“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


Query 1]
I am BSNL employee having income from salary only. I have would like to know that which return form should I fill? One more thing I wanted to ask you that in ITR-1, what Rs. 5,000 /-exemption limit is? What exemption refers to? What is the difference between exemption & deduction? [rakeshingley123@gmail.com]
Opinion:
1.      Income tax return can be filed by an individual taxpayer in form ITR-1 where the total income consists of the following income:
i) “Salaries” or income in the nature of family pension or
ii) “Income form house property”, where assessee does not own more than 1 house property and does not have any brought forward loss under the head; or
iii) “Income from other sources”, except winnings from lottery or income from race horses and does not have any loss under the head.
It is Provided that the ITR-1  form cannot be used by the person who:
(a)  is a resident, other than not ordinarily resident in India within the meaning of sub-section (6) of section 6 and has
i) assets (including financial interest in any entity) located outside India; or
ii) signing authority in any account located outside India;
(b) has claimed any relief of tax u/s 90 or 90A or deduction of tax under section 91; or
(c) has income not chargeable to tax, exceeding Rs. 5,000/-.
2.      In your specific case, if you satisfy the above criteria, you can file the return of income in form ITR-1.
3.      Exemption and deduction are two commonly used terms many get confused with, and most of the taxpayer can’t differentiate between the two. One needs to understand the difference between the two terms that many people commonly consider as one and the same.
a]
DEDUCTION:
The word “deduct” means “to subtract or take away from the total”. Tax deduction allows you to put some of your income to use in certain specified investments or expenses and deduct the amount from your income, thereby lowering your ultimate taxable income. In short, deduction reduces the amount of income which is taxable. Deduction is always on income forming part of your total income.
[
Few deduction forming part majority of tax payers are chapter VIA deductions like Deduction u/s 80C towards investments in LIC/PPF/NSC etc, U/s 80D towards health insurance premium, U/s 80E towards education loan interest payment, U/s 80G towards donations, U/s 80DD towards medical treatment of handicapped dependant etc.]
b] EXEMPTION:
Exemption means “Tax Free”. Exempted income does not form part of your total income on which income tax has to be paid. Another major difference between deduction & exemption is that exempt income doesn’t not form the part of gross total income (GTI).
[Few exemption available to majority of tax payers are life insurance money back, PPF Maturity proceeds, Agricultural income, share of profit from the partnership firm etc]

Query 2]
Please advise me whether the LTCG out of Shares, can be appropriated towards acquiring a New House. I have purchased a Flat @ Bangalore and the same is likely to be delivered before March-2015. In the meanwhile, I am planning to sell few shares and utilize the proceeds for meeting part of the acquisition cost. The rest of the amount for acquiring the Flat has been financed by our Bank. Please enlighten me regarding the LTCG. [sivaram.ganeshan@sbm.co.in]
Opinion:
1.      Any Long Term Capital Gain (LTCG) arising on sale of shares through recognised stock exchange is totally exempt i.e., tax free. In such case, tax payer is free to utilize the amount for any purpose without any barrier or restrictions as to its utilization or investment.
2.      Any other LTCG arising on sale of shares (other than mentioned in (1) above, would not be tax free and would be taxable. In such case, taxpayers have an option to save LTCG arising on sale of shares by investing the sale proceeds for purchase of another house property. The exemption in such case would be available u/s 54F.
3.      Exemption u/s 54F shall be admissible if following conditions are satisfied: -
a) Taxpayer is an individual or a Hindu Undivided Family.
b) Capital gain arises from the transfer of any long-term capital asset other than residential house property.
c)  Taxpayer has, within a period of one year before or two years after the date on which the transfer took place purchases, or within a period of three years after that date constructs, a residential house.
d)  Taxpayer does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
e)  Taxpayer do not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or constructs any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If all above conditions are satisfied, taxpayer can claim LTCG as exempt provided entire amount of net sale consideration is invested for new residential house property as mentioned above. If entire amount of net sale consideration is not invested, then exempt LTCG would be available proportionately. [U/s 54F, it’s the investment of actual net sale consideration that determines the claim of exemption.]
4.      Apart from exemption u/s 54F, taxpayers also have an option of claiming an exemption U/s 54EC as well. To save tax u/s 54EC, taxpayers have to invest the amount of LTCG, within a period of 6 months from the date of transfer, in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). For exemption U/s 54EC, Investment of LTCG is relevant and not the amount of net sale consideration as required in section 54F. [There is a maximum investment ceiling of Rs. 50 Lacs for investment in 54EC Bonds.]
With above generalized information, in your specific case, you can utilize the sale proceeds, present as well as future, for purchase of flat at Bangalore.

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