided that the taxes were paid during the year.
(iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24.
Deductions U/S 24:- Are exhaustive and no other
deductions are available:-

(i) A sum equal to 30% of the annual value as computed above.
(ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is deductible on accrual basis. Interest paid during the pre construction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed. This deduction is also available in respect of a self occupied property and can be claimed up to maximum of Rs.30,000/-. The Finance Act, 2001 had provided that w.e.f. A.Y. 2002-03 the amount of deduction available under this clause would be available up to Rs.1,50,000/- in case the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed before 1.4.2003. The Finance Act 2002 has further removed the requirement of acquisition/ construction being completed before 1.4.2003 and has simply provided that the acquisition/construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed.
Some Notable Points
In case of one self occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid may still be claimed therefrom. The resulting loss may be set off against income under other heads but can not be carried forward.
If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out.
Annual value of one house away from workplace which is not let out can be taken as NIL provided that it is the only house owned and it is not let out.
If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value.

From assessment year 1999-2000 onwards, an assessee who apart from his salary income has loss under the head “Income from house property”, may furnish the particulars of the same in the prescribed form to his Drawing and Disbursing Officer who shall then take the above loss also into account for the purpose of TDS from salary.
A new section 25B has been inserted with effect from assessment year 2001-2002 which provides that where the assessee, being the owner of any property consisting of any buildings or lands appurtenant thereto which may have been let to a tenant, receives any arrears of rent not charged to income tax for any previous year, then such arrears shall be taxed as the income of the previous year in which the same is received after deducting therefrom a sum equal to 30% of the amount of arrears in respect of repairs/collection charges. It may be noted that the above provision shall apply whether or not the assessee remains the owner of the property in the year of receipt of such arrears.

Tax Implication on Pension

There are several ways in which one can receive a pension and the exact details have to be checked to see the extent of a taxable element that is involved in the entire process. The nature of the payment actually determines the extent of the income that would be taxable and based on this the required effect would have to be given to the whole process. This aspect is important as the tax will eat into the final income that is available in the hands of the individual. Here is a closer look at the entire issue and how the investor or individual can tackle the position.

Pension:One of the ways in which you can receive income in your retirement years is through the route of pension. This is a way wherein you get a regular sum of money at specific time intervals usually monthly so that there is a regular flow of income that continues after you stop working. One of the changes that occur once you retire is that the regular income flow stops. Pension is meant to be a replacement for this situation where you can ensure that there is not a large difference that is visible immediately hence this will be a way in which you can ease the entire situation. A central theme of the pension effect in the field of taxation is that the amount received as a pension is taxable though there could be a separation of the heads under which the income would go depending upon the source from which the amount has been received. Once this is known then the additional elements can be tackled properly.

Received from employer:A way in which pension arises for an individual is that there is a regular payout that is available from their former employer. This is possible due to the long service that the individual has put in with the employer or that there are several conditions related to such a regular payout of the pension that is met by the employee. The end result is that there is a regular payout that they will get in the form of pension. Since the payout received will be taxable the next question is the head in which the amount will be considered.

In this sense the source from which the payout is received becomes very important so in this case it is the former employer who is making the payout. Due to this reason the amount is actually considered under the head of income from salaries and the individual would have to include the amount of the pension that they have received under this head. This means that there are no additional deductions that would be allowed from the income and hence the manner of the taxation of the net income is also clearly determined.

Other sources:There are several other ways in which an individual can receive a pension and this would cover receipts from an insurance company or it could be some other investment where there is a promise of a regular flow of income over a period of time which will act like a pension. In these situations the manner in which the taxation impact is covered is slightly different so there has to be attention to this area. The basic nature of the income under the taxation impact remains the same which is that the amount received will be fully taxable. If there is a lumpsum received on the maturity of an insurance policy then this might be tax free but it is not pension. Usually the pension received from different sources will go under the head Income from other sources. One thing that is crucial in this whole working is that when there is a family pension that is received then there will be a standard deduction that will be applicable so this is something that will provide an element of relief but the deduction is restricted to one third of the amount or Rs 15,000 whichever is less.

Tuesday, October 30, 2012

Taxation of Perquisites in India

If there are any benefits in addition to your salary that you obtain from your employer and if you are worried about the taxation of such benefits, then this content might give you an idea on what these Perquisites (benefits) are and how they are taxed in India.
Perquisite is actually a form of profit that an employee obtains from his/her employer apart from the salary or wages that he/she gains. As per the income tax department of India, this beneficial addition can be in the form of a cost free or reduced price accommodation provided by the employer, in the form of a service used or product purchased by the employee for which the employer pays the full amount or part amount, any equity or other form of security provided to the employee from the employer at a concessional price or free of cost.

There was a period when this benefit was taxed in the hands of employer in the name of ‘fringe benefit tax’. Now as ‘perquisite’, it taxed in the hands of the receiver who is the employee. The value of the benefit received as perquisite is considered to be a form of income and is added with the salary and taxed.
Categories and valuation of Perquisites for taxation:-
The valuation of each type of benefit is made as per the rules of income tax act. First the employer is categorized into one of the two categories. Further the taxation is made as per the rules in income tax act. One category contains a company or a firm, a local body, Association of Persons or Body of Individuals. Another category contains government companies, sole proprietor companies, Hindu Undivided Family etc.

Accommodation provided by government companies to employees irrespective of state or central government the tax is paid by the government organization which is the employer. For private firms the perquisite tax for this benefit is applicable as a percentage of salary based on the city where he/she is accommodated. There are certain exceptions for accommodation in mining areas, oil research areas and also in conditional transfer.

Facilities like sources of energy (gas, electricity) and water if provided or paid by the employer, the tax is charged in the hands of the employee based on the cost per unit of the facility.

The educational facility of the employee’s relative (son/daughter) if provided by the institution owned by the employer or where the expenses of education of the student is taken care of by the employer, the tax as perquisite is applicable in the hand of the employee. There is an exception in this case. If the expense for education does not exceed Rs 1000 per month in other schools in the same locality then this perquisite is tax exempt.

If an employee owns a vehicle (car) and uses it for both personal and official purposes, tax exemption is based on the cubic capacity of the car engine. A car whose engine is less than 1600 CC the amount of tax exemption is Rs 1200 per month and to those having over 1600 CC engine the amount exempt is Rs 1600 per month.
Fringe benefits taxed (FBT) in the hands of employer:-
  • 20% of the expenses on telephone or mobile provided to the employee for official purposes is considered as fringe benefit and is taxed in the hands of employer.
  • 50% of the expenses on health club facility provided to the employee fall under fringe benefit category.
  • 5% of the expenses on travel to foreign countries by the employee from the provided by the employer are considered to be fringe benefit.
The categories mentioned above just give an idea about how perquisites and fringe benefits are categorized. There are many more categories and areas of taxation for both FBT and perquisites. The valuation can change from time to time based on the changes made to tax laws.
Note: As of now FBT has been withdrawn and all perquisites are taxed in hands of employee after giving such slabs of exemption.

Company Fixed Deposits - India

Non banking financial companies in India:-
Apart from banks there are companies in India that accept money from general public for a fixed term and pay interest. These companies are authorized by the Reserve Bank of India to perform these tasks under specified regulations of RBI. However RBI does not guarantee on any sort of transactions or trades entered into with these institutions. In other words the institutions are not actually backed by the Reserve bank. There are set of guidelines and instructions from RBI to investors who are willing to invest in NBFCs. These instructions can help protect a person’s interest in investing in these companies.
Fixed deposit scheme is one of the schemes that are offered by NBFCs and there are specific permissions required to offer these schemes to public apart from regular authorization.
Features of company fixed deposit:-
Term: The term of company fixed deposits are usually less because when it comes to these deposit schemes the performance of the company and rating may change with time. So as a matter of insecurity shorter terms are preferred. The term as regulated by RBI cannot be less than 12 months or more than 5 years.

Types of company FD
: There are two types of fixed deposit schemes namely cumulative and non-cumulative fixed deposit schemes. Non Cumulative schemes as the name suggests pay off the interest earned on investment on regular basis (half yearly basis or annual basis) so the interest will not get acquired on principal to earn higher interest in the years to come. Cumulative fixed deposit scheme on the other hand where the interest accumulates with principal so as to earn higher returns when compared to non-cumulative plan. This scheme pays interest accrued on deposit schemes on maturity of the deposit.
Rating of a company: There are certain institutes (CRISIL, ICRA etc) that rate a company based on net owned fund (NOF) of the company. The companies are rated based on certain ceilings and slabs (ex: NOF more than 200 lakhs be rated in certain category) and based on the rating a person may decide whether he should invest or not in a company.
Interest rates: Interest rates on fixed deposit schemes offered by a company are higher than regular banks. This is one of the major reasons that people are interested in these schemes these days. The interest rate offered on the FDs is limited to a maximum of 12.5% by the Reserve bank of India and this figure can vary with time. A person has to stay updated about this information before depositing in these schemes. The interest rates available today in market range from 9% to about 12.25%. (coupon)
Pre-mature withdrawals: Premature withdrawals are permitted in these schemes and the lock in period of these schemes will be 3 months. Interest accrued and penalties are as per the terms and conditions of the company.
The person who is willing to deposit in company fixed deposits has to be conscious and updated about regulations of RBI and also current happenings in the industry. Here are few points that can help a person in this regard.
  • The company where the investment as deposit is made should be authorized by the Reserve Bank of India to accept money for fixed deposit schemes and the registration of permission for such schemes should be displayed in the offices of the company.
  • Rating of a company plays a major role while investing in fixed deposit schemes. This rating process renders the company’s worthiness for investment. Companies with lower rating in a financial span can also be denied permission to offer fixed deposit schemes. There are set of instructions wherein the company will have to inform the RBI about the financial crisis (if there are any) within certain duration and then stop accepting public deposits.
  • The interest rate provided on fixed deposits of companies is regulated by RBI.
  • The person who has issues related to receiving interest earned on deposits or principal can approach Company Law Board and launch a complaint in this regard. The board would direct the company and arrive at solutions to the problem faced.
Benefits of Company fixed deposit:-
There are few benefits of company fixed deposit that makes it preferable over other counterparts.
  • Interest rates in general are 2 to 3% higher than bank fixed deposits
  • On a short term they earn better income with good liquidity
  • The deposit scheme also has nomination facility
  • The application process and eligibility clauses are much simpler than those of regular bank fixed deposit scheme

Sunday, October 28, 2012

How to clear your name from CIBIL

If you have obtained a No Due certificate from your bank. This means you are no longer a defaulter. You need to inform your banker, enclosing a copy of the said certificate, and ask them to correct the CIBIL data. With regard to the processing of home loan application by another bank, you can explain the circumstances under which CIBIL data was not updated and that you have taken up the matter with a concerned bank. You can even show the No Due certificate as well as the letter written by you for correcting the data maintained by CIBIL.

How can a Credit Card improve your Credit Score

Ramesh is a Marketing Executive who has just started his career. He has read about the dangers of using credit cards and how they can lead him to overspend. Ramesh uses a debit card linked to his bank account and finds it a good alternative to a credit card. He gets a lot of offers for credit cards and is attracted by the convenience they offer. Does it help to have a credit history and will it add any value to his ability to manage his financial situation efficiently?

Ramesh must understand the role that a credit card can play in his financial life to be able to use it to his advantage. He can manage his cash flow by using a credit card to meet his regular expenses. He must also make sure that he pays his credit card bills fully each month in a cycle that is convenient.

Making payments for regular expenses through a credit card is a good way for Ramesh to keep track of his expenses. The credit card statement and the charge slips will give him the record to make sure he stays within his budget. Credit cards will also help him meet expenses in an emergency when he may run short of funds. Overdrawing on his bank account in such a situation by using a debit card will come at a cost.

There are some situations when using a credit card is more advantageous than a debit card. Making an online payment using a debit card carries a greater risk since an online fraud can clean out Ramesh' entire bank account. Similarly, an error in charging a purchase to a debit card could mean that the amount will be debited from his account immediately and take time to reverse, and he may fall short of funds during this time. In case of a credit card, he can appeal against the error and may not be required to pay.

Credit cards give him the facility of making a big purchase even if he does not have the funds immediately. He can also convert large purchases into EMI payments without attracting rolling credit charges, provided he makes the payments regularly.

A credit card is the easiest way for Ramesh to build a history of good credit behaviour, based on which his credit score will be assigned. A good score will help him access loans on attractive terms when he wants them. Since Ramesh is aware of the risks involved, he is very likely to use a credit card responsibly. He should, therefore, consider taking one and use it for the advantages and convenience it provides.

Saturday, October 27, 2012

Tax incentives on investments - Things to know

1) The tax incentives on investments are provided in the form of exemption for the amount invested, income earned and maturity amount. These incentives may be provided at any, none or all three stages of investment.

2) The EEE (exempt, exempt, exempt) taxation implies that the amount invested is exempt from tax in the year in which the investment is made. The returns and the amount redeemed are also exempt from tax. The PPF, ELSS and life insurance fall under this category.

3) Under the EET (exempt, exempt, tax) regime, the investment is only taxed at the withdrawal stage. NSC and pension policies are examples of EET investment as the amount put in is deductible from the total income and the income earned is exempt from tax.

4) If income in the form of interest or dividend is taxed, while the investment and maturity are exempt, the investment falls under the ETE (exempt, tax, exempt) regime. Tax-saving bank deposits and senior citizens savings schemes are such investments.

5) No exemption from tax is available for the amount invested under the TEE (tax, exempt, exempt) regime. The income earned from the investment and redemption, if the investment is held for a specified period, is tax-free. This is the case for equity shares and equity MFs.