Guide to Tax Saving

There are many modes of tax saving investment options for the tax payer. One has to plan diligently before investing so that he can ensure optimum tax savings along with maximum returns from the investments made.

1. Make investment of Rs 1.5 lakh under Sec 80C to reduce your taxable income.

2. 80C deductions are PPF, NPS, EPF, Life insurance premium, tax-saving mutual funds (ELSS), children’s tuition fees and housing loan principal repaid among others.

3. Buy Medical Insurance & claim a deduction up to Rs. 25,000 or 30,000/- (based on seniority) for medical insurance premium under Section 80D.

4. Claim deduction up to Rs 50,000 on Home Loan Interest under Section 80EE for a loan amount not exceeding Rs. 35 lakhs (loan to be sanctioned between 1st April 2016 and 31st March 2017)

5. 80E – Deduction in respect of interest on loan taken for higher education only an individual can claim thisdeduction, it is not available to HUF or any other kind of taxpayers.Higher education loan taken for self, spouse or children’s or for a student for whom the individual is a legal guardian& the taxpayer can take 8 years period of deduction.

6. 80 CCD- Any assessee deposits amount in a pension scheme notified by the Central Government upto a maximum limit of 10 % of his salary or 20 % of his gross total income as the case may be. In addition to that a further sum of Rs. 50,000/- can also be claimed as deduction if he has invested in excess of the above said limits. 7. 80 GG – Any assessee who is not in receipt of HRA, any expenditure of rent in excess of 10% of his total income subject to lower of Rs 5000 p.m or 25% of his total income for the year.

Tax Saving Fixed Deposits

Tax Saving Fixed Deposits are those deposits, by investing in which you can get deduction under section 80C of the Income Tax Act, 1961. Any investor can claim a deduction of a maximum of Rs.1,50,000 by investing in such tax saver fixed deposits.

Some of the points to be noted in this regard are as follows:

  1. Only Individuals and Hindu Undivided Families (HUFs) can invest in tax saving FD scheme.
  2. Interest earned on these is taxable under Income from Other Sources
  3. FD can be placed with a minimum amount which varies from bank to bank.
  4. These deposits have a lock-in period of 5 years. Premature withdrawals and loan against these FD’s are not allowed.
  5. A person can invest in these FD’s through any public or private sector bank except for co-operative and rural banks.
  6. Investment in Post Office Time Deposit of 5 years also qualifies for deduction under section 80 (C) of the Income Tax Act, 1961.
  7. Post Office Fixed deposit can be transferred from one post office to another.
  8. One can hold these FD’s either in ‘Single’ or ‘Joint’ mode of holding. In the case the mode of holding is joint, the tax benefit is available only to the first holder.
  9. The interest earned is taxable as per the investor’s tax bracket and therefore, TDS is applicable. The interest on deposits is payable on either monthly/quarterly basis or can be reinvested. A person can avoid TDS deduction on the interest earned by submitting Form 15G (or Form 15H for senior citizens) to the bank. Senior citizens can claim deduction of Rs 50,000 on the interest earned from deposits as per the newly inserted section 80TTB.
  10. If any amount, including interest accrued thereon, is withdrawn by the assessee from his account (Psot Office Deposit scheme and Senior citizens savings scheme), before the expiry of the period of five years from the date of its deposit, the amount so withdrawn shall be deemed to be the income (except income declared under other sources) of the assessee of the previous year in which the amount is withdrawn and shall be liable to tax in the assessment year relevant to such previous year.

How to file Return u/s 139(9) – Defective return?

When filing your yearly income tax returns, it is important to ensure that you provide details of all your income, deductions and investments. If the Income Tax Department finds any mismatch of information or mistakes in your tax return, it will send you a notice u/s 139(9).

If your return is found defective, then I-T department will send you a defective return notice under section 139(9) of the Income Tax Act. You will get 15 days of time from the date of receiving the notice to rectify the defect in your return.
The detailed process to submit the Response to defective notice is as below:

Step 1: Go to Income tax portal and Login to the same
Step 2: Now click on “e-File” tab and select the option “e-File in response to notice under section 139(9)”.

Step 3: On successful validation if there is any defective notice raised by either CPC/AO, the below screen will be displayed, select submit for the concerned defective return for which you are going to submit a response.

Step 4: For defective notice raised by CPC, the below screen will be displayed:

Step 6: Now if you agree with the effect then just fill your Income Tax Return by rectifying the defect by selecting Return u/s 139(9) and mention date of original return, acknowledgement number, Notice number and Notice date. Once you do that then generate its xml file and upload it in the above screen. After that you’ll see the below screen:

Who can claim the credit of TDS?

As per the Income-tax Act, when certain payments such as interest, commission, brokerage, rent are made, the person making the payment is required to deduct tax at source (TDS) and remit the same with the Government.
Hence, the person receiving the payment, known as deductee, receives the payment net of tax. i.e., The total amount receivable less TDS amount.

Claiming of TDS Credit:

Credit of TDS shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as deductee) on the basis of information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorised by such authority.
Therefore, the TDS Credit can be claimed by the deductee.

The TDS amount can also be claimed in the hands of the other person as per rule 37BA(2), where it states that the “income on which tax has been deducted at source is assessable in the hands of the person other than the deductee, credit for the whole or any part of the TDS, shall be given to the other person and not the deductee.”
It means the other person can claim TDS in his/her hands even if the TDS is not deducted and deposited against his/her PAN.

However, the deductee should file a declaration with the deductor and the deductor should report the tax deduction in the name of the other person in the information relating to the deduction of tax to the income tax authority or the person authorized by such authority.

What is the tax treatment on the sum received at the time of maturity or Surrender of ULIP’s?

  1. At Maturity of ULIP: Upon the completion of the tenure of your Unit Linked Insurance Plan, when they mature, the total amount received by you or your nominee will be completely exempted from tax under section 10(10D), if the following conditions are satisfied.
    • For ULIPs purchased after 1st April 2012 : When the premium is less than 10% of the sum assured, amount on maturity will be exempted under section 10(10D). If the premium is more than 10% of the sum assured then the entire amount is taxable, except in case of death.
    • For ULIPs purchased before 1st April 2012 : When the premium is less than 20% of the sum assured, then the maturity will be exempted under section 10(10D). If the premium is more than 20% of the sum assured, then the amount received on maturity is taxable, except in case of death.
  2. If ULIP is surrendered
    • Before lock-in-period : If the policy is surrendered before the lock-in-period of 5 years, then the entire surrender value will be treated as income for the current year and will be added in Gross Total Income and thus will be taxed as per applicable tax slab rate of the individual.
    • After lock-in-period : If the policy is surrendered after the lock-in-period of 5 years, then the surrender value will be exempt from taxation and assured can avail the tax benefit.

Mr Amit has a salary income & F & O’s Income? Tax audit under Section44AB is applicable to Mr Amit as his transaction limit of F & O’s exceeds 1 crore. How will be his turnover computed in relation to F & O’s Income?

In normal business turnover is based on sales and thus reaching the limit takes time.
But in F&O it reached easily as each lot is valued high, Limit is reached easily. Therefore computation method need be different. Thus for computing turnover limit Following things should be added:

  1. Profits from the trade
  2. Loss from the trade
  3. Premium received from sale of Options
  4. In case of Reverse Trade, difference should also be added

This can be explained by way of illustration. Below are four Components:

  1. Profits from the trade – Rs 1,00,000
  2. Loss from the trade – Rs 1,50,000
  3. Premium received from sale of Options – Rs 50,000
  4. In case of Reverse Trade, difference – Rs 75,000

Thus for the purpose of Tax Audit u/s 44AB, turnover will be calculated as : 1,00,000+1,50,000+50,000+75,000 = Rs.3,75,000/-.

Mr Ganeshan is an individual who is employed with a private company and he also deals in F & O’s (Future and options). What is the taxability of his F & O’S income?

As per section 43(5) the transaction of future & options are not considered as speculative transaction. However exemption is available only for equity. Thus if F&O for commodities are done the same will be termed as Speculative in Nature.
Other than commodity trading profit or loss arising out of transaction is treated as Business Loss or profit in nature. Any expense done in connection to this business will be allowed as expense and can be claimed while preparing Tax computation.

Since Futures & Options transactions are treated as business income or loss, the provisions related to profit and gains of business and profession will apply to these transactions.

An audit is required if –

  • Section 44AB – If the turnover exceeds Rs 1 crore, audit will be applicable, if an assessee opts for Presumptive basis u/s 44AD, then the applicability of tax audit is mentioned below.
  • Section 44AD – If the turnover is less than Rs 2 crore, and if profit less than 6% of turnover and total income exceeds basic exemption limit, then tax audit will be applicable. (An audit is not required if turnover is less than Rs 2 crores and also your total  income is within the taxable limit of Rs 2.5 Lakhs)

*In case of F&O transactions, the total of all contracts sold is not considered as the total turnover. The turnover is computed by taking into account the total of all favourable and unfavourable trades.
Your tax liability does not get affected by your turnover.

Ms Deeksha received a demand payable in intimation under section 143(1) from Income tax department. Help her in understanding what is intimation under section 143(1), why it is sent to her and how can she respond to Income tax department?

After Filing of your Income tax returns, Income tax department carries out a preliminary assessment of all the returns filed and intimate taxpayers the result of such preliminary assessment. Such intimation to the taxpayers post preliminary assessment is called Intimation under Section 143(1).

While processing the ITR, the tax department determines the sum payable or the actual amount of refund after making the following adjustments, an intimation shall be prepared or generated and sent to the assessee.
The Intimation shall specify the sum determined to be payable by or the amount of refund due to, the assessee.

Following are the adjustments that can be made by the Income Tax department:

  1. Any Arithmetical error in the return; or
  2. An incorrect claim, if such incorrect claim is apparent from any information in the return.
  3. Disallowance of loss claimed, if return is filed beyond due date u/s 139(1)
  4. Disallowance of expenditure indicated in the audit report but not taken in to account into computing the total income in the return
  5. Disallowance of deduction u/s. 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return is filed beyond due date u/s. 139(1)

The Intimation shall specify the sum determined to be payable by or the amount of refund due to, the assessee. An intimation shall also be sent to the assessee in case where the loss declared by the assessee is adjusted but no tax, interest or fee is payable by, or no refund is due, to him.

Where there is neither any adjustments nor any tax due from or refund payable to assessee, the acknowledgment of the return shall be deemed to be the intimation u/s 143(1).
The intimation will be sent to person regarding the same via email and SMS under section 143(1).

How to respond to Intimation u/s 143(1) in case of Demand Payable?

  • If the assessee agrees with the demand , then he/she will be required to pay the amount of tax as per the intimation u/s 143(1) . The taxes can be paid through bank or online payment. According to the current income tax laws, the time limit to respond to this is 30 days. If person do not respond to the notice within the stipulated time period, the department can take action against person.
  • If the assessee disagrees with the demand,
    • if you are able to identify the mistakes you have made while filing your return from the intimation, and they can be rectified by filing a revised return.
    • if there is no mistakes and you do not agree with the adjustments made by CPC, you can file an online rectification application under Section 154(1) intimating the correction of mistake appearing in the Section 143(1) intimation. 

Rectification under Section 154(1)

Sometimes there may be a mistake in any order passed by the Assessing Officer. In such a situation, mistake which is apparent from the record can be rectified under section 154.

Types of Errors for Rectification under Section 154

  • An Error of facts
  • Difference in the amount of advance tax
  • Arithmetical Mistakes
  • Minor clerical errors
  • Negligence towards mandatory provisions of law
  • Difference in the amount of tax credit
  • Error in mentioning gender while filing a return
  • Non-submission of the additional details for capital gains

Following are the steps to file an online rectification:

1. Login to your Income Tax e-filing Account. 

2. Go to ‘e-File’. In the drop-down select ‘Rectification’

3. Select the ‘Order/Intimation to be rectified’ as Income tax’ and ‘Assessment Year’ for which rectification is to be filed

4. Select the ‘Rectification Request Type’ based on the reason for filing rectification.

  1. ‘Tax credit mismatch correction only’ − on selecting this option, three check boxes, TCS, TDS, IT, are displayed. You may select the check-box for which data needs to be corrected. You can add a maximum of 10 entries for each of the selections. No upload of an Income Tax Return is required.
    This option was removed from the AY 2018-19.
  2. ‘Return data correctional xml’ – The taxpayer is correcting data for rectification. Several reasons are displayed. You can select a maximum of 4 reasons. After selecting the reason you will be required to select the concerned schedules to be changed in the rectification, an Option is provided for uploading xml.
  3. ‘Only Reprocess the return’ − on selecting this option, the ITR will be re-processed. No upload of an Income Tax Return is required.
  4. ‘Additional information for 234C’ – Nature of income/gain should be provided quarterly basis.

5. Click on “Submit” button. On successful validation, the rectification return is uploaded and success message is displayed.

I am an individual with many sources of Income. Determine whether the given Income will be taxable for me or not in India if I am a resident or Non-resident or Resident not ordinarily resident.

The taxability of Incomes is mentioned below:

Particulars (Source of Income) Resident Resident but not ordinarily resident Non -resident
Interest on UK Development Bonds, 50% interest received in India, rest 50% in abroad. Fully taxable 50% received in India taxable. 50% received in India taxable.
Dividend from British Company received in London. Fully taxable Not taxable. Not taxable.
Income from house property in London deposited in a Bank at London, later on remitted to India. Fully taxable Not taxable. Not taxable.
Interest on debentures in an Indian company received in London. Fully taxable. Fully taxable. Fully taxable.
Long term capital gains on sale of asset at Germany, 50% of profits are received in India. Fully taxable. 50% received in India taxable. 50% received in India taxable.
Income from property situated in Pakistan received there. Fully taxable. Not taxable. Not taxable.