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TAX TALK-08.02.2016-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

Beware, there is a penalty for property transactions in cash

Query 1]

1.      I am to get some amount in March 2016 on redemption of ELSS MF done in March-2013 for tax savings. Whether I shall have to pay IT on LTCG or otherwise? Kindly enlighten me in this matter. [kumarmeher52@gmail.com]

2.      Is it better to invest in Equity linked saving scheme to save tax? Isn’t PPF a better option as compares to ELSS? My agent has advised me to go for ELSS and not PPF. Please advise.  [ amitr******@gmail.com]

Opinion:

There are lot many taxpayers who are not well aware of the Equity-linked saving schemes (ELSS) as a tax cum financial planning tool. ELSS is one of the types of mutual funds with tax benefits. It is one of the most preferred tax saving option for the young taxpayers as it has the potential to yield robust tax free returns in addition to offering tax benefit. The return from ELSS are tax free and have a smaller lock in period of merely 3 years as compared to other tax saving options which offers nominal fixed returns or have longer lock in period. Since the amount is indirectly invested in the equity shares of listed companies in the stock exchanges, the risk of negative return in ELSS cannot be ruled out. There are three options available in the ELSS, as under:

1.      Growth option – In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the Net Annual Value (NAV) of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss. 

2.      Dividend option – In this option the fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors.

3.      Dividend reinvestments option – If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 1000 units of a fund and the fund declares dividend @ 2 per unit, the total dividend of 2000 (1000*2) will be reinvested on behalf of the investor as a fresh purchase.

ELSS Vs. PPF:

Since both the investment operates on EEE (Exempt-Exempt-Exempt) model, one needs to know difference between the two so as to arrive at a better decision. ELSS is an equity product while PPF is a debt product.  With PPF, returns are guaranteed while with ELSS, the returns are market-linked and there is no such guarantee. ELSS investments have lock-in of 3 years while PPF matures in 15 years.

Tax Implication on redemption of ELSS:

Planning for taxes is an integral part of your financial planning. Amount invested in ELSS cannot be redeemed before the end of three years from the date of investment. The fact remains even if the taxpayer has not claimed any tax benefits under Section 80C of the Income-tax Act.  Amount withdrawn from ELSS would be totally tax free. There are lot many taxpayers who makes investment in ELSS through the route of Systematic Investment Plan (SIP). At the time of redemption of such ELSS, each SIP installment is treated as a separate investment and the installment must complete three years of holding for it to be redeemed. Redemption is on a first-in first-out basis since the units allotted first will be redeemed first. Whatever may be the amount of redemption, it would be totally tax free.

Query 2]

I have two queries:
1. A, B and C are joint owners of a land in the ratio 40:40:20. B and C are father and son while A is a relative of B. Now B wants to construct on the land to which A and C have no objection and A will be pay annual rents for allowing the use of land while the ownership of building will belong to B only. What are the tax law requirements to put in practice the above arrangement? Whether I would get the tax benefit if I avail the bank loan for above construction purpose? And will Income Tax authorities accept such an arrangement?

2. I have entered into an agreement for sale of rural agricultural land at a price of Rs. 21 Lacs. I am going to receive Rs. 5 Lacs as advance. However the value adopted for stamp duty purpose will be quite less i.e., apporx. Rs. 7 to 9 Lacs. Please guide me how to account for this transaction and for the advance I am going to receive. Also, the whole transaction will be in cash as the buyer is a local farmer. Please guide on above as soon as possible. [sasim.ca.nagpur@gmail.com]

Opinion:

1.      The first part of the question is a very unique & often asked by the taxpayers on various occasion. Taxpayer need to understand that ownership in a house property is one of the first & foremost vital pre-condition  for claiming deduction towards Interest on housing loan u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Without ownership in the house property, no right would emanate for deduction. The second pre-condition is the availment of loan towards the house property.
Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets. In your case, land is owned by A, B & C whereas construction is proposed to be done by B alone. It appears that you would be entering in to some sort of documentary arrangement through Memorandum of Understanding (MOU) or Lease agreement whereby (a) you would be paying some annual value/ rent to A & C for using their share of land (b) the fact of construction or proposed construction by you would be mentioned therein. If it so & if you are properly documenting the transactions and routing the payment of construction through your account, you can claim deduction u/s 24(b) & u/s 80C towards housing loan repayment without any limitations. Ensure the proper documentation to prove that construction is done by you, loan is primarily your individual liability, and entire loan repayment is done by you.

2.      In your case, the actual sale price (Rs. 21 Lacs) is higher than the prevailing stamp duty valuation (i.e. ready reckoner value or guidance value) of Rs. 7 to 9 Lacs. In your case, there would not be any tax liability on notional basis. Even, since the agricultural land is a rural agricultural land (i.e., land beyond certain specified area of Municipal Corporation), entire receipt would be tax free. However, there is one important default that you would be committing under the Income Tax Act-1961. The default is acceptance of cash against sale of immoveable property. Beware, there is a penalty for property transactions in cash. In order to curb generation of black money in the property transactions, Section 269SS was amended by the Finance Act-2015 so as to provide that no person shall accept from any person any amount as advance or otherwise against sale/transfer of an immovable property otherwise than by an account payee cheque or bank draft or by ECS, if the amount is Rs. 20,000/- or more. It may be noted that penalty is there on the seller against accepting the amount in cash. Similarly section 269T prohibits the repayment of such money otherwise than by an A/c payee cheque/draft or ECS, if the amount is Rs. 20,000/- or more. Here again, the penalty is on seller against the repayment of the amount in cash. V

iolation of the provision of section 269SS & 269T attracts penalty u/s 271D & U/s 271E respectively which shall be a sum equal to the amount of the amount accepted /repaid in such violation.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at

SSRPN & Co

10, Laxmi Vyankatesh Apartment

C.A. Road, Telephone Exch. Square

Nagpur-440008

or email it at

nareshjakhotia@ssrpn.com.]