Category: FAQ

What is Dividend Stripping?

Dividend stripping is a practice of buying shares or mutual fund units before the declaration of dividend, post the dividend declaration they sell the share or unit when its price falls below the purchase price. This practice is termed as dividend stripping.
The advantage for Tax Payer by doing dividend stripping is that he can avail dual Tax benefits:

1. Dividend Income is exempt as per section 10(34/35) of Income Tax Act, 1961
2. Loss incurred under sale of Shares can be claimed as short term capital loss.

For Example:

Mr.A buys 1000 shares of ABC Ltd. For Rs.500 per share on 25^th January, dividend is declared by ABC Ltd on 19^th February at Rs.100 per share. Mr. A sold those 1000 shares on 28^th March for Rs.350 per Share.
In this instance, Mr. A can claim capital loss of Rs.1,50,000 and dividend earned of Rs.1,00,000 is exempt in his hands.
Due to the practice of dividend stripping the government incurs a huge loss in terms of tax revenue. Thus, to prevent the practice of dividend stripping, a new section 94(7) was introduced.

Section 94(7) of Income Tax Act, 1961

1. Any person buys or acquires any securities or unit within a period of three months prior to the record date;
2. Such person sells or transfers—
   • Such securities within a period of three months after such date; or
   • Such unit within a period of nine months after such date;
3. The dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

Interpretation:

The section interprets that if an individual buys a share within 3 months prior to record date i.e. the date on which the dividend will be paid, and sell it within 3 months after the record date, then the capital loss incurred due to the sale of shares will not be allowed for set off to the extent of dividend earned.

Similarly, in case of Mutual Funds – if an individual buys unit within 3 months before the dividend is to be paid and it within 9 months, then the capital loss incurred due to the sale of mutual funds will not be allowed for set off to the extent of dividend earned.

Now, in reference to the above example given, Dividend Income of Rs.100,000 is exempt in the hands of Mr. A and Capital loss will be allowed to set off only to the extent of Rs.50,000 (1,50,000 – 1,00,000).

Tax Implications of Dividend Stripping in case of Capital Gains

In case there is a capital gain on account of sale of shares after the receipt of dividend, then the dividend amount shall be exempt and only the actual gain on sale of share shall be taxable under head “Income from Capital Gains”.

A life insurance policy will now be eligible for tax benefits under sections 80C and 10(10D) of the Income Tax Act only if the premium paid is less than 10% of the sum assured on death. This criterion is applicable to both regular as well as single premium insurance policies. These amendments are applicable to those policies issued on or after the 1st April 2013.

The earlier provision allowed an exemption, if the annual premium did not exceed 20% of the actual sum assured. Please note, deduction for life insurance premium with respect to insurance policies issued up to 31st March 2012 shall not exceed 20% of the sum assured.

Hence,

• Any money received from a life insurance policy are entitled for a tax benefit under Section 10 (10D) only if the minimum sum assured throughout the policy term remains 10 times the single premium paid.
• The tax benefit under Section 80 C is available only if the annual premium is less than 10% of the sum assured.

Note:
If the maturity is not exempted under section 10(10D) and the amount received from a policy is more than Rs 1,00,000, it will be taxable and TDS @ 1% shall be deducted by the insurer before making this payment. If the amount received is less than Rs 1,00,000, then no TDS shall be deducted but the amount received shall be fully taxable, it will be taxed at income tax slab rate

During income tax return filing season, you come across Form 26AS very frequently.  Form 26AS gives overall view of tax deducted for your PAN at various sources.

Summary of Form 26AS:

Form 26AS gives an overall view of your income tax deducted in a particular financial year from various sources of income like tax deducted on Salary income, tax deduction on interest received from Fixed deposits, tax deducted on consideration received from sale of property, etc.

Form 26AS displays various taxes that are deducted from your income by your employer, bank, or your tenant. It also displays your advance tax or any self-assessment tax that have been paid during financial year during that year. The tax that is collected at source (any form of source like bank, employer etc.). It also contains the details of income tax refunds that you have received from your tax department during financial year. It also has a column showing AIR transactions details. AIR is the Annual Information Return which is filed by your bank in case you have entered into some specified transaction. 

Steps to view Form 26AS:

1. Log in to Income Tax department website https://www.incometaxindiaefiling.gov.in/home and get yourself registered there.
2. After getting registered, log in to the user ID.
3. Click on My Account tab.
4. You will see option of View Form 26AS (Tax Credit).
5. On the next page, you have to confirm and after confirmation, you will be redirected to Traces website.
6. Click on view/verify Tax credit & then on view 26AS.
7. Select the relevant assessment year for which you require form 26AS & You can select view as HTML to see your form 26AS. 

Contents of Form 26AS:

1. Part A of Form 26AS :
   TDS deducted by each source is shown as a separate table.  Please verify that
   • Details of deductor match your Form 16, Form 16A.
   • All entries for a deductor match the entries in your Form 16/16A. Check each entry for Section Under Which Deduction is made (192 for Salary, 194A for interest on Fixed Deposit from bank), Date at which Transaction is made, Status of Booking.
2. Part A1 of Form 26AS :
   This section will show transaction in those financial institutions such as banks    where the individual has submitted Form 15G / 15H. TDS in these cases would be zero (because you have submitted 15G/15H). This section enables you to keep a track of all the interest gain which has not been taxed.
3. Part B of Form 26AS :
   Tax Collected at Source (TCS) is collected by the seller from the buyer at the time of sale of specified category of goods (such as Alcoholic liquor for human consumption, Scrap, Parking lot, Toll plaza). The TCS Rate vary for each category of goods and the TCS is to be deposited with the government.
4. Part C of Form 26AS :
   Details of Tax Paid (other than TDS or TCS) If you have paid Advance Tax or Self-Assessment Tax it will appear in this section.
   If advance tax or self-assessment tax details don’t match with your details please contact the Bank.
5. Part D of Form 26AS :
   If you have got any tax refunds in that assessment Year it would be listed under this section.

* Any TDS deducted on any form of income received by a person is reflected in such person’s 26AS. However in case of TDS deducted under section 194IA by buyer while making payment to seller of property is also reflected in buyer’s 26AS.

Notes:

• Status of booking is F or FINAL which shows that payment details of TDS / TCS deposited in bank by deductors have matched with the payment details mentioned in the TDS / TCS statement filed by the deductors.
• If Status of Booking is U which means Unmatched . It means Deductors have not deposited taxes or have furnished incorrect particulars of tax payment. Final credit will be reflected only when payment details in bank match with details of deposit in TDS / TCS statement

Importance of Form 26AS:

• Form 26AS is an important tool that helps you to compare your taxes deducted at various sources and identify if you don’t have any multiple deductions in your account. In case you have a tax deduction and it is not shown under your form 26AS that it is not deposited with the Income Tax department, in such case you can contact your employer or the source which have deducted the tax at source. In most cases, this happens due to wrong PAN number being updated at the source. 
• Also, if your form 26AS is showing different values for TDS deducted that deducted you can request Income Tax Department to recheck your case and do the necessary changes. This also helps you avoid any kind of notice or penalty from Income Tax Department for non-reporting of actual TDS of your incomes.

What are Major Codes and Minor Codes in Form 26AS?

Here, Major Code means the type of “Tax Applicable”, whereas Minor Code means “Type of Payment”.
The List of Minor and Major Codes are:

Major Codes:

Minor Codes:

*Click here to know about Tax Credits

SIP, which is commonly known for Systematic Investment Plan, where in the intending investor has to invest a small chunk of his savings regularly say monthly/bi-monthly/fort nightly in any of the SIP scheme. It ensures financial discipline of the investor.

There is nothing to worry about the market mood, timing, performance of the security at the moment unlike in other investment modes. It has to be regularly invested. Returns when compared to investment in RD or ELSS are more in SIP.  Also, the overall average cost of investment is minimized, and returns are maximized. If invested over a long period money invested starts compounding.

Step-up SIPs allow investors to increase the SIP amount periodically. ‘Alert SIP’ is another form of the regular systematic investment plan which sends an alert to the investor to buy more when the markets are down. 

In case of the ‘perpetual SIPs,’ investors don’t have to choose the end date of the SIP. Once the goal is met, the investors can stop the SIP by sending a written communication to the fund house.

Withdrawal of SIP are very easy in case of contingencies or in need of the hour.

Investing in mutual funds is the easiest means to grow your wealth, especially for the small investors. A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. It is a well-diversified, low cost & tax efficient way of savings.

Different types of mutual funds are

1. Equity (Growth)
2. Debt (Income)
3. Money Market (including Gilt)
4. Balanced funds

Choosing a scheme of mutual funds can be decided by considering age, goals, risk aversiveness, asset allocation & timing of investment. There are debt or arbitrage funds for investment for a period of 1 day to 3 years, hybrid funds for a period of 3-5 years, equity funds for 7-10 years.

Mutual funds come with regular return schemes, less returns but growth-oriented ones and many more. Monitoring the investments made are not a high-end task now a days, because mutual funds are administered by the professional management. We can get the updates of the daily NAV (Net Asset Value). Subscribing & selling the fund units are also easy.

ELSS are diversified equity mutual funds that invest a major chunk of your money in equity and equity-related securities. ELSS funds offer you a convenient way to avail tax advantage coupled with trying to generate higher returns by harnessing the potential of the equity markets. Investing in ELSS funds makes you eligible to avail tax deduction of up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961.

Some of its features are:

• Ideal way to invest in equity market with less knowledge about it, supported by a professional fund management & a well-diversified portfolio. Can be invested with amount as less as Rs 500 also.
• Lesser lock-in-period than compared to other tax saving investment schemes i.e, 3 years. PPF comes with 15 years/ NSC with 5 years.
• Risk oriented, since the securities to be invested are equity. But if the investment is made for longer periods say 7-10 years, volatility in the returns can be minimized.
• Tax deduction is available under 80C up to Rs. 1.5 lakhs subject to other monetary limits in other modes of investment.

ELSS comes with dual benefits like tax benefits & wealth accumulation.

Any resident receiving any amount (more than Rs. 1,00,000/-) under a life insurance policy (including bonus) shall be deducted a tax deducted at source at the rate of 1% by the person responsible for paying the sum.

However, in case the amount so received during the financial year in aggregate does not exceed Rs. 100,000, TDS under this section shall not be made.

The amount so received (including the sum allocated by way of bonus on such policy) by the assessee shall be declared as Income from Other sources while filing the Return of Income.

TDS under sec 194DA shall be deducted only if the amount paid is not exempted from tax as per Sec 10(10D).

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.