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Tax Planning - Others

From tax point of view,there are many other key points that you need to know so that you can manage your affairs better. These may include provisions around Gifts, HUF, Taxation of certain assets/income, Clubbing of income etc. etc. Let’s understand some of the key areas of Income Tax Act that have bearing on your day to day life:

Features of HUF

Features of HUF
Clubbing of Income
Taxation of Mutual Funds
Set-Off & Carry Forward
Taxation of Gifts
Cash Transactions
Income From House Property
Residential Status

Certain Key Features of HUF

Under the Income-tax Act, 1961 (“the Act”) & Wealth Tax Act, 1957, a Hindu Undivided Family (“HUF”) is treated as a separate person for the purpose of taxation.

The term HUF is not defined under the Act. Hindu law defined it as consisting of all members lineally descending from a common ancestor, including their wives and daughters.
Daughter even after her marriage continues to remain co-parcener of HUF of her father. Thus female on her marriage, is at the same time member of two HUFs i.e. HUF of her father and HUF of her husband.
Even family with husband & wife without child constitute HUF (GowliBuddanna vs. CIT [1966] 60 ITR 293).
The income of a HUF would be assessed as such if there were a coparcenership.
The relation amongst the members of HUF arises out of legal status and not from a contract.
The HUF is a creation of Hindu Law, it exists even without any nucleus or ancestral joint family property.
The common hotchpotch can be filled by partition of a larger HUF, devolution of interest in coparcenary property of a coparcener who dies intestate, inheritance through a specific bequest under a will, reunion of separated coparceners, receipt of gift, blending of individual property with the family hotchpotch, doing joint labour for benefit of HUF, etc.
Gifts and Wills are the most common way for activating dormant HUF. However special care needs to be taken in drafting of the gift deed or the document evidencing the gift by the parent for the benefit of the said HUF.
As per section 56(2)(vii), where any sum of money, the aggregate value of which exceeds rupees five thousand is received without consideration by an Individual/HUF in any previous year, the whole of such sum shall be included in the total income of recipient.
- The aforesaid limit of 50,000/- will not apply to any sum received from relative.
- Explanation to section 56(2)(vii) defines the meaning of relative. In case of HUF relative means any member thereof.
- Gift received by the assessee from the HUF falls under section 10(2).
- For getting exemption under section 10(2), two conditions are to be satisfied Firstly, he is a member of HUF and secondly he receives the sum out of the income of such HUF, may be of earlier year(s).

Understand Clubbing of Income

Section	Nature of Transaction	Clubbed in the Hands of	Conditions/Exceptions	Relevant Reference
60	Transfer of Income without transfer of Assets	Transferor who transfers the income	Irrespective of: Whether such transfer is revocable or not Whether the transfer is effected before or after the commencement of IT Act	Section 60 does not apply if corpus itself is transferred. [Grandhi Narayana Rao 173 ITR 593 (AP)]
61	Revocable transfer of Assets	Transferor who transfers the Assets	Clubbing not applicable if: Trust/transfer irrevocable during the lifetime of beneficiaries/transferee or to transferor Transfer made prior to 1-4-1961 and not revocable for a period of 6 years. Provided the transferor derives no direct or indirect benefit from such income in either case	Transfer held as revocable If there is provision to re-transfer directly or indirectly whole/part of income/asset If there is a right to reassume power, directly or indirectly, the transfer is held revocable and actual exercise is not necessary. [S. Raghbir Singh 57 ITR 408 (SC)] Where no absolute right is given to transferee and asset can revert to transferor in prescribed circumstances, transfer is held revocable. [Jyotendrasinhji vs. S. I. Tripathi 201 ITR 611 (SC)] Trust in favour of minor children of assessee- stipulation that income from trust not to be given or used for beneficiaries until they attain majority, Income not to be clubbed – Section 64(1)(iii) Expl. 2A [Kapoor Chand vs. CIT 376 ITR 450 SC]
64(1)(ii)	Salary, Commission, Fees or remuneration paid to spouse from a concern in which an individual has a substantial* interest	Spouse whose total income (excluding income to be clubbed) is greater	Clubbing not applicable if: Spouse possesses technical or professional qualification and remuneration is solely attributable to application of that knowledge/ qualification. (burden of proof of qualification is on assessee — YashwantChhajta vs Dy. CIT 210 Taxmann 280)	Income for the purpose of Section 64 includes losses. [P.DoraiswamyChetty 183 ITR 559 (SC)] [also see Expl. (2) to Section 64] The relationship of husband and wife must subsist at the time of accrual of the income. [Philip John Plasket Thomas 49 ITR 97 (SC)] Income other than salary, commission, fees or remuneration is not clubbed under this clause
64(1)(iv)	Income from assets transferred directly or indirectly to the spouse without adequate consideration	Individual transferring the asset	Clubbing not applicable if: The assets are transferred; With an agreement to live apart Before marriage Income earned when relation does not exist By Karta of HUF gifting coparcenary property to his wife. L. HirdayNarain vs. ITO 78 ITR 26 (SC) Property acquired out of pin money. R.B.N.J. Naidu vs. CIT 29 ITR 194 (Nag.)	Income earned out of Income arising from transferred assets not liable for clubbing. [M.S.S. Rajan 252 ITR 126 (Mad.)] Cash gifted to spouse and he/she invests to earn interest. [MohiniThaper vs. CIT 83 ITR 208 (SC)] Capital gain on sale of property which was received without consideration from spouse [Seventilal M. Sheth vs. CIT 68 ITR 503 (SC)] Transaction must be real. [O.N. Mohindroo 99 ITR 583 (Delhi)]
64(1)(vi)	Income from the assets transferred to son’s wife	Individual transferring the Asset	Condition: The transfer should be without adequate consideration	Cross transfers are also covered [C.M. Kothari 49 ITR 107 (SC)]
64(1)(vii), (viii)	Transfer of assets by an individual to a person or AOP for the immediate or deferred benefit of his: (vii) — Spouse (viii) — Son’s wife	Individual transferring the Asset	Condition: The transfer should be without adequate consideration	Transferor need not necessarily have taxable income of his own. [P. Murugesan 245 ITR 301 (Mad.)] Wife means legally wedded wife. [Executors of the will of T.V. Krishna Iyer 38 ITR 144 (Ker)]
64(1A)	Income of a minor child [Child includes step child, adopted child and minor married daughter].	If the marriage subsists, in the hands of the parent whose total income is greater; or; [Anju Mehara vs. CIT 357 ITR 416 (P&H)] If the marriage does not subsist, in the hands of the person who maintains the minor child Income once included in the total income of either of parents, it shall continue to be included in the hands of same parent in the subsequent year and not in the income of other parent unless AO is satisfied that it is necessary to do so (after giving that parent opportunity of being heard)	Clubbing not applicable for:— Income of a minor child suffering any disability specified u/s. 80U Income on account of manual work done by the minor child Income on account of any activity involving application of skills, talent or specialised knowledge and experience	Income out of property transferred for no consideration to a minor married daughter, shall not be clubbed in the parents’ hands [Section 27] The parent in whose hands the minor’s income is clubbed is entitled to an exemption up to 1,500 per child [Section 10(32)] Minors admitted to benefits of partnership—Clubbing provision was held to be applicable [CIT vs. ShardabenKishorebhai Patel (2014) 225 Taxman 375/48 taxmann.com 296 (Guj.)(HC)]
64(2)	Income of HUF from property converted by the individual into HUF property	Income is included in the hands of individual & not in the hands of HUF	Clubbing applicable even if: The converted property is subsequently partitioned; income derived by the spouse from such converted property will be taxable in the hands of individual	Fiction under this section must be extended to computation of income also. [M. K. Kuppuraj 127 ITR 447 (Mad.)]

Note:

An individual shall deemed to have substantial interest in a concern for the purpose of Section 64(1)(ii).

IF THE CONCERN IS A COMPANY	IF THE CONCERN IS OTHER THAN A COMPANY
Person’s benefi shareholding should not be less than 20% of voting power either individually or jointly with relatives at any time during the previous year. (Shares with fixed rate of dividend shall not be considered)	Person either himself or jointly with his relatives is entitled in aggregate to not less than 20% of the profi of such concern, at any time during the previous year

The clubbed income retains the same head under which it is earned.
Income includes loss.

Understand Taxation of Mutual Funds

The following table gives a glimpse of holding period classification of mutual funds:

	Short-term	Long-term
Equity funds	Less than 12 months	12 months and more
Balanced funds	Less than 12 months	12 months and more
Debt funds	Less than 36 months	36 months and more

Taxation on different types of mutual funds

	Short-term capital gains (STCG) tax	Long-term capital gains (LTCG) tax
Equity mutual funds	15%	10% on LTCG in excess of 1 lakh
Balanced mutual funds Balanced funds are equity-oriented hybrid funds that invest at least 65% of their assets in equities.	15%	10% on LTCG in excess of 1 lakh
Debt mutual funds	As per tax slab	20% after indexation

Understand Set-Off and Carry Forward of Losses

No.	Section	Types of Loss	Set-off against Income		Can be carried forward (subject to Notes 4 and 8)
No.	Section	Types of Loss	In same Assessment Year	In subsequent Assessment Year	Can be carried forward (subject to Notes 4 and 8)
1	71B	House Property	Any income under any head of Income (Note 1- restricted up to 2 lakhs)	Income from House Property	8 years
2	70/74	Short-term Capital Loss r.w.s. 94(7) in respect of units of Mutual Funds/securities & 94(8) in respect of units of Mutual Funds or UTI (Notes 8 and 9)	Any Capital Gain	Any Capital Gains	8 years
3	70/74	Long-term Capital Loss [other than equity shares or units of equity oriented mutual fund or units of a business trust which are subjected to STT	Long-term Capital Gain	Long-term Capital Gains	8 years
4	71/74	Long-term Capital Loss on equity shares & units of equity oriented mutual fund or units of a business Trust which are subjected to STT (See Note 12)	Long-term Capital Gain (See Note 12)	Long-term Capital Gain (See Note 12)	N.A.
5	71	Other Sources	Any income under any head of income	Unutilized loss not allowed for carry forward	N.A.

Notes

Where in respect of any assessment year, the net result of the computation under the head "Income from House Property" is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head.
In terms of section 80, the losses other than depreciation & house property loss can be carried forward only if determined in pursuance of the return filed within the time prescribed u/s. 139(1). However in case return is filed late, Income Tax Authorities have the power to condone delay on the basis of limit of losses – Circular No. 8/2001 dated 16-5-2001.
As per section 94(7) if any person
- buys units of mutual funds/securities within the period of 3 months prior to record date for dividend, and
- transfers/sells such securities within 3 months of such record date or transfers/sells units within the period of 9 months of such record date
- dividend or income received or receivable on such securities/units is exempt
Then, the loss arising to the extent of the amount of dividend received or receivable shall be ignored while computing his total income chargeable to tax.
As per section 94(8) if any person
- buys units of mutual funds or UTI within the period of 3 months prior to record date for issue of bonus units and receives bonus units on such date
- transfers/sells all or any of the original units within period of 9 months of such record date
- he continues to hold all or any of the bonus units
Then the loss arising in respect of such purchase & sale transaction shall be ignored while computing his total income. However loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held on the date of sale or transfer.

Understand Taxability of Gifts

Particulars	Section 56(2)(x)
Recipient	Any Person
Giver	Any Person
Period covered	With effect from 1st April, 2017
Amount to be taxed	Sum of money received without consideration, the aggregate value of which exceeds 50,000 Immovable property received without consideration, the stamp duty value of which exceeds 50,000 – stamp duty value Received for a consideration which is less than the stamp duty value by an amount exceeding 50,000 – stamp duty value as exceeds such consideration. received for a consideration, where stamp duty value exceeds such consideration by more than -whole of the aggregate value 50,000; and an amount equal to 5% of the consideration -stamp duty value as exceeds such consideration. (from AY 2019-20 onwards) Stamp duty value on date of agreement for transfer of immovable property to be considered, if date of agreement and the date of registration are not the same. This is applicable only if consideration or part thereof, is paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account (or through such other electronic mode as may be prescribed)* on or before the date of agreement for transfer of such immovable property. Provided where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in section 50C(2) of Act, the AO may refer to a Valuation Offi and the provisions of section 50C and section 155(15) shall apply in relation to the stamp duty value of such property. c. Any property, other than immovable property Received without consideration, the aggregate fair market value (FMV) of which exceeds 50,000 – the whole of aggregate FMV Received for a consideration less than the aggregate FMV by an amount exceeding 50,000 – aggregate FMV as exceeds such consideration
Does not apply	Any sum of money or any property received from any relative on the occasion of marriage under a will or by inheritance In contemplation of death of payer or donor From local authority as defined in section 10(20) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 From or by any trust or institution registered under section 12A or section 12AA by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub- clause (vi) or sub-clause (via) of clause (23C) of section 10; By way of transaction not regarded as transfer under section 47(i) or 47(vi) or 47(via) or 47(viaa) or 47(vib) or 47(vic) or 47(vica) 47(vicb) or 47(vid) or 47(vii) (inserted vide Finance Act 2016 w.e.f. 1-4-2017); 47(iv) or 47(v) (inserted vide Finance Act, 2018 w.e.f. 1-4-2018) from an individual by a trust created or established solely for the benefit of relative of the individual from such class of persons and subject to such conditions, as may be prescribed*
Relative means	In case of an Individual — spouse of the individual; brother or sister of the individual; brother or sister of the spouse of the individual; brother or sister of either of the parents of the individual; any lineal ascendant or descendant of the individual; any lineal ascendant or descendant of the spouse of the individual; spouse of the person referred to in clauses
Property means	In case of HUF, from any member thereof. Immovable property being land or building or both shares and securities; jewellery; archaeological collections; drawings; paintings; sculptures; any work of art; bullion.
Fair Market Value means	FMV of a property, other than an immovable property, means the value determined in accordance with the prescribed method (Rules 11U and 11UA). The CBDT vide Notifi ion No. o. 61 /2017/F. No. 149/136/2014-TPL] dated 12-07-2017 has notified final rules for determining the FMV of unquoted equity shares for the purposes of section 56(2)(x) and section 50C of the Act.

Understand Restrictions on Cash Transactions

Acceptance of cash more than 2 lakhs in aggregate in a year, in a day or for one occasion or for one event or in one transaction.
Non-compliance : Penalty 100% of the amount (Section 271DA).
Acceptance of loan or deposit of more than 20,000/- in cash.
Non-compliance : Penalty 100% such of loan or deposit Section 269SS.
Repayment of loan or deposit in cash Section 269-T.
Non-compliance : Penalty 100% such of loan or deposit Section 271E.
Acceptance of advance more than 20,000/- in a year for transfer of immovable property Section 269SS.
Non-compliance : Penalty 100% of such amount.
Payment of premium for medical Insurance in cash.
Non-compliance : Deduction will not be allowed of such payments Section 80D.
Payment for donation for more than 2,000/- in cash to funds or trusts approved Section 80G.
Non-compliance : Deduction not allowed Section 80G.
Payment for donation more than 10000 in cash for research and rural development.
Non-compliance : Deduction not allowed Section 80GGA.

Understand Computation of Income From House Property

Particulars		Types of Property
		Let-out Property u/s. 23(1)		Self-occupied House Property u/s. 23(2)		Deemed to be Let-out Property u/s. 23(4)
		Amt.	Amt.	Amt.	Amt.	Amt.	Amt.
(i)	Reasonably Expected Rent		XXX		NIL		XXX
(ii)	Actual rent received or receivable		XXX		NIL		NIL
Gross Annual Value (GAV)			XXX
1.	(i) or,
2.	(ii)>(i), then (ii) or,
3.	(ii)<(i) due to vacancy then (ii)				NIL		XXX
Less : Municipal Taxes paid to local authority by the owner			(XXX)		NIL		(XXX)
1.	Net Annual Value (NAV)		XXX		NIL		XXX
Less: Deduction u/s. 24
(a)	30% of NAV	XXX		NIL		XXX
(b)	Interest on loans as allowed	XXX		XXX		XXX
2.	Total Deductions (a) + (b)		(XXX)		(XXX)		(XXX)
A.	Income from House Property (1 - 2)		XXX		(XXX)		XXX
B.	Add Unrealised Rent Received subject to conditions of deduction u/ss. 23/24		XXX		NIL		NIL
C.	Add arrears of Rent Received	XXX		NIL		NIL
Less: 30% of arrears of Rent		(XXX)	(XXX)	NIL	NIL	NIL	NIL
Total Income from House Property (A + B + C)			XXX		XXX		XXX

Section 71(3A): Income being loss under the head House property shall not be allowed to be set off against income under any other head in excess of 2,00,000/- Ref Sec 71(3A) w.e.f 01.04.2018.

DEDUCTIONS ALLOWED WHILE COMPUTING INCOME UNDER THIS HEAD

The following deductions shall be allowed from the annual value u/s. 24:

30% of the annual value as computed.
Interest payable on borrowed capital for the purpose of acquisition, construction, repairs, renewals or reconstruction of house property (subject however in case of self-occupied property it is subject to conditions and limits as mentioned hereinafter).
- Interest to the extent it is not claimed/allowed under any of the provisions of the Act, for the period prior to acquisition or construction of the premises would be deductible in five equal instalments starting from the year in which property is acquired or constructed.
- However In case of self-occupied House Property or the property not occupied due to employment etc. interest allowable is subject to following conditions:

Sr. No.	Particulars	Limit of Deduction (in )
1.	Property acquired/constructed after 1st April, 1999 with borrowed capital (deduction is allowed only where such acquisition or construction is completed within 3 years (5 years w.e.f. F.Y. 2016-17) from the end of the financial year in which capital was borrowed)	2,00,000/- w.e.f. 2015-16
2.	In case of property acquired/ constructed before 1st April, 1999	30,000/-

Notes:

Interest on new loan taken to repay original loan is considered as loan taken for such acquisition, construction, etc. (Refer CBDT Circular No. 28 dated 20-8-1969).
Where interest is claimed as a deduction, a certificate from the lender certifying the amount of interest payable should be furnished by the assessee.
The list of deduction specified u/s. 24 are exhaustive, no other deduction can be claimed other than specified therein.
Interest on borrowed money which is payable outside India shall not be allowed as deduction u/s. 24(b) unless the tax on the same has been paid or deducted at source and in respect of which, there is a person in India, who may be treated as agent of the recipient for such purpose.
Brokerage or commission paid to arrange a loan for house construction will not be allowed.
A new section 80EE was introduced by Finance Act, 2013 to allow additional interest of 1,00,000w.e.f. 1st April, 2014 (i.e. A.Y. 2014-15) against loan obtained for acquiring a residential house by an individual where such loan is sanctioned after 1-4-2013 but before 31-3-2014.

The said section 80EE has been amended by Finance Act, 2016, w.e.f. 1st April, 2017 (i.e. A.Y. 2017-18) to provide for a deduction of interest up to 50,000/- for loans sanctioned on after 1-4-2016 but before 31-3-2017) subject to such conditions as mentioned therein.

Understand Implications of Residential Status Under Income-Tax Act

Tax implication for an assessee depends on his residential status as per Indian Income-tax Act, 1961. In the case of Indian citizen, whether an income accrued to such a person outside India, is taxable in India depends upon the residential status of the person in India. Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India depends on the residential status of the individual, rather than on his citizenship. Therefore, determining correctly the residential status of a person is very significant in order to find out a person’s tax liability.

NON-RESIDENT STATUS UNDER THE INCOME TAX ACT

The term non-resident is negatively defined under section 2(30) of the Income-tax Act. An individual who is not a resident under the Income-tax Act is a non-resident (generally, termed NRI).

Test of Residency for Individual

The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act). The definition is explained in simple terms as under:

If an individual who satisfies any one of the understated conditions of section 6 of the Income-tax Act, then he becomes a Resident.

Condition	Status
1.	He is in India for 182 days or more during the relevant previous year	If yes, then he is resident (If not, check the next condition)
2.	He is in India for 60 days or more during the previous year and he is in India for 365 days or more during the 4 years prior to the previous year	If yes, then he is resident

The above provisions are applicable to all individuals irrespective of their nationality.

However, as a special concession for Indian citizens and Person of Indian Origin, the period of 60 days referred to in condition 2 above, is extended to 182 days in two cases:

where an Indian citizen leaves India in any year as a member of crew of an Indian ship or for the purpose of employment outside India; and
where an Indian citizen or a Person of Indian Origin, who is outside India, comes on a visit to India.

Further for an Indian citizen, being a member of a crew of a foreign bound ship leaving India, the period beginning from the date of joining the ship till the date of sign off from the ship, as entered into the continuous discharge certifi shall not be included while calculating period of stay in India.

If an Individual is not satisfying any of the above conditions to become resident, then he will be non-resident.

RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR)

An Individual, who is resident in a given year and who satisfies one of the following conditions, is given a special status of RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR) else

he will be Resident and Ordinarily Resident in India.

Condition	Status
1.	He is non-resident, as per the above provisions, for at least 9 out of 10 previous years prior to previous year under consideration	If yes, he is RNOR
2.	His stay in India during the 7 previous years prior to the previous year under consideration is less than or equal to 729 days	If yes, he is RNOR

IMPLICATIONS OF RESIDENTIAL STATUS

The incidence of tax depends upon a person’s Residential Status and also upon the place and time of accrual and receipt of income.

The charge of income tax with regard to the three categories of taxpayers can be summarised as follows:

Sources of Income	R & OR	R & NOR	NR
Indian Income
Income received or deemed to be received in India during the current financial year	Taxable in India	Taxable in India	Taxable in India
Income accruing or arising or deemed to accrue or arise in India during the current financial year	Taxable in India	Taxable in India	Taxable in India
Income accruing or arising or deemed to accrue or arise outside India, but first receipt is in India during the current financial year	Taxable in India	Taxable in India	Taxable in India
Foreign Income
Income accruing or arising or deemed to accrue or arise outside India and received outside India, during the current financial year	Taxable in India	Not Taxable in India	Not Taxable in India
Income accruing or arising outside India from a Business/ profession controlled in/from India during the current financial year	Taxable in India	Taxable in India	Not Taxable in India

In the above context, it may be noted that the ‘receipt’ of income refers to the first occasion when the recipient gets the money under his own control and it is the first receipt that determines the year and place of receipt for the purposes of taxation. If the income is already received outside India, no tax liability will arise when the whole or any part of such income is remitted to India.

Taxpayers in all categories are chargeable on income, from whatever source derived, which is received or is deemed to be received in India by or on behalf of them or which accrues or arises or is deemed to accrue or arise to them in India other than income specified as exempt income.
A “resident and ordinarily resident” pays tax in India on his entire world income, wherever accrued or received.
A “non-resident” pays tax only on his taxable Indian income and his foreign income (earned and received outside India) is totally exempt from Indian taxes.
A “not-ordinarily resident” pays tax on taxable Indian income and on foreign income derived from a business controlled in or a profession set up in India.

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