Types of expenses allowed as home improvement for calculating capital gains

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NEW DELHI: If you are selling a property, you can add home improvement expenses to the cost of acquisition of property for calculating capital gains. You can also claim indexation benefit on the cost of improvement of the property along with the purchase price as per the Income Tax Act. This will help bring down capital gains. But you need to first understwhat home improvement expenses are to claim the deduction.

The expenses incurred should be of capital nature. “Any capital expenditure incurred by the assessee to make any addition or improvement in the house is treated as ‘cost of improvement’. Thus, if renovation cost is in the nature of capital expenditure only then such renovation cost can be considered as ‘cost of improvement’ for the house property. The expenditure incurred on renovation or modifying the structure of house to make it habitable is allowable as a deduction,” said Tarun Kumar, a Delhi-based chartered accountant.

“There is no clear definition of what can be included under home improvement expenses but the expenditure has to be capital in nature,” said Prakash Hegde, a Bengaluru-based chartered accountant.

Therefore, if you have added a floor, room or have changed the structure of the house, the same can be claimed as home improvement expenses. But regular painting of the house or other regular maintenances will not be considered as home improvement expenses.

Apart from this, expenditures incurred on or after 1 April 2001, can be claimed under home improvement expenses.

Therefore, all capital expenditure incurred on or after April 1, 2001 shall be deducted while calculating capital gains. “If house is acquired by the assessee before April 1, 2001, any expenditure incurred on renovation incurred prior to April 1, 2001, shall be ignored while computing the capital gains,” added Kumar.

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Can a company provide insurance policy its shareholders?

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NEW DELHI :

Deepak Nitrite, the company that manufactures chemical intermediates to serve the domestic international market, offers an investors’ welfare scheme to its shareholders. It is a personal accident insurance policy that covers the risk of death permanent (total/partial) disablement sustained due to an accident by a shareholder of the company.

Policy coverage

The policy covers death permanent (total/partial) disablement. Here, the permanent total disablement means losing sight of both the eyes or of actual loss by physical separation of the two entire hands or two entire feet. Similarly, permanent partial disablement means losing sight of one eye or of actual loss by physical separation of one full hor one entire foot.

Any shareholders whose age is between 18 65 years will get the coverage. Further, the sum insured is offered according to the number of equity shares held. For instance, those holding up to 1,500 equity shares will get the sum insured of 40,000. If a shareholder holds equity shares between 1,501 5,000, he gets a sum insured of 60,000. For those holding equity shares above 5,000, the sum insured is 80,000. This means that if you hold shares of 29.25 lakh, that is, 1,500 shares that are currently trading at 1,950, you get a personal accidental coverage of just 40,000.

If you hold shares for 97.5 lakh, that is, 5,001 shares currently trading at 1,950, you get a personal accidental coverage of just 80,000. By contrast, if a 30-year-old had purchased a personal accident cover from a private insurer for a sum insured of 1.5 lakh, he would just have to pay a premium of about 380 annually.

“This is a curious case where various laws of two regulators, the Insurance Regulatory Development Authority of India (Irdai) the Securities Exchange Board of India (Sebi), are at interplay. Generally, insurance premium or sum insured cannot be calculated in the form of listed equity shares. The purposes of insurance investment are also distinct. In the past, Sebi Irdai went on war on a fundamental issue whether unit-linked insurance policies were insurance products or securities.

A listed company proposing such a scheme by calculating the sum insured on the floating value of listed shares may raise eyebrows of both the regulators unless the company has sought exemption or approval from them. Regulators would like to ensure that such an innovation is not an inducement or scheme or artifice to protect shareholders policyholders. Under corporate securities laws, usually, a company is prohibited from inducing a purchase, sale or holding of securities financing of such activities by the company or its promoters,” said Sumit Agrawal, founder, Regstreet Law Advisors & former Sebi officer.

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Part of your PF money may be invested in InvITs. What are InvITs?

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A part of your provident fund (PF) money may soon begin to be invested in Infrastructure Investment Trusts (InvITs) as retirement fund manager Employees’ Provident Fund Organisation (EPFO) may start investing a portion of its annual deposits in these infrastructure investment trusts.

The move could not only help India boost investments in infrastructure but also expthe scope of EPFO’s investment basket beyond bonds, government securities, exchange-traded funds (ETFs), two government officials told mint, requesting anonymity.

What are InvITs?

InvITs are investment vehicles housing infrastructure assets or projects of companies that allow investors to make small investments receive regular income. It is an alternative investment fund (AIF) that works like mutual funds is regulated by the Indian market regulator Securities Exchange Board of India (Sebi).

The key features of InvITs are mandatory distribution of 90% of net distributable cash flows to the unit investors, leverage cap of 70% on the net asset value, a cap on exposure to assets under construction (for publicly placed InvITs). InvITs are gaining popularity in a way as a preferred route for investors to monetize assets.

The InvIT is designed as a tiered structure with a sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).

“Among AIFs, InvITs are a good option. There is a demfor long-term funds in the larger infrastructure sector. It also offers a diverse mix to EPFO to look beyond its traditional investment vehicles,” said one of the two officials cited above.

EPF Contribution

Launched in 1952, Employee Provident Fund (EPF) has been a much-preferred investment avenue for salaried Indians as organizations with more than 20 employees have to mandatorily extend the benefits of the EPF scheme to its employees.

Eligible individuals contribute up to 12% of their monthly basic salary plus dearness allowance (DA), towards the EPF scheme. The individual then receives the total accumulated contribution as well as interest earned at the time of retirement.

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LTCL can be carried forward for eight FYs

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My father is over 80 years old his income for financial year 2020-21 is as follows: short-term capital gain of 1.2 lakh; long-term capital loss of 1.1 lakh; savings account interest of 4,000; fixed deposit interest of 20,000; NRI gift received of 10 lakh; resident Indian gift of 2 lakh.Does he need to file income tax return? If yes, in which form? Can we set off the short-term capital gain with the long-term capital loss? Should we show the monetary gifts in the income tax return? If yes, under which head or part of the form?

—Anil Jain

We have assumed that your father is an Indian tax resident is not into regular trading in shares. The gains have, therefore, been assumed to be in the nature of capital gains.

As per provisions of income tax law, long-term capital loss (LTCL) can be set off only against long-term capital gain (LTCG). Accordingly, the LTCL incurred by your father will not be eligible to be set off against short-term capital gains (STCG). Your father can carry forward the LTCL for eight FYs immediately succeeding the current FY set off the same against future LTCG.

To enable your father to carry forward the LTCL, he shall be mandatorily required to file his income tax return (ITR) within the prescribed tax filing due date.

Where a gift is received from a specified relative, the transaction of the gift itself will not give rise to any income tax implications in the hands of the receiver (i.e. your father). However, in case gift(s) are received from non-relatives the aggregate of such gifts exceed 50,000, the entire amount received shall be subject to tax in India.

Accordingly, taxability of the gifts received shall be determined based on whether or not the gift has been given by a relative of your father.

From a disclosure perspective, the taxable amount of gift is required to be reported as income under Schedule OS in Form ITR-2. Non-taxable gifts need not be reported in the ITR.

Also, please note that a deduction of up to 50,000 is available for interest income for senior citizens (on both fixed deposit savings interest). As your father’s total interest income is 24,000, a deduction of the entire amount shall be available.

Generally, a resident individual who is of the age of 80 years or more is required to file a tax return in India if his taxable income (prior to prescribed deductions) exceeds 5 lakh, subject to certain other exceptions not applicable in the instant case.

In your father’s case, if the total income (after considering taxable gifts) exceeds 5 lakh and/or your father wants to carry forward the LTCL, he would be required to file his tax return.

Further, as per the income sources provided, your father would be required to file his ITR using Form ITR-2.

Parizad Sirwalla is partner head, global mobility services, tax, KPMG, in India.

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What to keep in mind while filing I-T return of FY21

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The income tax department (ITD) launched a new e-filing portal (www.incometax.gov.in) on 7 June, as part of project CPC 2.0. It aims to provide improved taxpayer services to speed up the processing of tax return. Also, ITD will soon release a mobile app, which will have all the features available on the new portal. Each taxpayer will experience the new portal while filing income tax return (ITR) for financial year 2020-21 (FY21), the last date for which has been extended till 30 September.

Against this backdrop, let us understa few important aspects related to the filing of tax returns.

Key changes: The ITD has introduced a new utility named JSON for filing tax return forms for FY21. Currently, only tax return forms ITR 1, 2 4 have been released. These forms can import pre-fill data from the e-filing portal. The pre-filled data include personal details, salary income, dividend income, interest income, capital gains all the information available in Form 26AS.

From FY21, a new concessional tax regime has been introduced. Accordingly, taxpayers will get the opportunity to select between the old new tax regimes while filing the tax return. If you are a salaried individual would like to change the option communicated to the employer, it can be done at the tax return stage.

Plan of action: Collate all the relevant information documentation required for filing the tax return to avoid any misreporting or inaccurate reporting of income. Also, it should be made sure that all sources of income, including the exempt income such as PPF, is duly reported in the tax return. Before filing the tax return, reconcile all sources of income with the data reported in the tax return form. This will help in the seamless processing of tax return.

Evaluate tax liability in advance make the necessary tax payments within the due dates to avoid levy of interest applicable on delayed tax payments.

Based on the sources of income, one should choose the correct tax return form while filing the tax return. If the taxpayer uses the wrong tax return form, he/she may receive a defective return notice from the ITD. To illustrate, if a salaried individual has capital gains or foreign assets/income, ITR 2 should be filed.

When to file tax return: According to the Income Tax Act, an individual taxpayer having income from a business or profession exceeding the prescribed threshold needs to get the books audited file tax returns by 30 November. However, individuals with no requirement to get the books audited should file tax return within the specified due date, i.e., 31 July of the succeeding financial year. This due date has been extended to 30 September for FY21.

In case you miss these extended deadlines, there is an option to file a belated return up to 31 December, which has recently been extended to 31 January 2022. However, a late fee of 5,000 is applicable on the filing of such belated return.

The Central Board of Direct Taxes (CBDT) has clarified that the due date for filing the tax return shall not absolve the taxpayer from paying tax before the original return filing date. Any delay in tax payments beyond the original date of ITR filing will attract additional interest.

However, the CBDT has provided relief from levy of interest in the following cases: (a) If self-assessment (SA) tax payable does not exceed 1 lakh, (b) for resident senior citizens not carrying on business or profession, the SA tax paid up to the original due date for ITR filing shall be treated as advance tax no interest shall be levied on such amount for belated filing of return.

The ITD is making continuous efforts to improve the taxpayer experience. Now, it is the taxpayers’ responsibility to file the ITR on time pay the due taxes.

The new e-filing portal has been facing initial hiccups. However, it is expected that a state-of-the-art interface will be available to taxpayers by the time they start filing their tax returns.

Amarpal Chadha is tax partner India mobility leader, EY India . Alfred Rodrigues, tax director – people advisory services, EY India , contributed to this article. Views expressed are personal.

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