The Hindu Business Line : Traps to avoid during tax planning

How often have people planned a financial transaction meticulously, down to optimisation of tax implications, based on advice, hearsay, or their own reading of the law, and then realised to their dismay that a minor detail or development has been overlooked and the entire dynamics have changed significantly?

Well, one can take heart from the fact that one is not alone in such a situation; there are several circumstances under which people have had to cringe at that one slip, before moving on to correction, defence or litigation.

Salary hikes

Take, for instance, the lack of care to report appropriately details of your income to your employer. Let us say you have moved, in the middle of a financial year, to a high-paying job, where taxes are withheld by your employer after taking into consideration the basic threshold for exemption.

If you have not reported the income from your previous employment and taxes already withheld after having considered the basic threshold, what you find at the end of the year, or when you get down to preparing your return of income, is that there has been a short deduction of tax which needs to be paid off together with interest for short deduction and deferment of tax.

Equally, omission to report to the employer details of other income — interest (especially where no taxes are deductible at source) and house property income details (especially where it results in a loss on account of interest paid on borrowings) — results in avoidable short/excess withholding with all their consequences.

Scholarships

That scholarships received are exempt from tax, and have been held to be so even where an employer grants scholarships to employees’ children, with no reference however to the employment per se, is known. However, it is important that you ensure that the grant is clearly for defraying the cost of the scholarship and no part is seen as compensation for services rendered to the payer as that is not eligible for exemption. Also, such scholarships are subject to Fringe Benefit Tax (FBT). Where the FBT element is passed on to the recipient, you could find to your disappointment that you receive a sum less (by about 17 per cent) than what you expect or need.

Pay cuts

Economic slowdown, whether global, national or in a given enterprise, could see instances of salaries foregone. In such a case, it is worth remembering that salaries are taxable on a due basis, whether paid or not, which suggests an obligation on the part of the employer to pay and a right to the employee to claim the same.

If due, any waiver of salary would be tantamount to application of income and therefore taxable. Legal precedence suggests that a deduction is in order under genuine circumstances, and in the absence of any real income, one would do well to ensure that the salary is forgone before it actually becomes due, else to pay taxes thereon would add insult to injury.

Housing loans

Interest on housing loans can be deducted from income from house property — in respect of self-occupied property — subject to a cap of Rs 1,50,000, and to the extent of actual outgo, otherwise. Where a person has two houses, he has the option to choose the one that would be self-occupied while the other would be treated as if it has been let out.

A mistake people make is in borrowing in respect of the self-occupied property, which restricts the deductible interest even while income from the other property is taxed for the whole year, without any deduction therefrom. Leveraging the benefits of the interest deduction available with the use of property is therefore important.

Salary for Expats

An expatriate, employed by a foreign company but working in India for say less than six months, is generally given the impression that no tax is payable on account of short-stay exemption available to him. Consequently, the relevant details relating to income attributable to the tenure in India are not specifically maintained.

However, where the foreign employer creates a permanent establishment at a subsequent date, the employee becomes taxable in India. This exposes him to tax liability, interest consequences, not to speak of compliance requirements for him and his employer.

To take advantage of the rules relating to residence, where a person plans to leave India or in the case of the returning Indian, on the last day of the threshold period, his calculations could go awry if the passport is stamped after midnight, or there is an inordinate delay in the flight, and an entire additional day is counted.

Despite legal precedence that could be relied upon in such a case, cutting things so fine could inevitably involve litigation.

Capital Gains

You could be the happy recipient of gifted property held by your well-wisher for decades. Pleased at its high current value, you sell it for a substantial consideration. You need to now contend with the capital gains implications.

While the law is clear as to the cost of the acquisition (cost to the donor) vis-À-vis indexation, the law speaks of the first year in which the asset is transferred to the assessee, or April 1, 1981, whichever is later.

Despite decisions at the tribunal level, this has caused grief to some sellers saddled with a low cost of acquisition, together with an unfavourable index, leading to high capital gains.

(The author is Associate Vice-President, Markets, Grant Thornton, Mumbai.)

More Stories on : Income Tax | Racy Cases

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page