It should also be noted that for the share contributed towards Employee’s Pension Scheme does not accrue interest. However, members are entitled to receive a pension out of this accumulated sum after they turn 58 years old. How is Interest on EPF Calculated? The interest extended on EPF schemes is calculated each month and is calculated by dividing the rate p.a. by 12. Such a method helps to calculate the specific interest that is offered to member employees for a given month. For example – If the rate of interest is 8.55% p.a. the rate for each month would be (8.55/12) %, i.e., 0.7125%. Now, 12% of an individual’s salary is directed towards their EPF account. Assuming that the salary of an individual is Rs. 15,000 per month – 12% of Rs. 15,000 would accrue Rs. 18, 00 by month-end which would be transferred to the individual’s EPF account. Now, employers contribute 3.67% towards their EPF account, while 8.33% is contributed towards their EPS account. The contribution towards EPF account would be –3.67% of Rs. 15,000 = Rs. 550. The total contribution towards the EPF account would stand at Rs. (1800+550) = Rs.2350 The interest accrued in one month would be Rs. 2350 x 0.7125% = Rs. 16.75 It is to be noted that the interest accrued in a given month would only be credited to the account at the end of a current financial year. What is an EPF form? EPF forms are vital for the processing of any activity in an EPF employee member’s EPF account. Be it registration, PF transfer, withdrawal, or availing loans; an EPF form is mandatory for completing such activities. The table below offers a brief idea about the different EPS forms and the purpose they are required for – Form Purpose Of The Form Application Form 2 For nominating and declaring. Applicable to both EPF and EPS. 151 CU IDOL SELF LEARNING MATERIAL (SLM)
Form 5 For registering. Applicable to new employees registering for EPS and EPF. Form 5 For availing a claim under EDLI IF scheme Form For availing withdrawal benefits or EPS 10C scheme certification. Form For availing monthly pension. 10D Form For transferring EPF account. EPF 11 Form For purchasing LIC policy. 14 Form For availing tax-saving benefits on EPF 15G interest. EPF Form For settling employee’s provident 19 fund. Form For settling employees provident fund EPF 20 in case of death. Form For EPF withdrawal. EPF 31 Table 8.2: EPF Form Under what circumstances can EPF arewithdrawn? Individuals may opt for either partial or complete withdrawal of EPF. But such withdrawals can be made only under specific circumstances. 152 CU IDOL SELF LEARNING MATERIAL (SLM)
Here is a list of a few such circumstances under which individuals can withdraw EPF completely On retirement. If their unemployment period extends more than two months. While switching from one profession to another or in between jobs. But the duration without a job should be more than two months. Here is a list of a few such circumstances under which individuals can withdraw EPF partially For a wedding. For higher education. For purchasing land or constructing a house. Repayment of home loan. Renovating a housing property. What is the process of EPF withdrawal? EPF India members can withdraw EPF by submitting a withdrawal application either offline or through EPF online portal. For offline submission Individuals need to fill up a ‘new composite claim form’ or a ‘composite claim form” and submit the same to the EPFO office under their jurisdiction. A composite claim form needs to be attested by their employer. For online submission Individuals must have an active Universal Account Number (UAN). The mobile number used to activate the UAN should be active as well. UAN should be linked to be linked with AADHAAR. They would also need the PAN and respective bank details with its IFSC code. After ensuring all the prerequisites are in place, they need to login into the UAN online portal. Individuals need to verify their KYC details and then proceed as per instructions. Being a retirement-oriented scheme, the primary aim of Employee Provident Fund is to enable individuals to become financially prepared for their retired life. Individuals should try to avoid premature withdrawal if it is not necessary. Overview of Employee’s Provident Funds (EPF) 153 CU IDOL SELF LEARNING MATERIAL (SLM)
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 is an important piece of Labour Welfare Legislation which was enacted by the Parliament of India to provide social security benefits to the workers of industries. It is implemented by the Employees Provident Fund Organisation. Initially this Act was known as The Provident Fund Act, 1952. This Act is implemented by Employees Provident Fund Organisation of India. This organization has a mission to provide security in terms of old age income. The Employees Provident Fund bill was passed by both the houses of the Parliament which is RAJYA SABHA and the LOK SABHA and received the assent of the President on 4th March 1952. From 1st August 1976, the nomenclature of the Act was changed as Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 has been amended 15 times. The provisions of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 extended to whole of India except the state of Jammu and Kashmir and the State of Sikkim where it has not been notified so far after its annexation with the Union of India. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 is beneficial to the employees working in factories and many other establishments. This Act applies to each kind of factory which is engaged in any industry specified in Schedule and other establishments which employ twenty or more workman. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 does not apply to any factory or any establishment which is registered under Co-operative Societies Act, 1912 or any other statutory law relating to Cooperative Societies engaging less than 50 persons and working without the aid of power. Central Government has the discretionary power to extend the Act to non-factory units or establishments. Statutory rate of contribution to the provident fund by the employees and employers is 10% of the pay of the employees. The wages include basic wage,DA, including cash value of food concession and retaining allowance if there is any. Central government have a discretionary power to enhance this rate to 12%. These contributions after paying advances and final withdrawals are to be invested in government securities, negotiable securities or bonds, national saving certificates. Voluntary provident fund is a non-mandatory, voluntary contribution made by an employee into the EPF or employee’s provident fund. 12% of the employee’s contribution is added to the fund account and the voluntary addition is beyond the fixed percentage. As the provident fund is one of the most secure avenues for retirement, the surplus inclusion from basic salary and dearness allowance to VPF is widely beneficial. Employers are under no obligation to contribute to their employees’ VPF portfolio. Likewise, an employee is also under no obligation to contribute to the Plan. Once the contribution is chosen in VPF, the same cannot be terminated or discontinued before the base tenure of 5 154 CU IDOL SELF LEARNING MATERIAL (SLM)
years completed. The interest rate of Voluntary Retirement Plan is decided by the Government of India at the start of each financial year. 8.4 SUMMARY Retirement and pension benefits are given to a retired government official to make sure that they have a constant income and a secured life. The pension provisions are in place to ensure that the retired government officials are well off and can be financially independent and can lead their retired lives with no financial challenges. The retirement benefits mainly consist of the employees’ leave encashment (employees are allowed to accumulate leaves and exchange them for cash on their retirement), retirement gratuity, and the amount that they were contributing to their provident fund account throughout their service. All these, when put together, will result in a considerable corpus. This amount is going to be the backbone of the employee’s retired life. Using this amount wisely will alleviate the need to depend on others for handling financial expenses. This will give them a sense of financial confidence. Apart from the retirement benefits mentioned above, the retired government officials are also qualified to pension benefits. These benefits will allow them to lead a peaceful retired life with no hassles whatsoever in terms of finance. The different kinds of pension available for retired government official at the end of their employment tenure are pension on retiring, superannuation, voluntary retirement pension, compassionate allowances, family pension, compensation pension, and extraordinary pension. Superannuation pension plans are in place for those retired government officers who go on to serve until they turn 60 years old. Voluntary pension is paid out to those government officials who wish to retire just three months after they have completed serving for a period of 20 years. Extraordinary pension schemes are a kind of pension plan which is paid out to those retired government employees that are differently-abled or physically challenged or to the families of those government employees who lost their lives in the service of their employment with the government. When an employee retires, he/she is entitled to keep the present health care, dental, and vision coverage under COBRA (Consolidated Omnibus Budget Resolution Act) for 18 months. This act allows the retiree and spouse, if necessary, to pay the State’s active group rate, plus a 2% administration fee, in order to maintain continuance of coverage. 155 CU IDOL SELF LEARNING MATERIAL (SLM)
8.5 KEYWORDS Graduated Rate - System where the rate of tax increases on marginal amounts as the amount of taxable income rises. Synonym for progressive rate. Grandfather Clause - Clause temporarily preserving legislation which exists at the time a law is modified, or a treaty is concluded. Green Card Test - A test in the US to determine residence of an alien individual, i.e., an alien is considered resident if at any time during the calendar year he is a lawful permanent resident of the US under the immigration laws. Global Trading - Term used to describe transactions carried out by, inter alia, investment banks and securities dealers, involving financial instruments, financial services, and financial goods. Also known as 24-hour trading since the transactions is carried out continuously during a day in financial markets worldwide. Going Concern - A business, which is operating, e.g., at the time of takeover. The advantage of taking over a business as a going concern is usually recognized by a payment for goodwill as well as for other assets. 8.6 LEARNING ACTIVITY 1. Create a survey on Gratuity. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a session on Gratuity Eligibility Criteria. ___________________________________________________________________________ ___________________________________________________________________________ 8.7UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Gratuity? 2. How to Calculate Gratuity? 3. Write the Calculation of gratuity for the employees who are not covered under the Gratuity Act? 4. Write the Calculation of gratuity in case of death of an employee? 156 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Define Gratuity Rules? Long Questions 1. Explain the concept of Gratuity? 2. Describe the concept of Provident Fund? 3. Illustrate the Tax Exemptions on Gratuity? 4. Discuss the Gratuity Rules? 5. Examine theFew Significant Points about Gratuity? B. Multiple Choice Questions 1. What does the foreign house property’s income is taxable?? a. Non-Resident b. Not Ordinarily Resident c. Ordinarily Resident d. None of these 2. Which of the following is deductible from the annual value of House Property? a. Municipal taxes paid by the owner during the previous year b. Municipal taxes paid by the owner for the previous year c. Municipal taxes paid by the owner d. None of these 3. Select one of the following conditions must be satisfied to charge the rental income under the head Income of House Property a. The assessee should be one of the properties b. The property should consist of any buildings or lands c. The property should not be used by the owner for the purpose of business or professional purpose d. All of these 4. Select the right head of income for the statement under which Mr B is taxable - Mr. A owns a house property. He lent it to Mr. B at ` 10,000 p.m. Mr. B sublet it to Mr. C on monthly rent of ` 20,000 p.m.? a. Income from Other Sources b. Income from House Property c. Income from Salary 157 CU IDOL SELF LEARNING MATERIAL (SLM)
d. None of these 5. What does rule 4 include? a. All of these b. The defaulting tenant has vacated, or steps have been taken to vacate the house c. Tenancy must be Bonafede. d. Tenancy must be Bonafede. Answers 1-c, 2-a, 3-d, 4-a, 5-a 8.8 REFERENCES References book Turner, C.; Hodge, M. N. (1970). \"Occupations and Professions\". In Jackson, J. A. (Ed.). Professions and Professionalization. Sociological Studies. Coles, Colin (2002). \"Developing professional judgment\". Journal of Continuing Education in the Health Professions. Magali Sarfatti Larson, the Rise of Professionalism: a Sociological Analysis, Berkeley. Textbook references Guy Benveniste (1987). Professionalizing the Organization. San Francisco: Jossey- Bass. Jump up to: a b c Dent, Mike; Bourgeault, Ivy Lynn; Denis, Jean-Louis; Kuhlmann, Ellen Bloom, Samuel William; Bloom, Samuel W. (2002). The Word as Scalpel: A History of Medical Sociology. Oxford University Press. Website https://economictimes.indiatimes.com/wealth/earn/what-is- gratuity/articleshow/62047880.cms https://www.merriam-webster.com/dictionary/gratuity https://en.wikipedia.org/wiki/Gratuity 158 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9 – RETIREMENT 159 STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 Voluntary retirement scheme 9.2.1 Short title 9.2.2 Objective 9.2.3 Definitions 9.2.4 Operation of the scheme 9.2.5 Eligibility 9.2.6 Amount of ex-gratia 9.2.7 Mode of payment 9.2.8 Other benefits 9.2.9 Procedure 9.3 Encashment of earned leaves etc 9.3.1 Objective 9.3.2 Scope 9.3.3 Sanctioning 9.3.4 Authority 9.3.5 Encashment benefits 9.3.6 Eligibility 9.3.7 Procedure 9.3.8 Tenure 9.4 Summary 9.5 Keywords 9.6 Learning Activity 9.7 Unit End Questions 9.8 References CU IDOL SELF LEARNING MATERIAL (SLM)
9.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the concept of Voluntary retirement scheme. Illustrate the Encashment of earned leaves etc. Explain the Objective of Encashment. 9.1 INTRODUCTION Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are old or incapable of doing their job due to health reasons. People may also retire when they are eligible for private or public pension benefits, although some are forced to retire when bodily conditions no longer allow the person to work any longer (by illness or accident) or because of legislation concerning their positions. In most countries, the idea of retirement is of recent origin, being introduced during the late- nineteenth and early-twentieth centuries. Previously, low life expectancy, lack of social security and the absence of pension arrangements meant that most workers continued to work until their death. Germany was the first country to introduce retirement benefits in 1889. Nowadays, most developed countries have systems to provide pensions on retirement in old age, funded by employers or the state. In many poorer countries, there is no support for the elderly beyond that provided through the family. Today, retirement with a pension is considered a right of the worker in many societies; hard ideological, social, cultural, and political battles have been fought over whether this is a right. In many Western countries, this is a right embodied in national constitutions. An increasing number of individuals are choosing to put off this point of total retirement, by selecting to exist in the emerging state of retirement. A person may retire at whatever age they please. However, a country's tax laws, or state old- age pension rules usually mean that in each country a certain age is thought of as the standard retirement age. As life expectancy increases and more and more people live to an advanced age, in many countries the age at which a pension is awarded has been increased in the 21st century, often progressively. The standard retirement age varies from country to country, but it is generally between 50 and 70. In some countries this age is different for men and women, although this has recently been challenged in some countries (e.g., Austria), and in some countries the ages are being brought into line. The table below shows the variation in eligibility ages for public old-age benefits in the United States and many European countries, according to the OECD. 160 CU IDOL SELF LEARNING MATERIAL (SLM)
In his 1905 valedictory address to the Johns Hopkins Hospital, the eminent Canadian physician William Osler expressed his conviction that a man's best work was done before he was forty years old, and that by age sixty, he should retire. He called the ages between twenty-five and forty the \"15 golden years of plenty\". Workers between ages forty and sixty were tolerable because they were \"merely uncreative\". But after age sixty the average worker was useless and should be put out to pasture. Retirement as a concept began to be widely adopted in the United States after the period of the Industrial Revolution, where numerous aging factory workers began to show signs of aging: slowing down assembly lines, taking excessive sick days and usurping the spots of more youthful, more profitable men with families to bolster. Also, older workers brought about unemployment among the youthful population by declining to resign. The Great Depression exacerbated things. Though retirement was viewed by some as an essential adjustment, many among the older populace resisted the idea of retirement. By 1935, the idea that to get old individuals to quit working for pay was to pay them enough to quit working became widespread. A Californian, Francis Townsend, proposed a plan offering compulsory retirement at age 60. In return, the Legislature would pay benefits of up to $200 a month, a sum identical at the opportunity to a full pay for a centre pay labourer. In response to this, President Franklin D. Roosevelt proposed the Social Security Act of 1935, which made workers’ pay for their own particular retirement. Eleanor Roosevelt said hopefully of retirees, \"Old people love their own things even more than young people do. It means so much to sit in the same chair you sat in for a great many years.\"However, most resigned individuals wished they could work. The issue was still intense in 1951, when the Corning Company assembled a round table to make sense of how to make retirement more popular. At that gathering, the writer and student of Eastern and Western cultures, Santha Rama Rau, observed that Americans did not have the ability to appreciate doing nothing. By 1910, Florida got to be distinctly available as a retirement destination to the white collar class. Retirement communities started to show up in the 1920s and 30s. The explosion of golfcourses, and the onset of films and TV transformed having nothing to do into a leisure time activity. The distribution in 1955 of Senior Citizen magazine, which quickly went defunct, contained the first popular usage of the phrase \"senior citizen\". In 1999, The American Association of Retired Persons dropped \"Retired\" from its name and turned into \"AARP Inc.\" to reflect that its focus was no longer American retirees. In 1883, the German chancellor, Otto Von Bismarck, in a makeover against Marxists who were burgeoning in power and popularity, announced that anyone over 65 years old would be forced to retire and that he would pay a pension to them. It was the German Emperor, William I who, at the bidding of Bismarck in 1881, introduced the proposal for retirement in a letter to the Reichstag: \"those who are disabled from work by age and 161 CU IDOL SELF LEARNING MATERIAL (SLM)
invalidity have a well-grounded claim to care from the state\" Just like President Roosevelt, who would be called a 'socialist' for introducing his New Deal welfare programs, Bismarck was also labelled a 'socialist' for introducing these government programs. To this, Bismarck replied, \"Call it socialism or whatever you like. It is the same to me.\"The German welfare program provided contributory retirement benefits and disability benefits. Participation in the retirement system was mandatory and contributions were taken from the employee, the employer, and the government. In the mid-1800s certain United States municipal employees, including firefighters, police, and teachers, started receiving public pensions. In 1875, the American Express Company began to offer private pensions. By the 1920s, a variety of American industries, from railroads to oil to banking, began offering pensions. Many factors affect people's retirement decisions. Retirement funding education is a big factor that affects the success of an individual's retirement experience. Social Security plays an important role because most individuals solely rely on Social Security as their only retirement option when Social Security's trust funds are expected to be depleted by 2034.Knowledge affects an individual's retirement decisions by simply finding more reliable retirement options such as Individual Retirement Accounts or Employer-Sponsored Plans. In countries around the world, people are much more likely to retire at the early and normal retirement ages of the public pension system (e.g., ages 62 and 65 in the U.S.).This pattern cannot be explained by different financial incentives to retire at these ages since typically retirement benefits at these ages are approximately actuarially fair; that is, the present value of lifetime pension benefits (pension wealth) conditional on retiring at age a is approximately the same as pension wealth conditional on retiring one year later at age a+1.Nevertheless, a large literature has found that individuals respond significantly to financial incentives relating to retirement. Greater wealth tends to lead to earlier retirement since wealthier individuals can essentially \"purchase\" additional leisure. Generally, the effect of wealth on retirement is difficult to estimate empirically since observing greater wealth at older ages may be the result of increased saving over the working life in anticipation of earlier retirement. However, many economists have found creative ways to estimate wealth effects on retirement and typically find that they are small. For example, one paper exploits the receipt of an inheritance to measure the effect of wealth shocks on retirement using data from the HRS. The authors find that receiving an inheritance increases the probability of retiring earlier than expected by 4.4 percentage points, or 12 percent relative to the baseline retirement rate, over an eight-year period. 162 CU IDOL SELF LEARNING MATERIAL (SLM)
9.2 VOLUNTARYRETIREMENTSCHEME Retirement is usually something that workers plan for throughout the course of their careers. After all, it takes a decent nest egg plus a lifestyle plan to retire successfully. However, there is a form of retirement that can seemingly fall into the lap of workers: a voluntary retirement. This form of a retirement is typically offered by a company to reduce their workforce without conducting a layoff or holding another downsizing event. By doing so, it allows workers to make the switch into retirement at an earlier age while also helping the company rightsize their company, aligning their talent with their business goals. Well, it’s pretty much as it sounds: it’s when a company decides to offer retirement to workers to reduce their workforce without needing to hold a more intensive downsizing event. A company would want to do this because it’s a lot easier to let people go if they opt to be let go. Why hold a layoff event when you could just ask your staff if anyone wants a retirement package to leave on their own free will? It solves the problem while also keeping your staff members happy, which is a big concern when dealing with right sizing efforts. “Companies as diverse as Anheuser-Busch, Best Buy, Harley Davidson and Verizon all have one thing in common,these companies have all used buyout packages and early retirement plans to cut costs reduce painful layoffs and adapt to an ever-changing business environment,” reports Bonnie Conrad from Bizfluent. “Early retirement programs and company buyouts offer a number of important benefits, both for workers and for their employers.” Most of the time, employees gain eligibility to partake in a voluntary retirement after they have worked for an organization for a set number of years and have reached a specific age. This means that not everyone is eligible for early retirement packages. In fact, most employees aren’t. It gets a bit confusing, though, because many voluntary retirement programs are made eligible to workers who haven’t yet reached the typical age of 65 that normal retirement requires. “The policy may define who is eligible for early retirement by setting a minimum age and/or length of service. They may require retirement when a voluntary retirement application is submitted and not withdrawn within a certain time,” reports US Legal. “Public employee voluntary retirement programs are subject to state, federal, union, and/or agency laws and regulations.” Based on these laws plus how the company structures their program, eligible candidates are selected. So, to use a completely fictional example, you could say that employees are eligible after they complete 20 years of creditable service and are over the age of 50. However, it’s important to note that the benefits extended to these early retirees might be quite different than those extended to workers who reach the traditional retirement age. These benefits need fully explained to those who wish to take you up on your retirement offer, giving them an appropriate amount of time to think about their options to ensure that they have fully weighted their decision. 163 CU IDOL SELF LEARNING MATERIAL (SLM)
“Complex rules govern vesting and payment of benefits, so careful investigation of applicable requirements should be made before opting for early retirement,” continues US Legal. The most important part of selecting eligible candidates for voluntary retirement plans is to make sure that these individuals are taking up the offer voluntarily. This seems like a no- brainer, but the sad fact of the matter is that organizations have - in the past - used this type of benefit to discriminate against older workers, forcing them out under the guise of a great plan (more on this later). Once that’s done, the company needs to alert these individuals about the plan and give them a way to opt in. The best way to handle this is to be transparent when it comes to the offering. They shouldn’t reach out to the individuals directly in a one-on-one setting because this can lead to targeting issues. Instead, the company needs to be fully okay with anyone who meets the requirements to sign up. The two best options would be for HR or upper management to send out an email to all employees with a link to the voluntary retirement guidelines on the website or on a company intranet. Once the forms have been looked over, HR should then send a more official document that once again explains all the benefits that are being offered to the retiree. For example, it can explain their buyout rate, how their life insurance policy might change, how their healthcare service might change, and so on. The name of the game here is honesty and transparency. The company needs to make sure workers are fully aware of what is going on, how it will go down, and what benefits they will receive. You don’t want to spring random changes on the retirees because - not only is it ethically and legally wrong - but the transition to retirement can be tough even without trickery from an employer. 9.2.1 Short title This scheme may be called the Punjab State Public Sector Undertakings Voluntary Retirement Scheme 2002. This scheme shall apply to all the Public Sector Undertakings including all Cooperative Institutions of the State of Punjab. This will apply to the Subsidiaries of the PSUs defined as entities in which PSUs and/or Govt. hold more than 50% equity. This scheme shall come into force from the date of its notification. 9.2.2 Objective To achieve optimum human resource utilization. To optimize return on investment in PSU. 164 CU IDOL SELF LEARNING MATERIAL (SLM)
In implementing the VRS scheme, managements shall ensure that it is extended primarily to such employees whose services can be dispensed with without detriment to the company. Care shall be exercised to ensure that highly skilled and qualified workers and staff are not given the option. As there shall be no recruitment against vacancies arising due to VRS, it is important that the organisation is not denuded of talent. The managements of the PSUs shall introduce the VRS with the approval of their Boards and the administrative departments. Under no circumstances shall grant of VRS be construed as a right. 9.2.3 Definitions In this scheme, unless the context otherwise requires, “Public Sector Undertaking (PSU)” means an entity that is : Created under a Statute of the State Legislature; or Created under a statute of Parliament, in which case the management & control vests in Govt. of Punjab or Created under the Companies Act 1956 in which the Govt. of Punjab, holds equity share more than 50% of those issued or A Cooperative Society as defined under the “Punjab Cooperative Societies Act, 1961, as amended from time to time including Apex Cooperative Institutions. “Scheme” means Punjab State Public Sector Undertakings Voluntary Retirement Scheme (VRS) 2002. “Employee” means a person employed on permanent/regular basis working against regular sanctioned graded post. “Service” means a period of permanent or regular employment against graded post as defined in the Service Bye Laws/ Regulations of the PSU. “Year” means a financial year commencing on 1st April and ending on the subsequent 31st March. “Salary” means Basic Pay plus appropriate %age of DA as on the date of applying. “Family” means as defined under rule 2.17 of the Punjab Civil Services Rules. “Request for V.R.” means application submitted for VR, as per specimen proforma annexes. “Competent Authority” means the Chief Executive Officer/Managing Director of the Public Sector Undertaking concerned. 9.2.4 Operation of the scheme The Scheme shall remain in operation for 6 months from the date of issuance of notification to this effect. The Govt may extend it from time to time. In the case of a PSU which does not require budgetary or any other external support to implement the scheme, it shall come into operation upon the approval by the 165 CU IDOL SELF LEARNING MATERIAL (SLM)
Administrative Department of a resolution of the Board of Directors that the scheme be brought into effect with specified eligibility criteria. In the case of a PSU, which requires budgetary or any other external support to implement the scheme, it shall come into operation only after the Department of Finance approves a proposal of the Administrative Department based on a resolution of the Board of Directors as in above to this effect. 9.2.5 Eligibility All persons employed on permanent/regular basis working against regular sanctioned graded post of Public Sector Undertakings will be eligible to seek Voluntary Retirement provided they have completed a minimum of 5 years of service and have at least 5 years of service remaining before their superannuation. However, the employees falling in the following categories as determined by the concerned PSU are not eligible to seek Voluntary Retirement under the scheme: Specialist employees who have executed service bonds and have not completed the period prescribed therein. Employees serving abroad under special arrangement/bonds. Employees appointed on contract basis. Any other category of employees as may be specifically debarred by the Public Sector Undertaking from seeking retirement under this scheme. In case disciplinary action is pending against an employee, who has sought Voluntary Retirement, the Disciplinary Authority shall, after considering all facts, convey to the Competent Authority whether the request of the employee should be accepted or not. In case the Disciplinary Authority decides that the request of such an employee for Voluntary Retirement be not accepted, the same shall be communicated to the employee in writing and he shall have a right to make an appeal as provided under section 9 (v). 9.2.6 Amount of ex-gratia An employee seeking Voluntary Retirement under the scheme will be entitled to the compensation consisting of salary of 35 days for every completed year of service and 25 days for every year of the balance of service left until superannuation. The compensation will be subject to a minimum of Rs.25, 000/- or 250 days salary whichever is higher. However, this compensation shall not exceed 80% of the sum of the salary that the employee would draw at the prevailing level for the balance of the period left before superannuation. In case an employee is governed by a retiring/superannuation pension scheme the disbursement of pension shall commence from the month next to the date an employee would have retired in the ordinary course. 166 CU IDOL SELF LEARNING MATERIAL (SLM)
9.2.7 Mode of payment 100% of the amount of ex-gratia payable to an employee on opting for Voluntary Retirement under this Scheme would be paid in cash within 60 days from the date of his relieving. 9.2.8 Other benefits An employee whose offer for Voluntary Retirement under the Scheme is accepted will be eligible, apart from the ex-gratia defined above, to any benefit that would have been available to him upon superannuation as per the policy extant in the PSU prior to the date of notification of this scheme. It is clarified, however, that an employee shall not be eligible for both retrenchment compensation and ex-gratia under this scheme but shall have to opt for one of the two. 9.2.9 Procedure An eligible employee may submit request opting for Voluntary Retirement under the scheme to the Competent Authority through proper channel in a prescribed proforma (Annexure-A), which shall be available in the PSU. The Competent Authority may after considering the application and after giving an opportunity to the applicant of being heard, pass a speaking order within a period of 3 months, either accepting or rejecting the request. In case the Competent Authority fails to pass an order rejecting the request by the due date as given at sub-Paraabove, the request would be deemed to have been accepted and the employee would be retired A copy of every order made under paragraph above shall be given to the employee. An employee who is aggrieved by an order of rejection may within thirty days from issuance of such orders file an appeal before the Administrative Secretary of the Department under which the concerned PSU falls, whose decision shall be final and binding. The date of acceptance of VRS by the competent authority will be treated as date of voluntary retirement. General Conditions Arrears of wages due to general revision of pay scales etc. shall not be included in computing the eligible amount. Only completed years of service shall be reckoned for arriving at the minimum eligible service. Fraction of service of 6 months and above shall be reckoned as one year for the purpose of calculating the ex-gratia. Fraction of service less than 6 months will be ignored for the purpose of calculating the ex-gratia 167 CU IDOL SELF LEARNING MATERIAL (SLM)
The salary shall be calculated based on last salary drawn by an employee/officer. No employee shall be allowed to withdraw the request made for voluntary retirement under the scheme after it has been accepted by the Competent Authority The Competent Authority shall have absolute discretion either to accept or reject the request of an employee seeking Voluntary Retirement under the scheme. The reasons for rejecting the request of any employee seeking Voluntary Retirement shall be recorded in writing by the Competent Authority All payments under the scheme and any other benefit payable to an employee shall be subject to the prior settlement/re-payment in full of loans, advances, returning of Govt.’s property and any other outstanding due against him and payable by him to the PSU concerned. All payments made under the scheme shall be subject to deduction of tax at source as per Income Tax Act 1961 wherever applicable. An employee who seeks voluntary retirement under this scheme shall not be eligible for re-employment in Govt., any PSU or any of its subsidiaries. A complete data/record, on website of all those employees of the Public Sector Undertakings/Corporations, who have availed the VRS, shall be retained. While making future recruitments no person out of these shall be retaken in service. In the event of the death of an employee, whose request for voluntary retirement under the scheme has been accepted, the compensation, which would have become due and payable to the deceased employee, shall be paid to the person nominated to receive such dues. The benefits payable under this scheme shall be in full and final settlement of all claims of whatsoever nature, whether arising under the scheme or otherwise to the employee .An employee who voluntarily retires under this scheme will not have any claim against the PSU concerned of whatsoever nature and no demand or dispute or difference will be raised by him or on his behalf, whether for re-employment or compensation or back wages including employment of any of his relative on compassionate grounds in the service of the PSU or for any other benefits whatsoever. The vacancy caused by Voluntary Retirement shall stand abolished. The Govt. reserves the right to withdraw this scheme at any time it thinks fit and its decision in this respect will be final 9.3 ENCASHMENTOFEARNEDLEAVES Leave encashment is a leave carry forward process provided by the organization to the employee, and it can be availed on unused leaves of the employee. As these leaves get 168 CU IDOL SELF LEARNING MATERIAL (SLM)
credited every year, the employee can ask for encashment at the time of their resignation from the company or after retirement. The organization keeps data of the used and unused paid leave by the employee and balances at the end of the employment period. The employee can receive a day’s salary for every paid leave day in the encashment process. This process is valid for every employee working in the organization. Before that, let's get to know about the types of leaves employees can get and its benefits for further leave encashment. 9.3.1 Objective To have codified rules for encashment of leave, with a view to encourage employees to avail leave in a planned and systematic manner with necessary funds to meet their social obligations and their expenditure during the leave period and to reduce long absenteeism with consequent load on the staff requirements. 9.3.2 Scope The rules for encashment of leave shall cover all regular employees of the company, excluding those on deputation from Government / other organizations and company employees on deputation to others. 9.3.3 Sanctioning The authorities who are Competent to sanction leave shall be the sanctioning authority for approving encashment of leave under these rules. 9.3.4 Authority In the fields of sociology and political science, authority is the legitimate power that a person or a group of persons possess and practice over other people.In a civil state, authority is made formal by way of a judicial branch and an executive branch of government. In the exercise of governance, the terms authority and power are inaccurate synonyms. The term authority identifies the political legitimacy, which grants and justifies the ruler’s right to exercise the power of government; and the term power identifies the ability to accomplish an authorized goal, either by compliance or by obedience; hence, authority is the power to make decisions and the legitimacy to make such legal decisions and order their execution. Ancient understandings of authority trace back to Rome and draw later from Catholic thought and other traditional understandings. In more modern terms, forms of authority include transitional authority exhibited in for example Cambodia,public authority in the form of popular power, and, in more administrative terms, bureaucratic or managerial techniques. In terms of bureaucratic governance, one limitation of the governmental agents of the executive branch, as outlined by George A. Krause, is that they are not as close to the popular will as elected representatives are. The claims of authority can extend to national or individual sovereignty, which is broadly or provisionally understood as a claim to political authority that is legitimated. 169 CU IDOL SELF LEARNING MATERIAL (SLM)
Historical applications of authority in political terms include the formation of the city-state of Geneva, and experimental treatises involving the topic of authority in relation to education include Emile by Jean-Jacques Rousseau. As David Latin defines, authority is a key concept to be defined in determining the range and role of political theory, science, and inquiry. The relevance of a grounded understanding of authority includes the foundation and formation of political, civil and/or ecclesiastical institutions or representatives. In recent years, however, authority in political contexts has been challenged or questioned. 9.3.5 Encashment benefits The encashment of leave shall be regulated based on the last pay drawn which includes basic pay, dearness allowance, personal pay, if any, non-practicing allowance for doctors, deputation allowance in respect of employees of the company on deputation, allowance admissible to EDP and other staff working in Finance & Accounts department. The encashment benefit shall not be reckoned as Wage / Salary while working out overtime, Gratuity, Provident Fund, bonus under the Bonus Act, etc For instance, assume you get Rs 5 LAKHS at retirement towards leave encashment. Your basic salary (basic + DA + commission) directly preceding retirement was Rs 40,000 a month or a total Rs 4 LAKHS in 10 months. In this situation, the best exemption you will receive is Rs 3 LAKHS (sanctioned limit). So, Rs 2 will be calculated to your income and hence taxed. Leave encashment returned to the rightful heirs of a late employee is not payable. Suppose an employee has received leave encashment in any one or more years and has availed any exception in respect of the same. In such a situation, the limit of Rs 3 LAKHS will be decreased by the amount of release availed earlier. 'Employees can receive an exemption for the amount collected by them even on resignation or retirement for encashment of their leaves. The amount of the exception to be received will be decreased by that amount,' said the director of tax and administrative. According to a judgment of the Bombay High Court, leave encashment permitted on retirement too would be excluded from tax subject to the detailed limits. Proceeds collected towards leave encashment are chargeable if received if the employee is in service. Whether you are engaged in the private or government sector, the amount collected on account of leave encashment is entirely payable in your hands, if you withdraw a job due to termination or resignation. 170 CU IDOL SELF LEARNING MATERIAL (SLM)
Under income tax rules, the value or amount earned towards leave encashment is managed as income from payroll and taxed equally at the tax slab rate relevant to the employee. For government representatives, the amount taken towards leave encashment at the period of retirement is excluded from tax. 9.3.6 Eligibility Earned leave standing to the credit of an employee may be encased at his option only once in a calendar year provided that the quantum of leave to be encased in each case is not more than 50% of the Earned Leave at credit or 30 days earned leave whichever is less. An employee who is released on acceptance of his/her resignation shall be allowed encashment of Earned Leave standing to his/her credit as on the date of release, after adjusting the notice period not served if any. The trainees are allowed to encaseunveiled Leave with Full Stipend at the time of completion of their training. In calculating the period of Leave with Full Stipend, all holidays and off-days whether occurring during or end of the period shall be excluded 9.3.7 Procedure For leave encashment under rule 5.1 while in service, an employee shall be required to apply in writing to the sanctioning authority. In all other cases it shall be settled by appropriate authority. 9.3.8 Tenure These rules shall come into force with immediate effect. The Company reserves to itself the right to modify, cancel or amend any of the rules without prior notice 9.4 SUMMARY This chapter summarizes the findings of the previous chapters, focusing on common themes and areas of disagreement. The chapters disagree about the definition of volunteering; with some authors arguing that informal volunteering takes many forms and tends to be overlooked by survey instruments using measures supposed to be cross-culturally valid. Formal volunteers often receive stipends beyond the token levels considered acceptable in developed countries, and these stipends can cause political and practical problems for development work. Volunteers and concepts of volunteerism from the global North can be a negative influence on Southern volunteer programs and Southern conceptions of volunteerism, 171 CU IDOL SELF LEARNING MATERIAL (SLM)
but two chapters find examples of a positive influence in the spread of corporate volunteering in Latin America and the spread of global solidarity through North– South exchanges in Peru. Volunteers provide a boost to the economies of Southern countries and aid in development. The state has a complex and ambivalent relationship with volunteer programs, wanting to benefit from volunteers’ provision of services but often threatened by their role in politics and civil society. What can volunteer offer people who are looking for paid employment? That is the central focus of this monograph, a brief outline of the major elements of the links between volunteering and employment. To answer the question, we must look at the following issues: What is volunteer work? What are the benefits of volunteering? Why should people who are looking for a job consider doing volunteer work? How can volunteer centres and the agencies they serve work with people who volunteer primarily as a way of enhancing their chances of finding employment? What motivates people to volunteer has been the subject of many articles and books. Each identifies a variety of motives that lead people to volunteer and emphasizes their importance. Why people volunteer is intimately and directly related to the kind of volunteer activity they undertake, its conditions and duration, their commitment to it, and the success or failure of the volunteer placement. It used to be awkward and, in some cases, unacceptable to talk about the numerous and often complex motives that draw people into volunteer activity. Many people felt and some still feel that 'real' or 'pure' volunteer work is done without any expectation or hope of any return or benefit, and that the only motive behind 'real' volunteer work is altruism ‘the unselfish regard for or devotion to the welfare of others'. Today, more and more people agree that volunteers act out of many motives, that volunteer activity undertaken for other motives than altruism can be fruitful and meaningful, and that all volunteer effort involves exchange, even that which is based on altruism. Many Canadians volunteer because they believe it is the right thing to do. Their moral values, religious beliefs, or understanding of the nature of a community motivate them to assist others. The return or benefit they receive is the satisfaction of having fulfilled their moral, religious, civic, or altruistic responsibilities. This is a tangible benefit and should not be ignored or denied. But many Canadians volunteer for other reasons. In fact, most people volunteer for a mixture of reasons, including a belief that it is the right thing to do. People volunteer because they understand that it is important for citizens to participate in the life of their communities, and that this work benefits all citizens, not just the 172 CU IDOL SELF LEARNING MATERIAL (SLM)
'poor and unfortunate'. Many volunteer to 'give something back', helping others to express their gratitude for help given to them or someone they love. Other people volunteer to integrate into a new community or find their way back from tragedy by reaching out to others. Still others volunteer to meet people and build new relationships. A large and growing group of Canadians is turning to volunteer work for yet another reason: as part of their search for paid employment. Some individuals find their own way to volunteering; some are encouraged by other people, including employment counsellors, outplacement firms, therapists, friends, family members, and volunteers. The rest of this paper will examine what volunteer work has to offer those who are seeking a job, and how volunteer centres and agencies that engage volunteers can respond to this phenomenon. What does volunteering have to do with employment at all? Though few in the voluntary sector would ask this question, others sometimes do. And what is really being asked is 'what has volunteering to do with work'? That the question is still asked underlines the fact that misunderstandings persist about the real nature, scope, and import of the work of volunteers in Canada. Anyone who is a volunteer or works with volunteers knows that volunteer activity is real work volunteers 'exert their strength and their faculties to accomplish something, to perform something, or to produce something'. We sometimes find it difficult to call this activity 'work' because the word work has become synonymous with paid employment. In addition, professionals who deal with volunteers are deliberately careful about the use of the word 'work' when it is associated with volunteer activity, because volunteerism should never be promoted to supplant or displace paid workers. 9.5 KEYWORD Income Taxes - Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes). Independent Contractor - Performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. The recipients do control the results of the work; they decide whether the work is acceptable. Independent contractors are self-employed. Indirect Tax - A tax that can be shifted to others, such as business property taxes. Infant Industry - A new or developing domestic industry whose costs of production are higher than those of established firms in the same industry in other countries. 173 CU IDOL SELF LEARNING MATERIAL (SLM)
Inflation - The simultaneous increase of consumer prices and decrease in the value of money and credit. 9.6 LEARNING ACTIVITY 1. Create a session on Encashmentofearnedleaves. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Voluntaryretirementscheme. ___________________________________________________________________________ ___________________________________________________________________________ 9.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Voluntary? 2. Define Voluntaryretirement? 3. Describe the term Encashment? 4. What is an Encashment benefit? 5. Write the Eligibility of Encashment? Long Questions 1. Explain the Voluntaryretirementscheme. 2. Discuss the objective of Voluntaryretirementscheme. 3. Illustrate the concept of Eligibility of Voluntaryretirementscheme. 4. Describe the Encashment benefits. 5. Examine the Objective of Encashment. B. Multiple Choice Questions 1. What us the fundamental concept of Economics about resources? a. Equally distributed b. Unequally distributed c. Scarce d. Unlimited 174 CU IDOL SELF LEARNING MATERIAL (SLM)
2. What considers a world without scarcity of resources that what would be the consequences? a. All prices would be zero b. Markets would be unnecessary c. Economics would no longer be a useful subject d. All of these 3. Who is considered the founder of Microeconomics? a. Adam Smith b. John Keynes c. Friedrich Hayek d. Milton Friedman 4. Who is considered the founder of modern Macroeconomics? a. Adam Smith b. John Keynes c. Friedrich Hayek d. Milton Friedman 5. When analysing the impact of a variable on the economic system, the other things a. Must be kept constant b. Must also be analysed c. Must not be taken into consideration d. None of these Answers 1-c, 2-d, 3-a, 4-b, 5-a 9.8 REFERENCES References book Steimel, Sarah (1 February 2018). \"Skills-Based Volunteering as Both Work and Not Work: A Tension-centred Examination of Constructions of \"Volunteer\"\". 175 CU IDOL SELF LEARNING MATERIAL (SLM)
USGS Tsunami 2004 Summary\". United States Geological Survey. Archived from the original on 19 January 2011. ^ Power, Matthew (April 2005). \"The Tsunami Volunteers\". National Geographic Adventure Magazine. Archived from the original on 18 February 2011. Textbook references Boru, Nese (June 2017). \"The Effects of Service Learning and Volunteerism Activities on University Students in Turkey\" Astin, A.W. (1992). What Matters in College: Four Critical Years Revisited? San Francisco: Jossey-Bass. Pascarella and Terenzini, E.T. and P.T. (1991). How College Affects Students: Findings and Insights from Twenty Years of Research. Website https://en.wikipedia.org/wiki/Volunteering#References https://r.search.yahoo.com/_ylt=Awr9DtrWgBxh76kAikZXNyoA;_ylu=Y29sbwNnc TEEcG9zAzcEdnRpZANDMTYxMV8xBHNlYwNzcg-- /RV=2/RE=1629286743/RO=10/RU=https%3a%2f%2fen.wikipedia.org%2fwiki%2f Hiwi_%2528volunteer%2529/RK=2/RS=23Dxt8qfXK_GRe8JeJsaddccjtw- https://r.search.yahoo.com/_ylt=Awr9DtePgRxhcEsAADxXNyoA;_ylu=Y29sbwNnc TEEcG9zAzEEdnRpZANDMTYxMV8xBHNlYwNzcg-- /RV=2/RE=1629286928/RO=10/RU=https%3a%2f%2fvakilsearch.com%2fleave- encashment/RK=2/RS=NMCWdiPulzyNGkyb_ow6pInrQB8- 176 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 10 – CAPITAL GAIN 177 STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Heads of Income- Capital Gain 10.2.1 Conditions 10.2.2 Capital Assets 10.2.3 Type of Capital Gain 10.2.4 Terms Used 10.2.5 Calculation of Capital Gains 10.2.6 Capital Gains Exempt from Tax 10.3 Income from other Sources 10.4 Aggregation of Income 10.5 Short Term Capital Gain 10.6 Long Term Capital Gain 10.7 Deductions from Capital Gain 10.8 Exemption from Capital Gain 10.9 Summary 10.10 Keywords 10.11 Learning Activity 10.12 Unit End Questions 10.13 References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the concept of Capital Assets. Illustrate about Short-Term Capital Gain. Explain the Deductions from Capital Gain. CU IDOL SELF LEARNING MATERIAL (SLM)
10.1 INTRODUCTION Any gain arising on the transfer of a capital asset is chargeable to tax under section 45, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H. Incidence of tax on capital gains, however, depends upon whether capital gain is a short-term capital gain or a long-term capital gain. In other words, capital gain’s tax liability arises only when the following conditions are satisfied: Condition-1 There should be a capital asset. Condition-2 The capital asset is transferred by the assessee Condition-3 Such transfer takes place during the previous year. Condition-4 Any profit or gains arises because of transfer. Condition-5 Such profit or gains is not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB. If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred. A capital gain is an increase in the value of an asset or investment resulting from the price appreciation of the asset or investment. In other words, the gain occurs when the current or sale price of an asset or investment exceeds its purchase price. Capital gains are attributable to all types of capital assets, including, but not limited to, stocks, bonds, goodwill, and real estate. Realized capital gains are considered taxable events. Most countries impose special taxes for realized gains, levied on both individuals and corporations. However, for the gains of investment funds such as a mutual fund, the tax on the gains is imposed upon the fund’s investors. Generally, the holding time of an asset or investment affects the tax rate applicable to a capital gain. For example, if the gain is short-term (as defined above), it is taxed at the ordinary income tax rate. On the other hand, long-term (capital) gains are usually taxed at a lower tax rate. For example, if the ordinary tax rate is 35%, the capital gain can be taxed at a 20% rate. 178 CU IDOL SELF LEARNING MATERIAL (SLM)
10.2 HEADS OF INCOME- CAPITAL GAIN As per the Section 14 Income Tax Act, 1961, there are five main income tax heads for an individual. The computation of income tax is an important part and must be calculated according to the income of a person. For a hassle-free calculation, the income must be classified properly so that there is no confusion regarding the same. The government has classified the sources of income under separate heads and then the income tax is computed accordingly. The provisions and rules are according to the details mentioned in the Income Tax Act 10.2.1 Conditions Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax under the head capital gains. The gain can be on account of short- and long-term gains. A capital gain arises only when a capital asset is transferred. Which means if the asset transferred is not a capital asset; it will not be covered under the head capital gains. Profits or gains arising in the previous year in which the transfer took place shall be considered as income of the previous year and chargeable to income tax under the head Capital Gains and the concept of indexation shall apply, if applicable. 10.2.2 Capital Assets It is any property held by the income tax assessee excluding Any item held for a person's business or profession (stock, ready goods, raw material) will be taxed under the head profits and gains of business or profession Agricultural land means any land from which agricultural income is derived. Land which is not urban and is outside of 8 kilometres of a municipality, where population is less than 10,000 qualifies to be agricultural land. Capital assets are of two types: Short- and long-term capital asset. Short-term capital asset: This is an asset that is held for not more than 36 months immediately preceding the date of its transfer. This period of 36 months is substituted to 12 months in case of certain assets like equity or preference shares held in a company, any other security listed on a recognised stock exchange of India, Units of specific equity mutual funds and Zero- coupon bonds. In case of immovable property, the period of 36 months is substituted by 24 months. Long term capital asset: This is an asset that is held for more than 36 months, 12 months or 24 months. Transfer is defined as the sale of the asset, giving up of rights on the asset, forceful takeover by law or maturity of the asset. Many transactions are not considered as transfer, for example, transfer of a capital asset under a will. Stocks and units of equity diversified mutual funds qualify for long term capital gains if held for more than a year. In case of real estate, it qualifies for long term capital gains if it is held 179 CU IDOL SELF LEARNING MATERIAL (SLM)
for more than two years. Earlier to the Finance Act 2017, real estate was considered as a long-term capital asset only if it was held for more than three years. 10.2.3 Type of Capital Gain Capital Gains: Any profits or gains arising from the transfer of a capital asset affected in the previous year shall be chargeable to income-tax under the head capital gains. Examples of assets are a flat or apartments, land, shares, mutual funds, gold among many others. There are two types of capital gains: Short-term capital gain: capital gain arising on transfer of short-term capital asset. Long-term capital gain: capital gain arising on transfer of long-term capital asset. Capital gains can be taxed subject to the following conditions: The assessee must have owned a capital asset. The assessee must have transferred the capital asset in the previous year. There must have been profit or gains because of such transfer. 10.2.4 Terms Used Capital Gain Tax is determined while considering the following below mentioned three Crucial elements: A capital asset such as property, gold, etc. The transfer of such capital asset A profit earned because of this transfer. 10.2.5 Calculation of Capital Gains Capital gains are the profits accrued through the sale of capital assets. The 2 types of capital gains are long-term and short-term. Long-term capital assets are those held for 36 months or more, while short-term assets are held for a shorter duration. Capital gains arise when you sell capital asset for an amount that is more than what you paid for it. Capital assets are any investment products like mutual funds, stocks, or any real estate product like land, house, etc. An increase in the value of any of these when you sell them is termed as a capital gain. Similarly, a capital loss is suffered in case there is a decrease in the value of an asset for its purchase price. A realized capital gain occurs only when you sell the asset at a higher price than its original purchase price. Capital Gains Calculator 180 CU IDOL SELF LEARNING MATERIAL (SLM)
Calculating capital gains tax can be done using one of the online tools designed for the purpose. When calculating capital gains tax using a calculator, the following information is to be entered: Calculate Capital Gains Sale price. Purchase price. Details of the purchase such as the date, month, and year of the purchase. Sale details such as the date, month, and year of sale. Investment details, if any. The capital gains could have been invested in shares, debt funds, equity funds, real estate, gold, or fixed maturity plans. Once you have entered the information, the following details will be generated towards the calculation of your capital gains payable: The type of investment. Type of gain (whether short or long-term). Cost inflation index of the year of purchase. Cost inflation index of the year of sale. Difference between the purchase price and sale price. Time between the purchase and sale. Purchased index cost. Long-term capital gain without indexation. Long-term capital gain with indexation. Capital Gains Formula for Calculation Short-term Capital Gains Tax In the case of short-term capital gains, the computation is as given below: Short-term capital gain= full value consideration – (cost of acquisition + cost of improvement + cost of transfer). Long-term Capital Gains Tax: To calculate the long-term capital gains tax payable, the following formula is to be used: Long-term capital gain = full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where: 181 CU IDOL SELF LEARNING MATERIAL (SLM)
Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition. Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement. Capital Gains Rate The rate at which capital gains is calculated varies from year to year. In the case of long-term capital gains, individuals are taxed at 20.6% (including education cess). There are no deductions that can be availed under capital gains tax. Short-term capital gains tax is levied at the tax slab under which the individual falls under. Capital Gains Shares In the case of shares and stocks, the rates differ from long-term and short-term capital gains tax. The capital gains rate for the financial year 2016-2017 is as given below: Short-term gains for stocks and mutual funds are taxed at 15%. Short-term capital gain on debt mutual funds is taxed as per the income slab of the individual. Long-term capital gains on debt mutual funds are taxed at 20% with indexation and at 10% without indexation. On February 1st, 2020, Finance Minister Nirmala Sitharaman announced the introduction of long-term capital gain tax on sale of equity shares over Rs.1 LAKHS. The capital gains rate as per the Union Budget 2020 can be given as below: Long-term capital gains on equity shares are taxed at 10% without any indexation benefit. In the Interim Budget 2020, there are no changes made to the provisions that govern the long- term capital gains (LTCG) on the sale of stocks. Cost Inflation Index (CII) Cost inflation Index (CII)is a term that comes into play when we talk about long-term capital gains. This index is fixed and is declared every year by the government. For calculating capital gains on long-term assets, indexation is used. How to Calculate Capital Gains Tax using CII CII or Cost Inflation Index is used in the computation of long-term capital gains tax. The CII is notified through a notification issued by the Income Tax Department each financial year. The CII for the financial year 2020-21 is 301. Individuals who are calculating their capital gains will have to use the CII to ascertain the indexed cost of acquisition, which is to be deducted from the full value in consideration. 182 CU IDOL SELF LEARNING MATERIAL (SLM)
Thus, the CII is applied to the cost of acquisition, following which the figure becomes the indexed cost of acquisition. Following this, the formula for computation of long-term or short-term capital gains is calculated. When calculating the capital gains from the transfer of a long-term capital gains asset, a deduction can be claimed by indexing the cost of acquisition and the cost of improvement. Example of Taxation on Long-Term Capital Gains Using Indexation: Mr. Mishra bought a plot of land for Rs.10, 00,000 in the year 2005. After 10 years had elapsed, in January 2015, he sold off his land for Rs.30, 00,000. Cost Inflation Index, CII= Index for financial year 2014-15/Index for financial year 2005- 2006 = 1024/480 = 2.13 Indexed cost of purchase = CII x Purchase Price = 2.13 x 10, 00,000 = 21, 30,000 Long-term capital gain = Selling Price – Indexed cost = 30, 00,000 – 21, 30,000 = Rs.8, 70,000 Tax on capital gain = 20% of 8, 70,000 = 1, 74,000 Tax on capital gains without Indexation (for stocks and mutual funds): There is an option of not going the complicated route of indexation and directly computing capital gain tax. In this case, only 10% of the non-indexed capital gain is charged as tax. Individuals are free to choose to use indexation and pay 20% tax or ignore indexation and pay 10% on their capital gains. Tax Exemptions on Capital Gains Government provides several exemptions which can be claimed on capital profits made. Here is a list of all the exemptions that can be claimed with respect to gains from capital assets. Section 54 of the Income Tax Act entitles a person to tax exemption on profit earned if that entire profit amount is used to buy another house. The seller can buy a new house within 2 years from the date of sale of his previous property or construct a new house within 3 years from the date of sale. Section 54 EC entitles an individual for tax exemption if the entire capital profit is invested in bonds issued by NHAI that is National Highway Authority of India or REC which is Rural Electrification Corporation. There is a limit to exemption under Section 54 EC and is Rs.50 LAKHS. In case you can’t find the right property to buy, and you are unable to come up with a concrete plan in 2-3 years, you still can save tax on the capital profit earned. This can be achieved by investing gains in the Capital Gains Accounts Scheme (CGAS) in any 183 CU IDOL SELF LEARNING MATERIAL (SLM)
public sector bank. This amount can then be claimed for tax exemption. However, you are required to invest this money within the period stated by the bank else the deposit is treated as capital gain and tax is deducted on it. In case you sell an agricultural land, which is not within the limits of a civic body then tax is not levied on capital gain arising out of it. Capital gains are not applicable to sale of property if the entire amount is invested to set up a small scale or a medium scale industry. However, to avail tax exemption, the tools and machinery for manufacturing should be bought within 6 months from date of sale. For tax computations, capital losses can be used to offset the effect of tax on capital gains. However, long-term capital losses can be set off against long-term gains only. Short-term capital losses can be set off against short-term as well as long-term capital gains. 10.2.6 Capital Gains Exempt from Tax Calculation of tax is dependent upon the type of capital gain. Calculation of tax on short-term capital gains is simpler than that on long-term gains. For short-term gains, the gain is added to the total income and then the Income Tax is calculated based on the tax bracket that you fall in. Calculation of tax on long-term capital gains is a slightly trickier business. Since long- term capital assets are held for longer periods, inflation also factors in while computing tax on long-term capital gains. 10.3 INCOME FROM OTHER SOURCES Income from other sources, which is the last among the five heads of income sketched out in the Income Tax Act, is essentially a head of income that includes all receipts that cannot otherwise be classified under any of the other heads of income. According to section 56 of the Income Tax Act, the following three conditions need to be satisfied for a receipt to be categorized as income from other sources. There is an income. Such income is not exempted under any other provisions of the Income Tax Act. Such income cannot be charged as salary, income from house property, profits and gains from business or profession, or capital gains. Examples of other receipts chargeable as income from other sources Here are some examples of other receipts that automatically fall under this category. 184 CU IDOL SELF LEARNING MATERIAL (SLM)
Income from subletting of a house property by a tenant Casual income Insurance commissions received by the assessee Family pension payments received by the legal heirs of dead employees Interest on bank deposits and deposits with companies Interest on loans given Remuneration received by Members of Parliament Rent earned from a vacant plot of land Agricultural income from agricultural land situated outside India Interest paid by the Government on excess payment of advance tax 10.4 AGGREGATION OF INCOME Aggregated income of the assessee includes the following incomes: Income of the assessee (this has already been discussed in the previous units) Deemed Incomes Clubbing of Incomes (Income of other persons includible in the income of the assessee) Share of a member in the income of (a) Association of persons (AOP) or (b) Body of individuals (BOI) A detailed discussion of Aggregation of Income is made in the ensuring pages of this unit. In certain cases, some amounts are deemed as income in the hands of the assessee though they are not in the nature of income. These cases are contained in sections 68, 69, 69A, 69B, 69C and 69D. These are discussed in detail in Chapter 1. The Assessing Officer may require the assessee to furnish explanation in such cases. If the assessee does not offer any explanation or the explanation offered by the assessee is not satisfactory, the amounts referred to in these sections would be deemed to be the income of the assessee. Such amounts must be aggregated with the assessee’ s income. 185 CU IDOL SELF LEARNING MATERIAL (SLM)
Section 66 : Total income Section 67 : Omitted Section 67A : Method of computing a members share in income of association of persons or body of individuals Section 68 : Cash credits Section 69 : Unexplained investments Section 69A : Unexplained money, etc. Section 69B : Number of investments, etc., not fully disclosed in books of account Section 69C : Unexplained expenditure, etc. Section 69D : Amount borrowed or repaid on hundi Table 10.1: Aggregation of Income 10.5 SHORT TERM CAPITAL GAIN A short-term gain is a profit realized from the sale, transfer, or other disposition of personal or investment property (known as a capital asset) that has been held for one year or less. A short-term capital gain occurs when an investment is sold that's been held for less than one year, such as a stock. These gains are taxed as ordinary income, which is your personal income tax rate. A short-term gain can be compared to a short-term loss and contrasted with a long-term gain. Key Takeaways A short-term gain is a profit realized from the sale of personal or investment property that has been held for one year or less. 186 CU IDOL SELF LEARNING MATERIAL (SLM)
The amount of the short-term gain is the difference between the basis of the capital asset–or the purchase price–and the sale price received for selling it. Short-term gains are taxed at the taxpayer's top marginal tax rate or regular income tax bracket, which can range from 10% to as high as 37%. Understanding Short-Term Gains The amount of the short-term gain is the difference between the basis of the capital asset–or the purchase price paid to buy it–and the sale price received for selling it. Short-term gains are taxed at the taxpayer's top marginal tax rate. The 2020 and 2021 regular income tax brackets range from 10% to as high as 37%, depending on the investor's annual income. Conversely, long-term capital gains are taxed at a capital gains rate, which is often lower than a person's marginal tax rate. Long-term gains are the profits from an investment that's held for more than one year. A short-term gain can only be reduced by a short-term loss. A taxable capital loss is limited to $3,000 for single taxpayers and $1,500 for married taxpayers filing separately. Short-term gains and losses are netted against each other. For example, assume a taxpayer purchased and sold two different securities during the tax year: Security A and Security B. If the investor has earned a gain on Security A of $5,000 and a loss on Security B of $3,000, the net short-term gain is $2,000 = ($5,000 - $3,000). Short-Term Gains and IRAs Investors who earned short-term gains from an investment that was in an individual retirement account do not have to pay any short-term capital gains taxes on that income. However, if an investor takes out any money from the IRA, the withdrawal amount is considered income and is taxed at the investor's or taxpayer's ordinary income tax rate. The benefit to IRAs is that investors can grow their investments over the years without paying any capital gains taxes. In other words, the taxes on the gains are deferred, but once the money is withdrawn, it's taxed at the current income tax rate for that investor. How to File a Short-Term Gain Form 8949, Sales and Other Dispositions of Capital Assets is a form from the Internal Revenue Service to report gains and losses from investments. The form has instructions to guide you on how to calculate and report short-term gains. The upper portion of the form asks for the taxpayer's information such as name and social security number. The tax form also has two sections to be completed. The first section is for the short-term gains, and the second section is for any long-term investment gains. Typically, the IRS form Schedule D, Capital Gains and Losses would be used to report capital gains and losses. However, Form 8949 may also need to be completed outlining the net gain or losses so that the subtotals from this form can be carried over to the Schedule D form. 187 CU IDOL SELF LEARNING MATERIAL (SLM)
Special Considerations Ordinary income is taxed at various rates depending on how much your income was for the year. The short-term gain will be taxed at the same rate as your ordinary income. The total from the gain is added to your income for the year. As a result, you could pay a higher tax on your short-term gain from your investment if it pushed your income into a higher tax bracket for your ordinary income. It's important to consult a tax professional before filing taxes on your short-term capital gains. 10.6 LONG TERM CAPITAL GAIN A long-term capital gain or loss is the gain or loss stemming from the sale of a qualifying investment that has been owned for longer than 12 months at the time of sale. This may be contrasted with short-term gains or losses on investments that are disposed of in less than 12 months’ time. Long-term capital gains are often given more favourable tax treatment than short-term gains. Key Takeaways Long-term capital gains or losses apply to the sale of an investment made after owning it 12 months or longer. Long-term capital gains are often taxed at a more favourable tax rate than short-term gains. Long-term losses can be used to offset future long-term gains. As of 2019, the long-term capital gains tax stood at 0%–20% depending on one's tax bracket. Understanding Long-Term Capital Gain or Loss The long-term capital gain or loss amount is determined by the difference in value between the sale price and the purchase price. This figure is either the net profit or loss that the investor experienced when selling the asset. Short-term capital gains or losses are determined by the net profit or loss an investor experienced when selling an asset that was owned for less than 12 months. The Internal Revenue Service assigns a lower tax rate to long-term capital gains than short-term capital gains. A taxpayer will need to report the total of their capital gains earned for the year when they file their annual tax returns because the IRS will treat these short-term capital gains earnings as taxable income. Long-term capital gains are taxed at a lower rate, which as of 2019 ranged from 0 to 20 percent, depending on the tax bracket that the taxpayer is in. When it comes to capital gains losses, both short-term and long-term losses are treated the same. Taxpayers can claim these losses against any long-term gains they may have experienced during the filing period. These figures are all reported on tax Form 1040. 188 CU IDOL SELF LEARNING MATERIAL (SLM)
Examples of Long-Term Capital Gains and Losses For example, imagine Mellie Grant is filing her taxes and she has a long-term capital gain from the sale of her shares of stock for TechNet Limited. Mellie first purchased these shares in 2005 during the initial offering period for $175,000 and is now selling them in 2019 for $220,000. She is experiencing a long-term capital gain of $45,000, which will then be subject to the capital gains tax. Now assume she is also selling her vacation home that she purchased in 2018 for $80,000. She has not owned the property for very long, so she has not gathered much equity in it. When she sells it only a few months later, she receives just $82,000. This presents her with a short-term capital gain of $2,000. Unlike the sale from her long-held shares of stock, this profit will be taxed as income, and it will add $2,000 onto her existing wage calculation. If Mellie had instead sold her vacation home for $78,000, experiencing a short-term loss, she could have used that $2,000 to offset some of her tax liability for the $45,000 long-term capital gains she had experienced. 10.7 DEDUCTIONS FROM CAPITAL GAIN Sec. 1(h) taxes adjusted net capital gains of individuals at rates determined by the amount at which the gain would otherwise be subject to tax at the ordinary income tax rates. A 0% rate applies to adjusted net capital gains that would otherwise be subject to the 10% or 15% tax rate. A 15% rate applies to adjusted net capital gains that would otherwise be subject to tax at the 25%, 28%, 33%, or 35% tax bracket. A 20% rate applies to adjusted net capital gains that would otherwise be subject to the 39.6% tax rate. Net capital gain is defined as the excess of net long-term capital gains over net short-term capital losses. Adjusted net capital gain is defined as net capital gains reduced (but not below zero) by the sum of unrecaptured Sec. 1250 gain (taxed at a maximum rate of 25%) and (2) 28% rate gain plus qualified dividend income. Taxpayers can elect to reduce net capital gain (but not below zero) by the amount they consider as ordinary investment income under Sec. 163(d)(4)(B)(iii). The capital gain tax computation seemingly should be easy, but often it is not. The complexity comes from the phaseout of the 0% and 15% rates as other taxable income rises. It takes 27 lines in the IRS qualified dividends and capital gain tax worksheet to work through the computations With a good understanding of the mechanics, preparers can spot opportunities to advise clients to take advantage of the 0% rate and minimize the 20% rate. This flowchart is designed to quickly determine the tax on capital gains and dividends, based on the taxpayer's taxable income. It is for a single taxpayer, but numbers can easily be modified for taxpayers with a different filing status and updated for the change in tax 189 CU IDOL SELF LEARNING MATERIAL (SLM)
brackets each year. The flowchart and discussion assume adjusted net capital gain includes only net capital gains and qualified dividends. The flowchart shows how adjusted net capital gain is taxed at various income levels, using the 2014 tax brackets. The first column is for taxable income up to $36,900, the top of the 15% ordinary income bracket. The second column is for taxable income up to $406,750, the top of the 35% bracket. The third column is for income exceeding $406,750, the start of the 39.6% bracket. A key point in understanding the computations is to know that the taxpayer's tax is the sum of two computations. The first is the tax on adjusted net capital gain. The second is the tax on the taxpayer's other taxable income. Itemized deductions and personal exemptions first reduce other adjusted gross income (but not below zero) and then are applied against adjusted net capital gain. When the taxpayer's only income is adjusted net capital gain, or other taxable income is zero or negative, computing tax is simple. For a single taxpayer, the first $36,900 of adjusted net capital gain is not subject to tax, the next $369,850 is taxed at 15%, and adjusted net capital gain that exceeds $369,850 is taxed at 20%. It is still simple even when the taxpayer has other taxable income, if the sum of it and adjusted net capital gain is $36,900 or less, in which case adjusted net capital gain is still subject to the 0% rate. The phaseout of the 0% and 15% capital gain rates is determined by the amount of the taxpayer's taxable income. As shown in the second column in the exhibit on the next page, when a taxpayer has taxable income exceeding $36,900 but less than or equal to $406,750, the adjusted net capital gain is all taxed at 15%. However, if a taxpayer has other taxable income less than $36,900, a portion of the adjusted net capital gain is taxed at the 0% rate. An example illustrates each column in the flowchart. In each example the taxpayer is single. Tax amounts do not include any applicable net investment income tax. Example 1: The taxpayer has $36,900 of taxable income that consists of adjusted net capital gain of $16,900 and other taxable income of $20,000. The tax is $2,546, consisting of $2,546 tax on the $20,000 of other taxable income ($907.50 plus 15% of the excess over $9,075) and no tax on the adjusted net capital gain. Example 2: The taxpayer has taxable income of $150,000 that consists of adjusted net capital gain of $100,000 and $50,000 of other taxable income. The tax is $23,356, consisting of $8,356 of tax on the $50,000 of other taxable income ($5,081.25 plus 25% of the excess over $36,900) and $15,000 tax on the $100,000 of adjusted net capital gain (all taxed at 15%). Alternatively, if taxable income was still $150,000 but consisted of other taxable income of $26,900 and $123,100 of adjusted net capital gain, then $10,000 ($36,900–$26,900) of the adjusted net capital gain would be taxed at the 0% rate and the balance of it at the 15% rate. 190 CU IDOL SELF LEARNING MATERIAL (SLM)
Example 3: The taxpayer has taxable income of $600,000 that consists of adjusted net capital gain of $100,000 and $500,000 of other taxable income. The tax is $175,046, consisting of $155,046 on the $500,000 of other taxable income ($118,118.75 plus 39.6% of the excess over $406,750) and $20,000 on the $100,000 of adjusted net capital gain (all taxed at 20%). In the alternative, if taxable income was still $600,000 but consisted of other taxable income of $100,000 and $500,000 adjusted net capital gain, then $306,750 ($406,750–$100,000) of the adjusted net capital gain would be taxed at 15% and the balance of it at 20%. As a third alternative, if taxable income was still $600,000 but consisted of other taxable income of $30,000 and $570,000 of adjusted net capital gain, then $6,900 ($36,900–$30,000) would be taxed at the 0% rate, $369,850 ($406,750–$36,900) at 15%, and the balance at 20%. The flowchart does not reflect alternative minimum tax (AMT) considerations. AMT also taxes adjusted net capital gain at the 0%, 15%, and 20% rates, with the applicable phaseouts as income increases. However, alternative minimum taxable income is often different from ordinary income, and AMT does feature graduated rates. At higher income levels, AMT will need to be calculated. Knowing how the tax on adjusted net capital gains is calculated allows tax advisers to take advantage of opportunities to use the 0% rate and to minimize the 20% rate. Taxpayers with a significant portion of their income as adjusted net capital gain present ideal planning opportunities for tax savings. 10.8 EXEMPTION FROM CAPITAL GAIN The exemption The exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties (prior to Budget 2019, the exemption of the capital gains was limited to only 1 house property). The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 CRORES. The taxpayer must invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale. Conditions for availing this benefit 1. The new property can be purchased either 1 year before the sale or 2 years after the sale of the property. 2. The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale. 3. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption. 4. Please note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction. Section 54F: Exemption on capital gains on sale of any asset other than a house property 191 CU IDOL SELF LEARNING MATERIAL (SLM)
Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale consideration and not only capital gain to buy a new residential house property to claim this exemption. Purchase the new property either one year before the sale or 2 years after the sale of the property. You can also use the gains to invest in the construction of a property. However, the construction must be completed within 3 years from the date of sale. In Budget 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the sale consideration to claim this exemption. This exemption can be taken back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are invested towards the new house, the entire capital gain will be exempt from taxes if you meet the above-said conditions. However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the proportion of the invested amount to the sale price = capital gains x cost of new house /net consideration. Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds. If you are not keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 LAKHS issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). The money invested can be redeemed after 3 years, but they cannot be sold before the lapse of 3 years from the date of sale. With effect from the FY 2018-2019, the period of 3 years has been increased to 5 years. The homeowner has six months’ time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline. When can you invest in Capital Gains Account Scheme? Finding a suitable seller, arranging the requisite funds, and getting the paperwork in place for a new property is one time-consuming process. Fortunately, the Income Tax Department agrees with these limitations. If capital gains have not been invested until the date of filing of return (usually 31 July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains, and no tax must be paid on it. However, if the money is not invested, the deposit shall be treated as short-term capital gains in the year in which the specified period lapses. 10.9 SUMMARY In most countries, tax regulations stipulate that capital gain taxes can be levied on investors’ gains. In Canada, for instance, the law requires individuals to pay at least 192 CU IDOL SELF LEARNING MATERIAL (SLM)
half of their marginal tax rate on profits earned from asset disposal. Similarly, in the United States, both residents and companies incur capital gain taxes on their yearly net capital gains. Ideally, a capital gain tax is levied on any person or firm that decides to sell an asset for profit. The only exception is for day traders, who engage in the buying and selling of assets to make a living. As for the day traders, the profits they make are taxed based on their business revenue rather than capital gains. It’s also important to note that capital gain taxes are levied on different types of assets, whether they are stocks, bonds, or real estate property. As already explained, once a company sells an asset, it can make long-term or short- term capital gains. One of the benefits of capital gains that fall under the long-term status is that they attract lower capital gains tax rates. As such, one of the ways to reduce the tax that one is liable for is to hold assets for a longer period. Here is a breakdown of how capital gains tax is levied. As seen in the outline above, the long-term capital gains rate is determined by one’s marginal tax rate, which is then dependent on an individual’s income. That said, disposing of long-term capital gain assets during “lean” years can help reduce the capital gains tax. Situations that may cause a decline in an individual’s income include approaching retirement period, quitting, or loss of employment. Selling assets at such times can minimize the amount of capital gains tax levied. In any given period, capital losses can be used to offset capital gains. Let’s assume that an individual owns two types of stocks: A and B. When he sells stock A, he makes a profit of $60, but when he sells stock B, he makes a loss of $30. His net capital gain is the difference between his capital gain and loss: $30. By using capital losses in the years where he made capital gains, an individual can lower his capital gains tax significantly. Even though individuals are required to report all their capital gains, the tax to be levied is computed on the net capital gain. A capital gain occurs when the sales price received from disposing of an asset is higher than its purchase price. A capital gains tax is that tax imposed on the profits made from such sales. However, there are a few tricks that can be employed to lower the amount of capital gains tax imposed. They include holding assets for a longer period before selling them, disposing of assets when their income is low, and using capital losses to offset the gains. 193 CU IDOL SELF LEARNING MATERIAL (SLM)
10.10 KEYWORDS Capital Assets - Any item held for a person's business or profession (stock, ready goods, raw material) will be taxed under the head profits and gains of business or profession. Capital Gains - Any profits or gains arising from the transfer of a capital asset affected in the previous year shall be chargeable to income-tax under the head capital gains. Examples of assets are a flat or apartments, land, shares, mutual funds, gold among many others. There are two types of capital gains: Short-Term Capital Gain - Capital gain arising on transfer of short-term capital asset. Long-Term Capital Gain - Capital gain arising on transfer of long-term capital asset. Cost Inflation Index (CII) - Cost inflation Index (CII)is a term that comes into play when we talk about long-term capital gains. This index is fixed and is declared every year by the government. For calculating capital gains on long-term assets, indexation is used. 10.11 LEARNING ACTIVITY 1. Create a session on Capital Gains Exempt from Tax. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Short Term Capital Gain. ___________________________________________________________________________ ___________________________________________________________________________ 10.12 UNIT END QUESTIONS A. Descriptive Questions 194 Short Questions 1. What is condition under capital gain? 2. Define Capital assets? 3. Describe the types of capital gain? 4. What is Calculation of Capital Gains? 5. Write the Capital Gains Exempt from Tax? Long Questions CU IDOL SELF LEARNING MATERIAL (SLM)
1. Explain the Income from other Sources. 2. Discuss the Long-Term Capital Gain. 3. Illustrate the concept of Exemption from Capital Gain. 4. Describe the Short-Term Capital Gain. 5. Examine the Aggregation of Income. B. Multiple Choice Questions 1. What is the charging section of the income under the head capital gains? a. Section 15 b. Section 17 c. Section 10 d. Section 45 (2) 2. What are the conditions to be fulfilled for charging of income under the head capital gains? a. There must be a capital asset. b. There must be a transfer of such capital asset. c. The transfer of such capital asset has been affected during the previous year. d. All of these 3. Which of the following is not a requisite for charging income-tax on capital gains – a. The transfer must have been affected in the relevant assessment year b. There must be a gain arising on transfer of capital asset c. Capital gains should not be exempt u/s 54 d. Capital gains should not be exempt u/s 54EC 4. Which of the following shall not be regarded as capital asset? a. Urban Land b. Securities held by a Foreign Institutional Investor as per SEBI Act, 1992 c. Archaeological Collections d. Motor Car 5. Select on the following which shall be regarded as capital asset: 195 a. Gold Jewellery held by jeweller as SIT trade. b. Securities held by FII as per SEBI Act, 1992, held as stock in trade. c. Motor car held by motor car manufacturer as SIT CU IDOL SELF LEARNING MATERIAL (SLM)
d. None of these Answers 1-d, 2-d, 3-a, 4-d, 5-b 10.13 REFERENCES References book Auten, Gerald, and Charles Clotfelter. “Permanent vs. Transitory Effects and the Realization of Capital Gains.” Quarterly Journal of Economics 97 Auten, Gerald, and Joseph Cordes. “Cutting Capital Gains Taxes.” Journal of Economic Perspectives 5 (Spring 1991) Burman, Leonard, and William Randolph.(September 1994) “Measuring Permanent Reponses to Capital-Gains Tax Changes in Panel Data.” Textbook references Congressional Budget Office. How Capital Gains Tax Rates Affect Revenues: The Historical Evidence. Washington, D.C., March 1988. Congressional Budget Office. Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains. Washington, D.C., 1997 Feldstein, Martin, Joel Slemrod, and ShlomoYitzhaki. “The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains.” Quarterly Journal of Economics 94 (June 1980). Website https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-gains-tax/ https://taxguru.in/income-tax/capital-gain.html https://www.investopedia.com/terms/c/capitalgain 196 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 11 – SET OFF CARRY FORWARD OF LOSSES STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Concept 11.2.1 Restrictions to be kept in mind while making Intra-Head Adjustment of Loss 11.2.2 Provisions under the Income -Tax Law in relation to Carry Forward and Set offHouse Property Loss 11.2.3 Illustration for Better Understanding 11.3 Section 70 & 80 of Set off Carry Forward of Losses 11.3.1 Compulsory Filing of Loss Returns 11.3.2 Carry Forward and Set Off of Loss from House Property [Section 71b] 11.3.3 Carry Forward and Set Off of Business Losses other than Speculation Loss (Section 72) 11.3.4 Carry Forward and Set Off of Speculation Loss (Section 73) 11.3.5 Carry Forward and Set-Off of Loss from Activity of Owning and Maintaining Race Horses (Section 74a) 11.3.6 Carry Forward and Set-Off of Capital Loss under the Head ' Capital Gains' (Section 74) 11.3.7 Carry Forward and Set Off of Loss of a ' Specified Business' Referee in Section 45ad (Section 73a) 11.4 Summary 11.5 Keywords 11.6 Learning Activity 11.7 Unit End Questions 11.8 References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to: 197 Describe the Compulsory Filing of Loss Returns. Illustrate about Carry Forward and Set Off of Speculation Loss (Section 73). CU IDOL SELF LEARNING MATERIAL (SLM)
Explain the Illustration for Better Understanding. 11.1 INTRODUCTION Profit and losses are two sides of a coin. Losses, of course, are hard to digest. However, the Income-tax law in India does provide taxpayers some benefits of incurring losses too. The law contains provisions for set-off and carry forward of losses which are discussed in detail in this article. Set off losses means adjusting the losses against the profit or income of that particular year. Losses that are not set off against income in the same year can be carried forward to the subsequent years for set off against income of those years. A set-off could be an intra-head set-off or an inter-head set-off. The losses from one source of income can be set off against income from another source under the same head of income. For e.g.: Loss from Business A can be set off against profit from Business B, where Business A is one source and Business B is another source and the common head of income is “Business”. Losses from a Speculative business will only be set off against the profit of the speculative business. One cannot adjust the losses of speculative business with the income from any other business or profession. Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an activity of owning and maintaining race-horses. Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain. Losses from a specified business will be set off only against profit of specified businesses. But the losses from any other businesses or profession can be set off against profits from the specified businesses. After the intra-head adjustments, the taxpayers can set off remaining losses against income from other heads. E.g., Loss from house property can be set off against salary income. Given below are few more such instances of an inter-head set off losses: Loss from House property can be set off against income under any head Business loss other than speculative business can be set off against any head of income except income from salary. 198 CU IDOL SELF LEARNING MATERIAL (SLM)
One needs to also note that the following losses can’t be set off against any other head of income: Speculative Business loss Specified business loss Capital Losses Losses from an activity of owning and maintaining race-horses After making the appropriate and permissible intra-head and inter-head adjustments, there could still be unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments against income of these years. The rules as regards carry forward differ slightly for different heads of income. 11.2 CONCEPT If income from a particular source is exempt from tax, then loss from such source cannotbe set off against any other income which is chargeable to tax. E.g., Agricultural income is exempt from tax; hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income. 11.2.1 Restrictions to be kept in mind while making Intra-Head Adjustment of Loss If in any year the taxpayer has incurred loss from any source under a particular head of income, then he is allowed to adjust such loss against income from any other source falling under the same head. The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called intra- head adjustment, e.g., Adjustment of loss from business A against profit from business B. Following restrictions should be kept in mind before making intra-head adjustment of loss: Loss from speculative business cannot be set off against any income other than income from speculative business. However, non-speculative business loss can be set off against income from speculative business. Long-term capital loss cannot be set off against any income other than income from long-term capital gain. However, short-term capital loss can be set off against long- term or short-term capital gain. No loss can be set off against income from winnings from lotteries, crossword puzzles, race including horse race, card game, and any other game of any sort or from gambling or betting of any form or nature. Loss from the business of owning and maintaining race horses cannot be set off against any income other than income from the business of owning and maintaining race horses. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
Loss from business specified under section 35AD cannot be set off against any other income except income from specified business (section 35AD is applicable in respect of certain specified businesses like setting up a cold chain facility, setting up and operating warehousing facility for storage of agricultural produce, developing, and building a housing project, etc.) 11.2.2 Provisions under the Income -Tax Law in relation to Carry Forward and Set off House Property Loss If loss under the head “Income from house property” cannot be fully adjusted in the year in which such loss is incurred, then unadjusted loss can be carried forward to next year. In the subsequent years such loss can be adjusted only against income chargeable to tax under the head “Income from house property”. Such loss can be carried forward for eight years immediately succeeding the year in which the loss is incurred Loss under the head “Income from house property” can be carried forward even if the return of income/loss of the year in which loss is incurred is not furnished on or before the due date of furnishing the return, as prescribed under section 139(1). 11.2.3 Illustration for Better Understanding Business income (computed as per the provisions of Income-tax Law) of Mr. Kiran before allowing deduction on account of depreciation amounted to Rs. 84,000. Depreciation as per the provisions of section 32 amounted to Rs. 1, 00,000. What will be the amount of unabsorbed depreciation in this case? ** It can be observed that business income before claiming deduction under section 32 on account of depreciation is Rs. 84,000 and depreciation allowable as per section 32 is Rs. 1,00,000, hence, after claiming deduction on account of depreciation of Rs. 1,00,000, there will be a loss of Rs. 16,000. This loss is on account of depreciation and, hence, loss of Rs 16,000 will be termed as unabsorbed depreciation. 11.3 SECTION 70 & 80 OF SET OFF CARRY FORWARD OF LOSSES As per Section 2 of the Income Tax Act, 1961 definition of Income includes losses also. Losses in the Income Tax Act, 1961 are dealt in accordance with Chapter VI of the Act which consists of Section 70 to Section 80. Assessee paid tax on Total Income. It might be possible that assessee earn income from one source of Income & Losses from other sources of income under the same head. For Example: Losses from business A & Income from business B under the same head i.e., P/G/B/P. Similarly, it might also possible that the net result of one head is Losses & on the other hand Assessee earns positive income from other head. For Example: Net losses 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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