Tax

  Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.   Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.                                        401

Sub-Section - 3.3 Taxability of Various Financial Products 3.3.1. Provident Fund and Small Savings Schemes - Contribution, Interest, Withdrawal and Terminal Value Taxability of Provident Funds See section 2.1 Taxability of Small Saving Schemes: Post office monthly income scheme (MIS) Salient Features: 1. Interest rate of 7.6% per annum payable monthly w.e.f. 01-01-2020 2. Maturity period is 5 years. 3. No Bonus on Maturity w.e.f. 01.12.2011. 4. No tax deduction at source (TDS). 5. No tax rebate is applicable. 6. Minimum investment amount is ₹1500/- or in multiple thereafter. 7. Maximum amount is ₹4.50 lakhs in a single account and ₹9 lakhs in a joint account. 8. Auto credit facility of monthly interest to saving account if accounts are at the same post office. 9. Account can be opened by an individual, two/three adults jointly, and a minor through a guardian. 10. Non-Resident Indian / HUF cannot open an Account. 11. Minors have a separate limit of investment of ₹3 lakhs and the same is not clubbed with the limit of guardian. 12. Facility of premature closure of account after 1 year but on or before 3 years @2.00% discount. 402

13. Deduction of 1% if account is closed prematurely at any time after three years. 14. Suitable scheme for retired employees/ senior citizens and for those who need regular monthly income. National Saving Certificates (NSCs) 1. NSC VIII Issue (5 years) – Interest rate of 7.9% per annum w.e.f. 01-07-2019 2. NSC IX Issue (10 years) - Interest rate of 8.0% per annum w.e.f. 01-04-2019 3. Minimum investment ₹100/-. No maximum limit for investment. 4. No tax deduction at source. 5. Investment up to ₹1,50,000/- per annum qualifies for Income Tax Rebate under NSC - section 80C of IT Act. 6. Certificates can be kept as collateral security to get loan from banks. 7. Trust and HUF cannot invest. 8. A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor. 9. The interest accruing annually but deemed to be reinvested will also qualify for deduction under NSC - section 80C of IT Act. Public Provident Fund (PPF) 1. Interest rate of 8.0% per annum w.e.f. 01-04-2019. 2. Minimum deposit is 500/- per annum. Maximum deposit is ₹1,50,000/- per annum 3. The scheme is for 15 years. 4. Investment up to ₹1,50,000/- per annum qualifies for Income Tax Rebate under section 80C of IT Act. 5. Interest is completely tax-free. 6. Deposits can be made in lumpsum or in 12 instalments. 7. One deposit with a minimum amount of ₹500/- is mandatory in each financial year. 403

8. Withdrawal is permissible from 6th financial year. 9. Loan facility available from 3rd financial year upto 5th financial year. The rate of interest charged on loan taken by the subscriber of a PPF account on or after 01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue to be charged on the loans already taken or taken up to 30.11.2011. 10. Free from court attachment. 11. Non-Resident Indians (NRIs) not eligible. 12. An individual cannot invest on behalf of HUF (Hindu Undivided Family) or Association of persons. 13. Ideal investment option for both salaried as well as self employed classes. Post Office Time Deposit Scheme Salient Features: 1. 1 year, 2 year, 3 year and 5 year time deposits can be opened. 2. Interest payable annually but compounded quarterly: Period Rate of Interest One year 6.9% Two years 6.9% Three years 7.9% Five years 7.7% 3. Minimum amount of deposit is ₹200/- and in multiples of ₹200/- thereafter. No maximum limit. 4. Investment up to ₹1,00,000/- per annum qualifies for Income Tax Rebate under section 80C of IT Act. 5. Interest income is taxable. 6. Facility of redeposit on maturity of an account. 404

7. In case of premature closure of 1 year, 2 Year, 3 Year or 5 Year account on or after 01.12.2011 between 6 months to one year from the date of deposit, simple interest at the rate applicable to from time to time to post office savings account shall be payable. 8. 2 year, 3 year or 5 year accounts on or after 01.12.2011 if closed after one year, interest on such deposits shall be calculated at a discount of 1% on the rate specified for respective period as mentioned in the concerned table given under Rule 7 of Post office Time Deposit Rules. 9. Account can be pledged as security against a loan to banks/ Government institutions. 10. Any individual (a single adult or two adults jointly) can open an account. 11. Group Accounts, Institutional Accounts and Misc. account not permissible. 12. Trust, Regimental Fund or Welfare Fund not permissible to invest Senior Citizen Saving Scheme Salient Features: 1. Interest @ 8.7% per annum from the date of deposit on quarterly basis w.e.f. 01-04-2019 2. Minimum deposit is ₹1000 and multiples thereof. Maximum limit of 15 lakhs. 3. Maturity period is 5 years and can be extended for a further period of 3 years. 4. Age should be 60 years or more, and 55 years or more but less than 60 years who has retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme on the date of opening of the account within three months from the date of retirement. 5. No age limit for the retired personnel of Defence services provided they ful fill other specified conditions. 6. The account may be opened in individual capacity or jointly with spouse. 7. TDS is deducted at source on interest if the interest amount is more than ₹10,000/- per annum. 8. Investment up to ₹1,00,000/- per annum qualifies for Income Tax Rebate under section 80C of IT Act. 9. Interest can be automatically credited to savings account provided both the accounts stand in the same post office. 405

10. Premature closure is allowed after one year on deduction of 1.5% of the deposit and after 2 years on deduction of 1%. 11. No withdrawal permitted before the expiry of a period of 5 years from the date of opening of the account. 12. Non-resident Indians (NRIs) and Hindu Undivided Family (HUF) are not eligible to open an account. Post Office Saving Account Salient Features: 1. Rate of interest 4.0% per annum 2. Minimum amount ₹50/- in case of non-cheque account, ₹500/- in case of cheque account. 3. Maximum balance permissible is ₹1,00,000/- in a single account and ₹2,00,000/- in a joint account in initial deposit. 4. Interest Tax Free upto Rs.50000 u/s 80TTB for Sr.Citizen and Rs.10000 u/s 80 TTA for other citizens. Addition Rs.3500 u/s 10(15)(i). 5. Any individual can open an account. 6. Cheque facility available. 7. Group Account, Institutional Account, other Accounts like Security Deposit account & Official Capacity account are not permissible. 3.3.2. Equity Shares - Listed and Unlisted There is no tax implication while making an investment in shares. There are tax benefits to investing in some pre-approved companies as mentioned in the third point below. The tax implication arises only at the time of sale of shares as under:  Any equity share, which has been sold through a recognised stock exchange and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long Term Capital Gains under Section 10 (38) of the Act. Similarly, in case of Short Term Capital Gain of such shares, the gains shall be taxed only at 10%, plus surcharge and education cess.  406

 Under Section 80C, any subscription to equity shares or debentures forming part of any eligible issue of capital, approved by the Court or an application made by a public company or subscription to such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled. Tax Implication of a Bonus/Rights Issue on Equity Shares Under Section 55(2)(AA), bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue. The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment. Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'nil' according to Section 55(2) (AA) (ii). The sale price of such transferred rights will be taken as capital gain. The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement. In case of the transfer of such rights, the cost of acquisition is the aggregate of the amount of purchase price, paid to the transferor to acquire the right entitlement and the amount, paid by him to the company for subscribing to such right offer of share. The period of holding in the hands of the transferee will be from the date of allotment of such shares. Capital Gains Liability Arising on Sale of Shares i.e. Long-term/Short-term In case of equity or preference shares in a company, if the shares are held for more than 12 months immediately prior to its transfer then it is known as long term capital asset and on transfer of long term capital asset, long term capital arises. Long term capital gains arising on transfer of equity shares will not be chargeable to tax from assessment year 2005-06 if such transaction is covered by securities transaction tax under section 10(38). 407

Taxability of Dividend Income, Received from Investments in Shares Dividend, received from investment in shares, is not taxable in the hands of the recipient. The company, distributing the dividend, is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient. STT (Securities Transaction Tax) The Securities Transaction Tax has been introduced by Chapter VII of the Finance Act (No.2) Act, 2004. It provides for a levy of a transaction tax on the value of certain transactions. These transactions include the purchase and sale of equity shares in a company, purchase and sale of units of an equity growth fund, sale of a unit of an equity growth fund to the mutual fund and sale of a derivative. The transaction tax will be payable on all transactions that have taken effect from October 1, 2004. S. No. Taxable Securities Transaction Rate Payable by 1 2 3 4 1. Purchase of an equity share in a company, 0.1% Purchaser where - Seller (a) the transaction of such purchase is entered into in a recognised stock Seller exchange; and (b) the contract for the purchase of such share is settled by the actual delivery or transfer of such share. 2. Sale of an equity share in a company, 0.1% where– (a) the transaction of such sale is entered into in recognised stock exchange; and (b) the contract for the sale of such share is settled by the actual delivery or transfer of such share. 2A. Sale of a unit of an equity oriented fund, 0.001% where – (a) the transaction of such sale is entered into in a recognised stock exchange; and (b) the contract for the sale of such unit is 408

settled by the actual delivery or transfer of such unit. 3. Sale of an equity share in a company or a 0.025 % Seller unit of an equity oriented fund, where - Seller (a) the transaction of such sale is entered Purchaser into in a recognised stock exchange; and Seller (b) the contract for the sale of such share or Seller unit is settled otherwise than by the Seller actual delivery or transfer of such share or unit. 4. (a) Sale of an option in securities 0.017 % 0.125 % (b) Sale of an option in securities, where 0.01% option is exercised (c) Sale of a futures in securities 5. Sale of a unit of an equity oriented fund to 0.001 % the Mutual Fund. 6. Sale of unlisted equity shares under an offer 0.2% for sale referred to in section 97(13)(aa) - sale of unlisted equity shares by any holder of such shares under an offer for sale to the public included in an initial public offer and where such shares are subsequently listed on a recognised stock exchange Surcharge: Nil, Education cess: Nil Note: STT is not applicable in case of Government securities, bonds, debentures,units of mutual fund other than equity oriented mutual fund and in such cases, tax treatment of short - term and long - term capital gains shall be as per normal provisions of law. Computation of Long Term Capital Gains on Shares both Equity and Preference, Listed or Unlisted and Debentures: 409

If transaction is IF it is not covered by STT covered by STT Capital Assets Long Term at the time of Listed equity shares covered transfer Without With by indexation indexation Listed equity shares not 10% covered by In excess of Rs.1 lakh 10% 20% Unlisted equity shares Listed Preference shares 10% 10% 20% Unlisted Preference shares Listed Debenture NA NA 20% Unlisted Debenture NA 10% 20% NA NA 20% NA 10% NA NA 20% NA 3.3.3. Equity Transactions - Stock Market and Off Market Equity Transactions: Stock Market Trading in dematerialized securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers. Delivery of securities to or from a clearing member is called \"Market Trades\" in the depository system. A simple way of determining whether a trade is a market trade is that, either source or target in a transfer instrument is a CM account; such a transfer is a “Market Trade” Equity Transactions: Off Market Trading in dematerialized securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers. Trades which are not settled through the Clearing Corporation/ Clearing House of an exchange are classified as \"Off Market Trades\". Delivery of securities to or from sub brokers, delivery for trade-for-trade transactions, by this definition are off-market trades. 410

Securities Transaction Tax (STT) is the tax payable on the value of taxable securities transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004. What all is covered by Securities? Securities definition is as per section 2(h) of the Securities Contracts (Regulation) Act, 1956, but for our purpose, let’s just simply says Securities mean Equity Shares and Equity Derivatives (i.e. Futures and Options). Full definition of Securities is given in Appendix, for information. What are taxable transactions? Purchase and Sale of securities through a recognized stock exchange in India. STT is not applicable on off-market transactions. What rate is STT payable? STT is applicable at different rates depending upon the security (whether equity or derivative) and the transaction (whether purchase or sell). Current STT rates are given below. Note that Service Tax, Surcharge and Education Cess are not applicable on STT. Income Tax and STT Taxation of profit or loss from securities transactions depends on whether the activity of purchasing and selling of shares / derivatives is classified as investment activity or business activity. Treatment of STT also depends upon whether the income from these securities transactions are included under the head “Income from Capital Gains” or under the head ‘Profits and Gains of Business or Profession’. Scenario 1: ‘Income from Capital Gains’ This refers to the scenario where the assessee is either Salaried or is engaged in some other business or profession and trading in securities is not the main line of business. In such cases gains or losses from securities transactions are taxed under the head “Income from Capital Gains”. Gains or losses are subject to Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) tax depending upon the period of holding, i.e., if the holding period is less than 1 year, gains are classified as STCG and if the holding period is equal to or greater than 1 year, gains are classified as LTCG. Any equity share, which has been sold through a recognised stock exchange and on which STT has been paid, is entitled to exemption from LTCG under Section 10 (38) of the Act. Similarly, in case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act. 411

Important points to note: 1. STCG and LTCG rates of 15% and NIL are available only if the specified security is sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange in India, will not be covered 2. the purchase of the specified securities could be through any mode and need not be through a recognised stock exchange 3. The exemption is not available to transactions where STT has not been paid 4. Since LTCG is exempt, Long Term Capital Loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse 5. As per section 40(a)(ib) of the Income tax Act, STT cannot be claimed as an expense in computing the income chargeable under Capital Gains Scenario 2: ‘Profits and Gains of Business or Profession’ This refers to the scenario where main business of the assessee is trading in securities. In such cases the gains or losses are classified as business income, which is taxed at the regular rate of income-tax. STT paid in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under section 36 of the Income-tax Act. 3.3.4. Equity Oriented Products - Equity Schemes of Mutual Funds, ETFs, ELSS, etc. Equity Schemes of Mutual Funds  Dividend/income received by unit holders is exempt in the hands of unit  holders, whether units are of equity oriented schemes or of debt oriented schemes.  Mutual Fund company is liable to pay tax on distributed profits @ 25% in  case of Individual/HUF/NRI unit holders & @ 30% in case of company unit holders. Rates shall be increased by surcharge @ 10% and cess @ 3%.  For taxation of capital gains on mutual fund units, please refer chapter 2.4.  In case of NRI, tax rates on capital gains shall be as follows: Nature Purchase Listed/ Section 10(38) Tax rate of currency unlisted security Applies 10% above Rs.1 lakh Indian Listed Tax 20% with indexation or Equity Does not Shares 412

Foreign Unlisted apply 10% w/o indexation Listed Can’t apply Tax 10% w/o indexation Applies Exempt Preferen Indian Unlisted Does not 10% w/o indexation ce Listed apply Shares Foreign Can’t apply 10% w/o indexation Indian Unlisted Can’t apply Tax 20% with indexation or Debentu Foreign Listed 10% w/o indexation res Any Unlisted Can’t apply Tax 10% w/o indexation currency Listed Can’t apply 10% w/o indexation Units Unlisted Can’t apply 10% w/o indexation Listed Can’t apply Tax 10% w/o indexation Unlisted Can’t apply Tax 10% w/o indexation Always Can’t apply 10% w/o indexation listed Can’t apply 10% w/o indexation Applies Exempt Does not Tax 20% with indexation apply Exchange Traded Funds (ETFs) Exchange traded funds (ETFs) are uniquely structured investments that track indexes, commodities or baskets of assets. Like stocks, ETFs can be purchased on margin and sold short, and prices fluctuate throughout each trading session as shares are bought and sold on various exchanges. Twenty years ago, the first exchange traded fund (ETF) was introduced - the SPDR S&P 500 ETF (SPY). Since then, the ETF industry has blossomed into a trillion-dollar- a-year business, with an increasing number of ETFs available to match a variety of investment styles, goals and risk tolerances. ETFs have become standard in many investors' portfolios, due in part to the many benefits of ETF investing, including their tax efficiency. Due to the method by which ETFs are created and redeemed, investors are able to delay paying most capital gains until an ETF is sold. As with any investment, it is important for investors to understand the tax implications of ETFs prior to investing. Here we will introduce asset classes, structures and the tax treatment of exchange traded funds. 413

ETF Asset Class and Structure The way that an ETF is taxed is determined by its method of gaining exposure to its underlying assets, its structure and the amount of time that the ETF is held. Exchange traded funds can be categorized into one of five asset classes:  Equity funds (market indexes, stocks)  Fixed income funds (bonds)  Commodity funds (tangible goods)  Currency funds (foreign currency)  Alternative funds (multiple asset classes or non-traditional assets) For taxation purposes, ETFs are further categorized by one of five fund structures: Open-end funds Unit investment trusts (UITs) Grantor trusts Limited partnerships (LPs) ETF Tax Treatment The combination of an ETF’s asset class and structure, along with how long the ETF is held (short-term gains apply to investments that are held for three years or less, long-term apply when a position is held for more than three years), determines its potential tax treatment. Index ETFs or sectoral ETFs are treated as equity oriented schemes and tax accordingly. Short term Tax is 15% and LTCG is taxed at 10% in excess of Rs.1 lakh. While Gold ETF are taxes as debt funds where STCG is taxed at normal slab rate before 36 months, and LTCG are taxed at 20% after indexation. Same with go with international ETF. Equity Linked Saving Scheme (ELSS) Equity Linked Savings Schemes (ELSS) is a tax saving mutual fund that are open for investments during the year. There are different kinds of tax benefits that the investors can expect with the instrument and hence there is a need to take a careful look at how this entire thing is structured. There has to be a look at the performance of the fund along with the other conditions while making a purchase decision and hence this will require some work. Here are the tax benefits that will come along with the fund. 414

Investment Deduction ELSS funds are one of the eligible options that qualify for a deduction under Section 80C of the Income Tax Act. This means that the investments made into the fund will qualify for a deduction from the taxable income of the individual. This is part of the overall limit of ₹1 lakh that is available for individuals and they can make the full use of this limit in the instrument. There is a 3 year lock in that is present on the ELSS funds so this will need to be considered at the time of making the investment. The investment will lead to a reduction of the taxable income by the amount of the investment and this constitutes the initial tax benefit. Dividend The ELSS is an equity oriented option as the entire portfolio of the fund is invested into equity shares. This is actually the only pure equity option that is present under Section 80C for the individual and hence when it comes to the issue of asset allocation this point needs to be considered. In terms of the receipt of the earning on the fund the dividend that is actually received is tax free in the hands of the investor. There is also no dividend distribution tax that will be levied on the fund at the time of the payment of the dividend so this means of getting the earnings from the fund will be tax free without any indirect impact being present. Capital Gains The other route in which the investor will actually gain from the investment is through capital gains on the amount invested. This happens when the investor get an appreciation in the value due to the rise in the Net Asset Value (NAV) of the fund. Since there is a three year lock in on the fund there cannot be a short term capital gains earned on the investments. So the long term capital gains that is actually earned on the investment will be tax free in thehands of the receiver as there is no tax that is levied on equity oriented funds that have been held for a period of more than one year. There will be a securities transaction tax that has to be paid at the time of the sale of the units but the fund will deduct this amount and give the remaining figure to the investor. On the other hand if there is a long term capital loss that is incurred then the individual will have to discard this from the tax calculation because the loss cannot be set off against any other income. 3.3.5. Debt Products - Bonds, Debentures, Government Securities, Income Schemes of Mutual Funds including Fixed Maturity Plans (FMPs) Debt Products - Bonds 415

Income, Capital Gains and Taxation Distributions Fixed-rate capital securities pay monthly, quarterly or semi-annual distributions that, like interest payments on bonds, are fully taxable to the investor. Investors should be aware that, unlike other bonds, most fixed-rate capital securities include a provision allowing the issuer to defer distributions for up to five years. Although deferral would be permissible only if the issuer also suspended all dividends on its common and preferred stock (like regular preferred stock), investors in fixed-rate capital securities could have their income interrupted if this situation were to occur. During such a period, the investor would incur a tax liability on the deferred income, which continues to accrue, typically at a compounded rate, even though it is not actually paid. Investors can avoid such a tax obligation by holding their securities in a tax- deferred retirement account. At the end of the deferral period, the issuer would be required to pay all deferred distributions. Taxability of Income The treatment of investment income from trust and debt securities for federal income tax purposes is unclear under current tax statutes and regulations and may vary depending upon whether the possibility of the issuer deferring payments is, or is not, a remote contingency. If deferral is a remote contingency, payments should be included in income by a holder as such payments are accrued or received, depending upon the holder’s method of accounting. If deferral is not a remote contingency, the income may be treated as original-issue discount (OID) and both cash and accrual investors would be required to report accrued OID even if it is different than the amount received. In general, for investment-grade issuers who pay common stock dividends, payments will be treated as interest, not OID. Ask to check the prospectus for applicability. A holder who purchases such fixed-rate capital securities in the secondary market for a price in excess of the original-issue price plus accrued OID (including income treated as OID) may reduce income accruals by the amount of such excess by including income on a constant yield- to-maturity basis. Consult your tax adviser for specifics. Should the issuer elect to defer payments, the deferred income continues to accrue for tax purposes, even though the investor receives no cash payments with respect to the security. To avoid the impact of a tax liability on “phantom” income that accrues but is not actually received, investors may wish to hold these securities in qualified tax-deferred retirement accounts. Income from partnership securities is generally reported to investors on a simplified K-1 form. In general, partnership issuers use a monthly convention that allocates the income accrued on the underlying debentures of the parent to the persons holding the partnership securities at the end of each month. Accordingly, although partnership investors, like investors in trust and debt securities, are required to accrue such income even during a deferral period, the income only 416

has to be accrued by the partnership holders at the end of each month rather than on a daily basis. For investors who purchase the securities at original issuance, this distinction will only affect the investor who sells a security prior to the end of the month. With respect to a trust or debt security, such investor would be taxed on accrued income to the date of sale. However, with respect to the sale of a partnership security, such investor would only pay tax at ordinary income tax rates on income accrued through the prior month end; the portion of the sale price attributable to income accrued during the current month through the date of sale would instead be taken into account in computing a capital gain or loss. Calculating Capital Gains or Losses As with bonds and preferred stock, if fixed-rate capital securities are sold or otherwise disposed of prior to maturity, the investor may realize a capital gain or loss on the transaction. The amount of gain or loss will equal the difference between the amount realized from the sale and the adjusted tax basis, which includes the amount of accrued but unpaid income required to be included by the seller through the date of sale. For example: Purchase price: ₹25.00 Sale proceeds: ₹26.10 [including ₹0.40 in accrued income] Adjusted tax basis: ( ₹25.40) [purchase price + ₹0.40 accrued income in sale price] Capital gain: ₹0.70 In the case of a partnership security purchased at original issuance, generally no accrued income will be included in the seller’s adjusted tax basis unless the issuer has deferred income payments. Where the seller had purchased a security of any type in the secondary market, any portion of its purchase price attributable to income accrued prior to its purchase will be included in basis. Although a gain or loss on a sale of a security is generally considered to be capital, special rules apply to shares of securities purchased at “market discount,” i.e., for an amount less than the original-issue price plus accrued original-issue discount. In such a case, a portion of any gain up to the amount of accrued market discount is taxed as ordinary income, unless the seller had elected to include accrued market discount in income on a current basis. 417

Debentures Non-Convertible Debentures are simple debentures that cannot be converted into equity shares of the issuing company. These debentures usually carry interest rates higher than Convertible Debentures. For tax purpose, interest earned on NCD held till maturity is considered as Income from Other Sources which is clubbed into income of the debenture holder and taxed as per the applicable income tax slab rate. Selling listed NCD in secondary market before maturity has two implications: a) PNCD sold within one year of issue will give rise to Short Term Capital Gain/ Loss which would be clubbed into debenture holder's income and taxed according to applicable slab rate. b) NCD sold after one year of issue but before maturity will give rise to Long Term Capital Gain/Loss which will be taxed at 10 per cent with added surcharge. No indexation benefits are available on selling listed NCDs in secondary market. Also, Securities Transaction Tax (STT) does not apply in case of debentures. Further, it should be noted that selling the debentures in secondary market will be possible based on its market demand. You would be able to sell only if someone is ready to buy at the quoted price. Every year, bondholders receive their annual 1099-INT forms and dutifully report the numbers that are listed there on their tax returns. However, there is often more to what appears on these forms than the income that is generated from the stated rate of interest. Many fixed income investors are unaware of a number of factors that can impact the amount of taxable interest that they must report at the end of the year. This article will explore each of the major categories of bonds, as well as analyze some of the other issues that factor into what investors must report as income. Government Securities TypesofBonds Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals (ex - semi-annual, annual, sometimes monthly). All bonds fall into one of three broad categories: 1. Government 2. Corporate 3. Municipal 418

Although certificates of deposit (CD) can trade like bonds in the secondary market and are taxed in a similar manner, they are not considered to be bonds. The following is a breakdown of each type of debt. Capital Gains Bonds are instruments which offer tax exemption for transferring gains of long term capital assets. The Investment in these Bonds is to be made within six months from the date of such transfer of capital assets (Land/House Property etc.) for being exempted from Capital Gains Tax under Section 54EC of the Income Tax Act, 1961. The eligible bond under Section 54 EC are:  RECL (Rural Electrification Corporation Ltd)  NHAI (National Highways Authority Of India)  RECL NHAI Features 5.75% 5.75% Taxable Taxable Coupon/Interest rate SEC 54 EC SEC 54 EC 10,000 10,000 Tax Status 50,00,000 50,00,000 5 Years 5 Years Tax Benefit Annual Annual Minimum ( ₹) Maximum ( ₹) Tenure Mode of Interest  Section 54EC  See chapter 2.4 GOI Savings (Taxable) Bonds 1. Bonds may be held by: An individual, NRI, HUF, Charitable institution or University. 2. There is no maximum limit for investment. Bonds are issued at a minimum amount of ₹1000/- (face value) and in multiples thereof. 3. Interest on bonds will be taxable under IT Act, 1961. The bonds will be exempt from wealth tax under the Wealth Tax Act, 1957. 4. The Bonds will bear interest at the rate of 8% per annum. Interest on non-cumulative bonds will be payable at half-yearly intervals from the date of issue or interest on cumulative Bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal, as the subscriber may choose. 419

5. Tax will be deducted at source while making payment of interest on the non-cumulative bonds from time to time and credited to Government Account. Tax on the interest portion of the maturity value will be deducted at source at the time of payment of the maturity proceeds on the cumulative Bonds and credited to Government Account. 6. The Bonds shall be repayable on the expiration of 6(six) years from the date of issue Tax Free Bonds Tax free bonds are instruments where interest earned is not taxed. However, there is no deduction for the principal invested in these bonds. These bonds will be eventually listed on the Bombay and National Stock Exchange, so investors will have the option of selling them before the full term of the bond. However, the price you may get for selling before they mature will depend on market conditions. Experts say these bonds make sense only for very risk-averse investors with a lot of cash at hand (say upward of ₹100,000). Fixed Maturity Plans(FMPs) FMPs are debt instruments coming from Mutual Funds. A Fixed Maturity Plan (FMP) is a fixed income scheme and generally is 100% equity free. FMPs have a fixed life and a definite maturity date i.e. they are closed ended schemes and once closed you can't invest in that FMP and hence they are called as Fixed Maturity. Post the maturity date the fund ceases to exist and your investment along with the appreciation is automatically returned back to you. FMPs invest in Commercial Paper, Certificate of Deposits, Debentures, Bonds, Securitized debt, Money Market instruments etc. So, an FMP is also a 100 per cent debt instrument. The maturity amount is not fixed they don't guarantee fixed rate of return, As per SEBI regulations, the portfolio and the indicative returns of the FMP cannot be disclosed by the Mutual Fund house, but they offer better post tax returns. How? How FMP is Better Compare to bank FDs In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab (or the marginal rate of tax). As far as FMPs are concerned, the tax implication depends upon the investment option – dividend or growth. 420

In the dividend option, the FMP issuer deducts the dividend distribution tax and thereafter there is no tax liability in the hands of the investors. Whereas in the growth option, returns earned are treated as capital gains i.e. Long Term Capital Gains enjoy indexation benefits and Short Term Capital Gains are added to income of investor and taxed accordingly. Taxability of Fixed Maturity Plans If you invest in an FMP, the dividend is tax-free in the hands of the individual investor. If you invest in the growth option of the FMP for less than 3 years, the gains are added to the investor's income and taxed at the investor's slab rate. If you invest in the growth option of the FMP for over 3 years, you pay either 10% capital gains tax without indexation or 20% with indexation. Indexation is the process by which the inflation is taken into account when computing the tax liability to understand indexation. Long-term capital gains (investment of more than 3 years) enjoy indexation benefits. The tax liability is computed using two methods i.e. with indexation (charged at 20% plus surcharge) and without indexation (charged at 10% plus surcharge); the tax liability will be the lower of the two. Short-term capital gains are added to the income of the investor and taxed as per his/her slab. 3.3.6. Income Distribution and Dividends on Various Investment Products See chapter 2.5 3.3.7. Securities Transaction Tax (STT) and Dividend Distribution Tax (DDT) See chapter 2.5 & 3.3 3.3.8. Life and Health Insurance Products, Unit Linked Insurance Plans (ULIPs), Unit Linked Pension Plans (ULPPs), etc. Life and Health Insurance Products Life Insurance is a critical part of an individual's personal insurance portfolio. It's a strategic part of the future security that one must provide for one's family in the face of the inevitable. 421

The proper type and the appropriate level of life insurance can be a matter of life and death. Securing the long-term financial security and quality of life for the people you love most is crucial, and the first step in securing it is life insurance. Many individuals also look at life insurance from tax planning perspective. Position Prior to the Finance Act, 2003 It would not be wrong to say that the Life Insurance Corporation has risen to its current stature because of tax concessions given to policyholders. It is the prospect of substantial reduction in tax that has generally induced individuals and Hindu undivided families to take insurance policies. While the premium paid went to reduce the annual tax burden by way of tax rebate, the lump sum received when the policy matures was treated as tax-exempt capital receipts. Any controversy about taxing bonus payments in excess of the maturity value was set at rest when the Finance (No. 2) Act, 1991, inserted Section 10 (10D) in the Income Tax Act, 1961 with retrospective effect from April 1, 1962. It was laid down that any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, would be exempt from tax. Amendment made by the Finance Act, 2003 This established position of exempting maturity proceeds of life insurance policies has been unsettled in this year's Finance Act 2003. Section 10 (10D) is now substituted by a new section with effect from financial year commencing from April 1, 2003 relating to assessment year 2004-05 so as to deny exemption to any sum received under an insurance policy in respect of certain life insurance policies where premium payable in any of the years during the term of the policy exceeded 20 per cent of the capital sum assured. Examples of such plans are Bima Nivesh, Jeevan Dhara, Kotak Insurance Bonds and Birla Flex Plan. The reason for bringing the proceeds of tax insurance policies with high premium and minimum risk cover under the tax bracket is similar to the reason for taxing deposits or bonds. Hence, such policies are to be treated at par with other investment schemes. It is difficult to understand how a life insurance policy can be compared with the normal deposit or investment in bonds. Moreover, when tax rebate is also denied, levy of tax on maturity of the policy is unjust. 422

The original amendment in the Finance Bill 2003 was modified to exempt the sum received under an insurance policy issued on or before March 31, 2003 in respect of which the premium payable for any years during the term of the policy exceeds 20 per cent of the actual capital sum assured is taxable. Further, any sum received under such policy on the death of a person shall continue to be exempt. The taxability of such insurance policy at the time of maturity or surrendered arises only when the premium payable exceeds 20 per cent of the capital sum assured as per the terms of the policy and not actual premium paid during the year exceeds 20 percent of the capital sum assured. While calculating the capital sum assured, no account shall be taken of the value of any premium agreed to be returned or any benefit by way of bonus or otherwise over and above the sum actually assured which is to be or may be received to the insurer at the time of maturity. A question will arise as to the computation of income in respect of the amount received. Policy is a 'capital asset' within the meaning of section 2(14). On maturity or surrender there will be a 'transfer' and amount received will be treated as a consideration and premium paid will be considered as cost and indexation benefit will be available. The income so arrived will be taxable as long-term capital gains. Tax Saving Life Insurance Plans The Importance of Tax Saving What does one understand by the term, tax savings? The income that an individual earns every year is subject to the Income Tax laws governing that country. The Income Tax rates are not the same for all. The rates varies basis on different income levels.. So the total income tax an individual needs to pay depends upon the annual income he or she has earned in that given year. But, there are many ways by which one can save income-tax.So the question arises that how to save income tax? To extract maximum tax benefits, you need to invest your earnings wisely in different insurance plans. This is where your investments come into play, as a lot of investment plans come with several benefits. With the help of tax deduction, a break granted by the government, one can save tax on premium paid. The maturity proceeds of life insurance product is tax free as well. You could look at long term objectives like investing in a pension plan for a life after retirement or a life cover to secure your family's future. There are a range of tax saving plans available for individuals to gain tax benefits under various sections. This is why it is very important to carry out an extensive research and know about the different products available. 423

Tax Saving through Life Insurance Products To save tax, Life Insurance products play a important role. Under the Income Tax Act 1961, by investing in a life insurance plan, you are allowed to claim deduction on the premiums that you pay when calculating taxable income (subject to conditions of Income Tax Act, 1961). This means, the insurance premiums which you pay helps in reducing your tax outflow. Further subject to conditions, maturity proceed from Life Insurance comes under exempted incomes. This means, no tax to be payable on any benefits received on maturity or on death. Hence Life Insurance Scheme can help you avail dual tax benefits. Also, you are investing in a Life. You can also get Tax benefits on Health Insurance and production product. This helps in reducing the computable tax base, thus resulting in reducing the net tax liability. Tax Planning for Individuals Let's take a look at some of the benefits which an individual person can benefit from tax saving. An Individual/salaried can avail following tax benefits on premium paid by way of deductions from taxable income 1. Section 80C - Premium paid on Life Insurance policies: deduction upto ₹1,50,000 Premium paid on pure term, endowment and Ulip product eligiblefor 80C benefit 2. Section 80CCC- Premium paid on pension policies :deduction upto ₹1,50,000 deduction is within ₹1,00,000 limit of Section 80C and 80CCD(1) 3. Section 80D- Premium paid on health insurance policies: deduction upto ₹75,000/- ₹25,000 deduction is allowed for self, spouse and dependentchildren: Additional ₹25,000 for parents or ₹50,000 for parents above 60 years of age. 4. Maturity proceeds from Life Insurance policies are exempt u/s 10(10D) subject to specified conditions So go ahead, secure your future by investing in a Life Insurance Policy that reaps in great benefits along with making sure that your hard earned money stays with you. Tax Benefits on Mediclaim / Health Insurance Premium Section 80D The investments made for paying health insurance premium qualify for tax deduction under section 80D. Deduction Available: Individuals who are less than 60 years of age and amount of health insurance premium paid which is ₹25,000 or lesser. The policy holder can also claim for further deduction of ₹25,000 if they have bought health insurance for parents ( ₹50,000 if either of your parents is a senior citizen). This is irrespective whether they are dependent on you or not. There is no deductions for claims made on health insurance for in-laws. 424

Medical expenditure for senior citizen is also covered in 80D upto Rs.50000 if no health policy is given to them. Who can claim? Individuals can claim for tax deduction if they have paid premiums for health insurance coverage for self, spouse, parents and children. For HUF assesses, premium paid for insuring the health of any member of the HUF, can be used for deduction. Factors to Consider: The premium could have been paid by any modes of transaction other than cash. The taxable income for the year you claim is applicable for the health insurance premium that you pay. The premium paid should not be paid from gifts received by you. In case of part payment of premium; For Ex; if you pay 50% premium and rest 50% is paid by your parents then the deduction for the amount you paid can be claimed. And parents can claim for their contribution. Section 80DD The expenditure incurred for paying medical bills for your handicapped dependent qualify for tax deduction under section 80D. Deduction Available: It can be ₹75,000 or actual expenditure. In case of severe handicap conditions it can be ₹1,25,000 as the deduction limit. Who can claim? The deduction can be claimed by the dependent parents, spouse, children and siblings. In all these cases, dependents must not have claimed any deduction for their disability. Deductions are allowed in either of the following cases. a) Expenditures incurred for medical treatment, training or rehabilitation of a disabled dependent, including amount spent for nursing. b) Any insurance scheme amount paid for the maintenance of your disabled dependent in case of your untimely death. 425

Disability Meaning: It means a person suffering from 40% or more of any of the below disabilities. A severe disability condition is 80% or more of the disabilities. Blindness and Vision problems   Leprosy-cured  Hearing impairment  Loco-motor disability  Mental retardation or illness Factors to Consider: The individuals would need to produce a copy of the disability certificate issued by central or state government medical board. Insurance policy should be in your name and made for life. It can pay either an annual or a lump sum amount for the benefit of the dependent on your death. If the disable dependent predeceases you, the policy amount will be returned to you and treated as an income, this fully taxable. Section 80DDB Medical expenses incurred for treatment of specified illnesses, could fetch you a tax benefit under section 80DDB. Deduction Available: For individuals who are lesser than 60 years of age a deduction limit of ₹40,000 is applicable. If you are a senior citizen above 60 years of age then there is a limit of ₹60,000. If you are …………………………………………………….. Who can claim? Tax deduction can be claimed by individuals for the expenditure made for treatment of self, spouse, children, siblings, and parents, wholly dependent on you. Covered Diseases:  Neurological Diseases (where the disability level has been certified as 40% or more).  Parkinson’s Disease  Malignant Cancers  Acquired Immune Deficiency Syndrome (AIDS)  Chronic Renal failure  Hemophilia  Thalassemia 426

Factors to Consider: If the insurance company, employer... have already made the reimbursement of the treatment cost then the deductions cannot be made. In the case of you receiving partial reimbursement the balance amount can be used for deduction. You need to submit the proof of specified ailment by giving a certificate issued by the specialist working in a government hospital. 427

Sub-Section 3.4 Taxation of various Financial Transactions 3.4.1. Transaction in the Nature of Gifts/Prizes/Winnings See chapter 2.5 3.4.2. Agriculture Income Agricultural Income – Section 2(1A) 1. Land must be situated in India, whether urban or rural 2. Even rent received for a land, which is being used by tenant for agricultural purposes, is agricultural income only. 3. Income derived from saplings or seedlings grown in a nursery shall be agricultural income, whether any process has been carried out on land or not. 4 Agricultural income is exempt for all assessees u/s 10(1). 5. Examples – agricultural income: seeds, flowers, vegetables, fruits, grains, pulses, cotton, bamboo. 6. Examples – non-agricultural income: breeding of livestock, poultry farming, fisheries, dairy farming 7. In case of a company which is engaged in agricultural activities, agricultural income shall be exempt u/s 10(1) for such company, but any dividend declared by such company shall be liable to CDT @ 15%. 8. In case of partnership firm engaged in agricultural activities, any salary and/or interest paid by such partnership firm to partners shall be treated as agricultural incomes in the hands of partners and hence exempt u/s 10(1). 428

Calculation of Tax Liability in Case of Agricultural Income Conditions 1. Assessee is an Individual, HUF, AOP/BOI, etc. (i.e. assessee taxable at the normal rate of tax applicable to an individual). (i.e. for firm, company, etc. agricultural income is fully exempt). 2. Non-agricultural income (i.e. total income) exceeds maximum amount which is not chargeable to tax (i.e. 2,50,000/3,00,000/5,00,000). 3. Agricultural income exceeds ₹5,000. 4. In case assessee does not satisfies any of the above conditions, then calculate tax on non-agricultural income as per normal provisions and such agricultural income shall have no treatment under Income-tax Act. 5. In case all the above said 3 conditions are satisfied, then calculate tax on assessee’s total income as follows: Calculation of Tax Liability Step 1. Aggregate agricultural income and non-agricultural income and calculate tax on that aggregate as per normal provisions of the act (i.e. LTCG @ 20%, STCG 111A @ 15%, winning from lotteries, etc. @ 30%, and balance @ slab rates applicable, etc.). Step 2. Aggregate maximum amount not chargeable to tax (i.e. 2,50,000/3,00,000/5,00,000) with agricultural income and calculate tax on that aggregate (i.e. aggregate @ slab rates, since no special income included) Step 3. Reduce amount calculated in step 2 from step 1 and balance shall be tax on total income of the assessee. Step 4. Subtract Rebate u/s 87A of ₹5,000 or add surcharge @ 15%, if applicable. For the purposes of rebate or surcharge, total income shall only be considered without adding agricultural income. Step 5. Add EC & SHEC on tax calculated in step 4 above. 429

Points to be Considered 1. Agricultural income shall be considered while calculating advance tax liability and interest u/s 234B & 234C. 2. Agricultural income shall in no case be included in total income. It shall be included only for the limited purpose of calculation of tax liability. Income which is partially agricultural and partially from business Business Business income Agricultural income Growing & manufacturing of Tea 40% 60% Growing & manufacturing of 35% 65% Rubber 25% 75% Growing & manufacturing of 40% 60% Coffee On the basis of market value of agricultural grown & cured produce, split the profits in two parts grown, cured, roasted & grounded Any other business e.g. potato & chips, sugarcane & sugar, tomato & tomato ketchup 3.4.3. Cash Payment Over a Specified Limit Section 40A(3) Where the assessee incurs any expenditure in respect of which a payment oraggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds ₹10,000, no deduction shall be allowed in respect of such expenditure. Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ₹10,000: 430

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds ₹20,000, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors : Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of this sub-section shall have effect as if for the words “ ₹10,000”, the words “ ₹35,000” had been substituted. Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft in order that such expenditure may not be disallowed as a deduction under this sub-section, then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner. 431

ANALYSIS 1 Rule 6DD – Cases and circumstances in which a payment or aggregate of payments exceeding ₹60,000 may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft No disallowance u/s 40A(3) shall be made and no payment shall be deemed to be the profits and gains of business or profession u/s 40A(3A) where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds ₹20,000 in the cases and circumstances specified hereunder, namely: (a) where the payment is made to - (i) the Reserve Bank of India or any banking company as defined in section 5(c) of the Banking Regulation Act, 1949; (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959; (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined u/s 56 of the Banking Regulation Act, 1949; (v) the Life Insurance Corporation of India established u/s 3 of the Life Insurance Corporation Act, 1956: (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; (c) where the payment is made by – (i) any letter of credit arrangements through a bank, (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; 432

(vii) a debit card. Explanation For the purposes of this clause and clause (g), the term \"bank\" means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949, whether incorporated or not, which is established outside India; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee (e) where the payment is made for the purchase of - (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed ₹50,000; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee - (ii) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship and 433

(iii) does not maintain any account in any bank at such place or ship; (j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. 2. Circular no. 10/2008, dated 05-12-2008 (1) The following clarifications are being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:— (i) The expression ‘fish or fish products’ used in rule 6DD(e)(iii) would include ‘other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.’ (ii) The 'producers' of ‘fish or fish products' for the purpose of rule 6DD(e) of I.T. Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc. (2) It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other middleman, by whatever name called. (3) The Board is of the view that the expression ‘the produce of animal husbandry’ used under rule 6DD would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted u/s 40A(3) read with rule 6DD. It is further clarified that exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called. (4) Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for 434

the purpose of the sub-section. The expenditure for purchasing the stock-in-trade is one of such outgoings. (Attar Singh Gurmukh Singh 1991 – SC) (5) Even if the payments were made by way of advances and were ultimately treated as discharging the liability to pay the price of the goods purchased, the payments so made must be considered to fall within the expression ‘expenditure’ incurred for payment of the price of the goods. (Kejriwal Iron Stores 1988–Raj.) (6) Where the payment was made partly in cash and partly by way of post-dated cheques, section 40A(3) will apply only if the cash payment exceeded the prescribed limit. (H.A. Nek Mohd. & Sons 1982–All.) (7) Section 40A(3) concentrates on the size of the payment and the manner of the payment. If different items are included in a single bill, it would not be right to dissect the bill and find out whether each item of expenditure is above the statutory limit; the proper way is to read the entries in a wholesome fashion. (Shree Shanmuga Gunny Stroes 1984–Mad.) (8) Irrespective of any number of transactions, where the amount does not exceed the above amount in each transaction, the rigours of section 40A(3) will not apply. (Triveniprasad Pannalal 1997–MP) (9) When income is estimated on gross profit rate, without allowing any deductions, there would be no need to look into the provisions of section 40A(3) and rule 6DD (Banwari Lal Banshidhar 1998–All.) 3. Circular No. 34 dated 5/3/1970 Question: Does the requirement apply also to loan transactions? Answer: No, because advancing of loans or repayment the principal amount of the loan do not constitute expenditure deductible in computing the taxable income. However, interest payments in amounts exceeding ₹20,000 in a day are required to be made by crossed bank cheques or drafts, as interest is a deductible expenditure. Question: Does the requirement apply to payments made by commission agents(arhatias) for goods received by them for sale on commission or on consignment basis? Answer: No, this is because such a payment is not an expenditure deductible incomputing the taxable income of the commission agent (arhatiya).For the same reason, the requirement does not also apply to advance payments made by the commission agent to the party concerned against supply of goods. However, where a commission 435

agent (arhatiya) purchases goods on his own account, and not on commission basis, the requirement will apply in that case. The provisions of section 40A(3) would apply in computing the income under the heads “Profits and gains of business or profession” and “Income from other sources” as per section 58(2). All payments in excess of ₹20,000 in a day whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3).However, the section will not apply to repayment of loans or payment towardsthe purchase price of capital assets such as plant and machinery not for resale. 4. Purchase of processed fish which is fresh fish meat obtained after removal of its inedible portions like head, tail, shell, etc., would fall within definition of ‘fish products’ under rule 6DD entitling assessee to get benefit of exemption from operation of section 40A(3). (Inters as, Sea Food Exporters 2010–Ker.) Mode of taking or accepting certain loans and deposits – Section 269SS No person shall take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through abank account if, - (a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or (b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or (c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),is ₹20,000 or more: Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by- (a) Government; (b) any banking company, post office savings bank or co-operative bank; (c ) any corporation established by a Central, State or Provincial Act; (d) any Government company as defined in section 617 of the Companies Act, 1956; 436

(f) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act. Explanation For the purposes of this section- (i) “banking company” means a company to which the Banking Regulation Act, 1949, applies and includes any bank or banking institution referred to in section 51 of that Act; (ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949; (iii) “loan or deposit” means loan or deposit of money. ANALYSIS 1. There shall be violation of section 269SS only if following conditions are satisfied:  Loan being taken is otherwise than by an account payee cheque or account payee bank draft  After including loan being taken with loan already taken & unpaid (if any), total amount repayable shall become ₹20,000 or more.  It does not matter how the original loan was taken. 2. Loan taken from 2 separate persons shall not be aggregated for this purpose. 3. In the present times many banking transactions take place by way of internet banking facilities or by use of payment gateways. Accordingly, it is proposed to amend the provisions of the said sections 269SS and 269T so as to provide that any acceptance or repayment of any loan or deposit by use of electronic clearing system through a bank 437

account shall not be prohibited under the said sections if the other conditions regarding the quantum etc. are satisfied. These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year2015-16 and subsequent assessment years. Mode of repayment of certain loans or deposits – Section 269T No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or depositor by use of electronic clearing system through a bank account if - (a) the amount of the loan or deposit together with the interest, if any, payable thereon, or (b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, is ₹20,000 or more: Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid: Provided further that nothing contained in this section shall apply to repayment of anyloan or deposit taken or accepted from - (i) Government; (ii) any banking company, post office savings bank or co-operative bank; (ii) any corporation established by a Central, State or Provincial Act; (iv) any Government company as defined in section 617 of the Companies Act, 1956; (v) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette. 438

Explanation For the purposes of this section - (i) “banking company” shall have the meaning assigned to it in clause (i) of the Explanation to section 269SS; (ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949; (iii) “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature. Penalty for failure to comply with the provisions of section 269SS – Section 271D (1) If a person takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner. Penalty for failure to comply with the provisions of section 269T – Section 271E (1) If a person repays any loan or deposit referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so repaid. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner. 3.4.4. Dividend and Bonus Stripping Provisions- Shares, MF Schemes Including with Reinvestment Option BOND WASHING TRANSACTION (1) Where the owner of any securities (in this sub-section referred to as \"the owner\") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of 439

this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person. Explanation The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired. (2) The provisions of sub-section (1) shall not apply if the owner proves to the satisfaction of the Assessing Officer - (a) that there has been no avoidance of income-tax, or (b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1). DIVIDEND STRIPPING (1) Where - (a) any person buys or acquires any securities or unit within a period of 3 months prior to the record date; (b) such person sells or transfers - (i) such securities within a period of 3 months after such date; or (ii) such unit within a period of 9 months after such date; (c ) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax. 440

ANALYSIS 1. Section 94(7) nowhere requires that securities/units shall be held as capital asset. Therefore, even if securities/units are held as stock-in-trade, section 94(7) shall apply. 2. For the applicability of section 94(7), all the following conditions needs to be satisfied: a) Purchase of securities/units within last 3 months of record date b) Receipt of dividend/income which is exempt c) Resale of securities/units within 3/9 months of record date d) There is loss on resale. 3. If loss on resale exceeds amount of dividend/income, excess shall be allowed to be claimed by the assessee. BONUS STRIPPING (1) Where - (a) any person buys or acquires any units within a period of 3 months prior to the record date; (b) such person is allotted additional units without any payment on the basis of holding of such units on such date; (c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of 9 months after such date, while continuing to hold allor any of the additional units referred to in clause (b), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer. 441

ANALYSIS 1. Section 94(8) applies only to units and not to shares. 2. Applies even if units held as stock-in-trade. 3. For the applicability of section 94(8), all the following conditions needs to be satisfied: a) Purchase of units within last 3 months of record date b) Allotment of additional units without any payment c) Resale of all or some of the units within 9 months of record date d) There is loss on resale e) Assessee continues to hold atleast 1 of the additional units on the date of resale. 4. If loss is treated as CoA of additional units, other provisions of capital gains shall apply accordingly specifically of indexation. Explanation For the purposes of this section, - (a) “record date” means such date as may be fixed by – (i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or (ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to section 10(35), for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be; (b) “securities” includes stocks and shares; (c) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred; 442

(d) “unit” shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB. (i.e. “unit” means unit of a mutual fund specified u/s 10(23D) or of the Unit Trust of India) Example R, an individual resident in India, bought 1,000 equity shares of ₹10 each of A Ltd. at ₹50 per share on 30.5.2019. He sold 700 equity shares at ₹35 per share on 30.9.2019 and the remaining 300 shares at ₹25 per share on 20.12.2019. A Ltd. declared a dividend of 50%, the record date being 10.8.2019. R sold on 1.2.2020, a house from which he derived a long-term capital gain of ₹75,000. Compute the amount of capital gain arising to R for the assessment year 2020-21. Answer The amount of capital gains arising to R has to be computed applying the provisions of subsection (7) of section 94, which provides that “where: (a) any person buys or acquires any securities or unit within a period of three months prior to the record date; and (b) such person sells or transfers - (c) such securities within a period of three months after such date; or (d) such unit within a period of nine months after such date; and (e) the dividend or income on such securities or unit received or receivable by such person is exempted, then the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purpose of computing his income chargeable to tax”. For this purpose, “record date” means such date as may be fixed by a company for the purpose of entitlement of the holder of the securities to receive dividend and “securities” includes stocks and shares. Computation of capital gains of Mr. R for the assessment year 2020-21 443

Particulars ₹₹ Long-term capital gain on sale of building 75,000 Less: Short-term capital loss on sale of shares 7,000 14,500 700 shares 7,500 60,500 300 shares Taxable long-term capital gains Computation of capital gain on sale of shares of A Ltd. by Mr.R Date of purchase of shares 30.9.2019 30.5.2019 Record date 700 10.8.2019 Date of sale of shares ₹35 20.12.2019 Number of shares sold Sale price per share 300 ₹25 Particulars ₹ ₹ 7,500 Sale consideration 24,500 15,000 7,500 Less: Cost of acquisition 35,000 Not Less: Dividend income as per section 94(7) [700×10×50%] [See 10,500 deductible Note below] 3,500 7,500 Short-term capital loss on sale of shares 7,000 Note: 1. 700 shares are sold within 3 months after the record date, hence related dividend income should be deducted from the loss as per section 94(7). 2. 300 shares having been sold after 3 months of record date, section 94(7) is not applicable. So, the dividend income of ₹1,500 should not be deducted. Such dividend is exempt u/s 10(34). 3. Short-term capital loss can be set-off against long-term capital gains as per the provisions of section 74(1)(a). Therefore, short-term capital loss on sale of shares can be set-off against long-term capital gains on sale of building. 444

Example Compute capital gains in the following cases- Name of the units-Growth units of PNI Mutual Fund (Face value: ₹10) Record date for allotment of bonus unit-December 5, 2019 (a person holding 2 units will get 1 bonus unit). X purchases 1000 above-mentioned units on October 1, 2019 at the rate of ₹23 per unit. On December 5, 2019 he gets 500 bonus units. Find out the tax consequences in the following different situations- 1. He transfers 800 original units on March 10, 2020 at the rate of ₹26 per unit. He does not transfer remaining original units and bonus units till the expiry of 9 months from the record date (i.e., September 5, 2020). 2. He transfers 800 original units on March 10, 2020 at the rate of ₹17 per unit. He does not transfer remaining original units and bonus units. 3. He transfers 900 original units on March 10, 2020 at the rate of ₹18 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 100 bonus units at the rate of ₹17 per unit. 4. He transfers 700 original units on March 10, 2020 at the rate of ₹14 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 400 bonus units at the rate of ₹13 per unit. 5. He transfers 400 original units on January 1, 2020 at the rate of ₹24 per unit. On March 1, 2020, he further transfers 200 original units at the rate of ₹19 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020).However, 200 bonus units are transferred on September 10, 2020 at the rate of ₹15 per unit. 445

Solution: Case 1 Case 2 Case 3 Case 4 Case 5 ( ₹) ( ₹) ( ₹) ( ₹) ( ₹) Original units (case of loss) - 13,600 16,200 9,800 3,800 - 18,400 20,700 16,100 4,600 Sale consideration - (-)4,800 (-)4,500 (-)6,300 (-)800 NA 4,800 4,500 6,300 800 Less-Cost of acquisition 20,800 - - - 9,600 Short-term capital gain 18,400 - - - 9,200 Short-term capital loss which cannot be adjusted against any other capital gain(a) Original Units (case of gain) Sale Consideration Less: Cost of acquisition Short-term capital gain 2,400 - - - 400 Units held by X after the 500 500 500 500 500 aforesaid transactions Bonus units (b) Nil 9.6 9.0 12.6 1.6 Cost of acquisition of bonus units (per unit) [(a)/(b)] - - 1,700 5,200 3,000 - - 900 5,040 320 Bonus units - - 800 160 2,680 Sale consideration Less: Cost of acquisition Short-term capital gain 446

SECTION-IV ESTATE PLANNING PROCESS, andSTRATEGIES TAXATION ASPECTS SUB-SECTIONS 4.1 Estate Planning Overview 4.2 Estate Planning Process 4.3 Methods of Estate Planning 4.4 Will 4.5 Powers of Attorney 4.5 Trust Structure for Efficient Transfer 447

Learning Objectives: On successful completion of this section, the student should be able to:  Explain what is meant by estate planning and the purposes that it serves.  Evaluate the value of client’s estate.  Understand the risk and drawbacks involved in estate planning.  Understanding the consequences of dying intestate.  Understanding how estate is settled if there is no will: The Hindu Succession Act and The Indian Succession Act.  Identify the client’s estate planning objectives.  Develop and evaluate estate planning strategies to create an estate plan.  Evaluate the advantages and disadvantages of each estate planning strategy.  Understand the various methods of estate planning such as Wills, Trust, Insurance, Gift, Power of Attorney and their use in estate planning.  Understand the characteristics of a will, types of will, how to revoke a will and the probate process  Describe the purpose of Power of Attorney (PoA), Types of PoA and how to revoke a PoA.  Describe the use of trusts as an estate and tax planning tool.  Demonstrate knowledge of trust taxation. 448

Sub-Section - 4.1 Estate Planning Overview Estate Planning prevents your lawyers from becoming your heirs –Edgar Watson Howe 4.1.1 The concept of Estate Planning Estate Planning is an integral part of the financial planning process. In simple terms, Estate planning refers to the preparation of plan for managing the accumulated assets of a person in the interest of the intended beneficiaries. In other words, Estate Planning is the process of arranging and planning for an individual’s succession and financial affairs ensuring that the estate of the individual passes to the estate owner’s intended beneficiaries. Wealth may be accumulated with a specific purpose of being passed on to heirs, to charity, or to any other intended purpose. Without formal structures that ensure that these purposes are met, there could be disputes, conflicting claims, legal battles, avoidable taxes and unstructured pay- offs that may not be in the best interest of the beneficiaries. Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the interest of the intended beneficiaries. What constitutes Estate? The term ‘estate’ includes all assets and liabilities belonging to a person at the time of their death. All the property that an individual owns is part of his or her estate. An estate can include jewellery, tools, cars, musical instruments, house, land, cash, bank accounts, stocks, bonds, life insurance policies, provident fund, recurring and fixed deposits and other items. This may include assets as well as claims a deceased is entitled to receive or pay. The term estate is used for assets whose legal owner has deceased, but have not been passed on to the beneficiaries and other claimants. Once transferred, the estate becomes the asset of a beneficiary who has received the legal ownership. Example: Rahul, an IT professional, owns a house worth ₹75,00,000. He has two cars value at a total of ₹10,00,000. He has himself insured his life for an assured sum of ₹1,00,00,000. He has also made investment in mutual funds which are currently worth ₹15,00,000. In the above example, Rahul’s estate in case any exigency with his life will be ₹2,00,00,000. 4.1.2 Purpose and Need of Estate Planning The primary purpose of estate planning is to protect, preserve and manage the assets. The objective of estate planning is to protect the emotional and physical well-being of loved ones by leaving a legacy of stability and security. Estate Planning helps accomplish a number of crucial objectives like: 449

 To preserve the assets that the client has spent a lifetime to build.  To distribute wealth in a pre-determined manner to the owner’s intended beneficiary or beneficiaries. Beneficiary can be children, parents, dependents, friends and/or any other individual.  To ensure the management of your Estate during and beyond your lifetime.  To eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses.  To ensure harmonious succession and disposition of the individual’s estate.  To provide orderly succession of business and thus ensuring the continuity of the family’s wealth across generations.  To protect one’s estate from creditors.  To provide the estate with enough cash and other liquid assets to pay debts, taxes and other expenses.  To provide for the guardianship of minor children upon death or incapacity.  To provide someone who will manage his/her assets upon death or incapacity.  To provide for a favorite charity. 4.1.3 Risks and Drawbacks Involved in Estate Planning If a person dies without making an estate plan, his property will be inherited by his heirs in accordance with laws of succession applicable to him. The end result may not be what the person would have chosen. If the dependents include minor or incapacitated children, more than one spouse, elderly parents or in-laws, or siblings and siblings-in-law, there may be disputes in distribution of property. Distribution of estate may also suffer due to lengthy legal procedures and administration costs. This could add both inconvenience and financial burden to the family. The prolonged dispute, legal battles and costs can be avoided through proper and timely estate planning. In the absence of an estate plan, the assets are distributed as per relevant laws of succession which might not be the way one would have envisaged. Moreover, considerable time, effort and money are expended in transferring the assets to the beneficiaries by way of succession certificates from courts. A succession certificate is issued and granted by a civil court to the legal heirs of a deceased person to realise the debts and securities of the deceased. It establishes the authenticity of the heirs and gives them the authority to have securities and other assets transferred in their names as well as inherit debts. It is issued as per the applicable laws of inheritance on an application made by a beneficiary to a court of competent jurisdiction. 450