Tax Implications And Calculations

Tax Implications and Calculations Wednesday,11th July 2007 Buying a home, especially with a home loan, has huge tax implications for the homebuyer. An overview of the tax laws and how they they impact the homebuyer No matter how much you write on the subject of Income Tax, the subject remains as complicated as ever before. Hence, here, the aim is to be as concise as possible without making the issue too complicated. However, this is just for a broad level understanding of the subject. For taking any decisions it is recommended that you take the advice of a qualified tax practitioner. There are 4 things that you need to understand to get a fundamental knowledge of Income Tax. These are: Taxable Income Income is taxed under 5 basic heads: Salaries - Income is calculated under this head after allowing for deduction of profession tax paid. Income from House property - Income is calculated under this head after allowing deduction for interest paid on loans taken for acquiring the property and a standard deduction. Capital Gains - The capital gains earned after deducting the cost of acquisition and improvement of the asset is chargeable under this head. Profit and gains from Business or Profession - The profits earned from a business or profession after deducting the expenses incurred from the gross income of a business are taxable under this head. Income from other Sources - All items of income not covered in the above four heads are chargeable to tax under this head after deducting expenses incurred in earning those incomes. One important thing to remember is that calculation of income under any head (except Salaries) can result in a loss (if expenses are more than the income). Generally speaking, if you leave out Income under the head "Capital Gains" and

Income from speculative businesses the losses from one source of income can be set off against the income calculated from another source under the same head or another head of Income. Loss under the head "Profit and Gains of Business or Profession" is not allowed to be set off against salary income. Thus any loss under the head "Income from House Property" can be set off against incomes shown under the head "Salaries" or "Profit and Gains from Business or Profession". The aggregate of the income from all these sources put together (after adjusting losses, if any, as mentioned above) constitute "Gross Total Income" or "GTI". Deductions from Gross Total Income • •

1. 2. 3.

1. These are deductions available from your GTI. The deductions are available from Gross Total Income for certain kinds of income/expenses. Some examples are: 2. Investments made in life insurance policies, or contribution made by you towards the employee provident fund or investment in PPF, or for repayment of capital portion of the home loan to Banks/employer companies, investment in infrastructure bonds, investment in notified schemes of mutual funds, contribution to the pension scheme of the central government, tuition fees paid for your children etc. (Section 80C, 80CCC and 80CCD) Expenses on Medical policies (section 80D), Interest on education loans (section 80E) Donations to recognized charitable bodies (section 80G and section 80GGA),

The Total Taxable income or TTI is calculated after deducting these items from your GTI. Exemptions These are incomes that are not chargeable to Income Tax at all. That means that they do not, ab initio, form part of your taxable income. Some examples are From Salaries: House Rent Allowance/Leave Travel Allowance/Conveyance Allowance, which is exempt to the extent provided in the Act and rules. From Income from other sources: Income on RBI Tax Free Bonds, Interest on Public provident fund, gifts received from specified relatives or on the occasion of marriage (from anyone) or under a will, etc. Thus these incomes do not form part of your GTI at all. The Tax payable is calculated based on the TTI based on slabs which are well known. There is a surcharge of 10% if the TTI exceeds Rs. 10, 00,000/-. In all cases there is an education cess of 2% of the tax payable (including the surcharge, if applicable). The calculation of tax payable by you can therefore be summarised as under:

CALCULATION OF TAX LIABILITY A

Income from Salary Income from house property Profit or gain from business or profession Income from capital gains Income from other sources GROSS TAXABLE INCOME (GTI)

B

DEDUCTIONS (SEE BELOW)

C

TOTAL TAXABLE INCOME (A-B)

D

GROSS TAX LIABILITY

E

REBATES

F

D-E Surcharge, if applicable and Education

G

Add: Cess

H

NET TAX LIABILITY (F+G)

EXEMPTIONS - FIGURE A

Section

Particulars

Exemption Limit

10 (1)

Agricultural Income

No Limit

10 (5)

Leave Travel Concessions

Actual Travel Exp. Subject to Max. Limit.

10(10)

Death cum Retirement gratuity

Specified Limit

10(10A)

Payment of Commutation of Pension

Specified Limit

Payment of Leave Encashment

Specified Limit

Payment received under VRS

Specified Limit

10(10AA)

10 (10C)

10(10D)

Sum received under Specified types of Life Insurance Policy including Bonus

No Limit

10 (11)

Payments from Statutory P.F. or Public Provident Fund

No Limit

10(16)

Scholarship Granted to meet Cost of Education

No Limit

10 (34)

Dividend paid by Domestic Company

No Limit

Income in respect of Units of UTI / Income in No Limit respect of Mutual Funds Gifts received from specified relatives or from 56 (2) (v) anyone on the occasion of your marriage or under No Limit a will or inheritance 56 (2) (v) Rs. 25000/- per Other sums of money received as Gift annum 10 (35)

DEDUCTIONS - FIGURE B

Section 80 C

Qualifying Payments / Conditions / Income Incidents Life Insurance premium Cont. to Provident Fund Cont. to Superannuation Fund Cont. to Public Provident Fund Cont. to Regional Provident Fund Specified Deposit in Post Office Saving Bank Unit Linked Insurance Plan of UTI etc. Subscription to NSC Notified Mutual / Pension Funds Education expenses for any two children Purchase of Units in Mutual Fund in specified ELSS Repayment of Housing Loan Principal amount Maximum Limit of Investment in Infrastructure deduction is Rs. Bonds 100000/-.

80CCC

80CCD

Payment made to LIC or other Insurance Companies under Approved Pension Plan

Employer/Employee Contribution to Pension scheme of central government

1. Pension Received is Taxable 2. Amount withdrawn is Taxable 3. Maximum amount deductible under this section is Rs. 10000/Only for central government employees Limit of 10% of basic salary (plus DA in some cases) each for employee contribution and employer contribution

Total deduction under section 80C, 80CCC and 80 CCD put together cannot exceed Rs. 100000/-. So if full deduction is claimed under section 80C no further benefits are available under section 80CCC and section 80CCD

80D

Premium paid for approved Insurer for its

1. Self, Spouse, Dependent Parents / Children

Mediclaim Scheme/Critical illness Rider on

2. Payment should be made by Cheque.

Life Insurance Policies

80DD

Expenses for Medical treatment, Training & Rehabilitation of dependent with disability.

3. Max Limit Rs.10,000 / 15,000 for Senior Citizen 1. Certificate from Medical Authority required 2. Max Limit Rs.50,000 for Ordinary Disability Rs.75,000 for

Severe Disability 80DDB

Amount paid for Medical 1. Self and Dependent treatment of specified 2. Certificate from Disease or ailments. Medical Authority required. 3. Max Limit as in 80DD

80E

Interest on Loan taken for Higher Education

80G

Donation for Charitable purposes

80GGA

80U

Income of person with Disability (Defined u/s 2(I) of PDEOPRFP Act

1. Available for 7 years from year in which repayment of loan starts.

1. Donation should not be in Kind 2. Amount of Donation not to exceed 10% of GTI 3. 50% Generally / 100% in case of PM Relief Fund etc. 1. Certificate from Medical Authority required 2. Max Limit as in 80DD

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Glossary Wednesday,11th July 2007 NO, AC does not mean an air-conditioner; neither does FI stand for something like Formula - 1 in the home loan parlance. Here is a list of words, with their meanings, that could baffle you otherwise...

AC - Additional Charges (AC) are levied by HFIs that are over and above the

AF- Administrative Fees (AF) is charged by a HFI on the loan amount sanctioned to you. This fee is normally payable at the time of accepting the offer letter. It is charged mainly to meet the operating expenses of the loan amount for the entire tenure. The expenses for technical site visits made to the property are also covered under this fee.

DAS- Deduction Against Salary. This is an arrangement when a salaried employee asks his employer to deduct the instalment from his salary and pay it to the financier. This is done with the mutual consent of the employer and the financier. Some HFIs offer better rates for customers who are employed in organizations where the HFI has a DAS arrangment.

DMA/DSA/ Franchisee - Direct Marketing Associate / Direct Sales Associate. This is an agency of a financier which takes care of customer sales and service. Most car financiers do not have their field sales force as this is handled by the agency. They are authorised by the financiers. [Top] DPC - Delayed Payment Charges. It is the penalty for delay in paying the instalments. [Top] EMI - Equated Monthly Instalment. This is the instalment and which is payable every month and is a fixed amount payable every month.

DPC- Charges on the DPC in case of a further delay on your part to pay the installment due are termed as Additional Charges.

EMI Break up - The EMI is broken up into principal and interest. This break up of the EMI is never constant and keeps changing from month to month, year to year. However, the EMI remains constant over the tenure of the loan.

FCNR - FCNR refers to Foreign Currency Non-Repatriable account. This is a Fixed Deposit Foreign Currency account and not a savings account. Deposits in this account can be made in any of the five currencies - US Dollar, UK Pound, Deutsche Mark, Japanese Yen and Euro.

FI - Stands for Field Credit Investigation or plain Field Investigation - most financiers appoint an outside agency, who authenticates the identity of the client and confirms his place of residence and office address.

FOIR - The Fixed Obligation to Income Ratio (FOIR) is similar to the IIR as detailed above. The difference in case of a FOIR is that in FOIR calculation, the HFI takes into account the installments of all other loans previously availed including the Home Loan applied for. In other words, this ratio includes all the fixed obligations that you pay every month. The Fixed Obligations however, do not include statutory deductions like PF, Profession Tax, etc. and deductions for investment like Voluntary PF, LIC Premium, Recurring deposit, Contribution towards society, etc.

FSI - Floor Space Index or FSI as it is more popularly known as refers to the ratio of the Built up area of a property to the area of the land on which it is built. An FSI of 2:1 would mean that the total built up area of the building can be equal to twice the area of the land on which it is being built.

HFI - HFI stands for Housing Financial Institution and covers banks, corporates and financial institutions that offer Housing Loans. [Top] IC - Incidental Charges (IC) are levied by some HFIs for visits made by the collections team to the customers houses who have delayed the payment of installment. IIR - The Installment to Income Ratio (IIR) is a term very commonly used by HFIs to calculate your loan eligibility. It is generally expressed as a percentage. This percentage denotes the portion of your monthly installment on your Home Loan. This figure is normally pegged at 40% but can vary on the basis of actual salary details, qualifications, employer / business, years of experience, growth prospects and sources of other income. For Example : if IIR is 40% and your Gross Income is Rs. 10,000/- per month, then as per the IIR ratio you will be eligible for a loan where the installment does not exceed Rs. 4,000/- per month (40% multiplied by Gross Monthly Income)

LTV / LCR - LTV stands for the Loan to value ratio while LCR stands for the Loan to cost ratio. They are terms used by various HFIs to signify the loan amount that a person is eligible for on the total cost of the property. There is a limit on the maximum loan amount that a person can get for a property irrespective of the loan eligibility.

NeAR - Net Effective Annualised Rate. This is the net rate paid by the client after taking into account all discounts, other charges paid, subventions, advance instalments and is the rate to be used for evaluation of two or more offers.

NOC - This is a document required by all HFIs from the concerned authority in cases where you are not the owner of the land in which your property is being built. The authority depends on the type of property i.e. society if the society has been formed

and conveyance deed executed. Builder if it is purchased from a builder directly or if the society has not been formed. Development authority if the property has been directly allotted by a development authority, etc. However, if the customer is building a property on a plot of land that he owns, a NOC is not be required.

NRE - NRE or Non-Resident External Account refers to a savings or a Fixed Deposit account held by a Non-resident Indian in a bank in India. This account can be jointly held with an NRI only. The interest income is totally tax free and the principal and interest are fully repatriable in any of the five currencies - US Dollar, UK Pound, Deutsche Mark, Japanese Yen and Euro. This is also a rupee account.

NRNR - NRNR refers to Non-resident non-repatriable account. The is a Fixed Deposit Rupee account and cannot be a savings account. The interest earned in this account is repatriable in any of the five currencies - US Dollar, UK Pound, Deutsche Mark, Japanese yen and Euro.

NRO - NRO or Non-Resident Ordinary account refers to the savings or Fixed Deposit account of a Non-resident Indian in a bank in India. This is a Rupee account. Interest earned in this account is taxable. The account can be jointly held with a resident Indian. The principal and interest in this account are non-repatriable.

PDC - Post Dated Cheques. These are issued in favour of the financier for repayment of loan.

PEMI - This refers to the Pre EMI that you pay when your loan is partly disbursed. In Home Loans, the disbursement is made as per the stage of construction of the property. When your loan is partly disbursed, you cannot start paying your EMI. Instead you pay simple interest on the part amount drawn by you at the rate that is applicable to you. This is called a PEMI.

PF - Processing fees (PF) is charged at the time of submission of the application form and covers expenses incurred for processing the application form. This fee has to be paid upfront by the customer.

PPC - Pre Payment Charges or PPC as it is known stands for the charges that you incur when you pay back the loan before the completion of the tenure. PPC varies

from one HFI to another. It is either a percentage of the loan amount being prepaid or a flat value based on the amount of prepayment.

ROI - Rate of Interest or the ROI as it is more popularly known refers to the rate of interest charged by the HF on your loan. It is the rate at which you pay interest on the loan that you availed.

Framed construction / RCC - This is a type of construction which is most commonly used by developers for construction of their project. This indicates that the entire load of the property rests on the slabs and columns that are constructed with the use of reinforced concrete. When all the slabs and the columns of the construction are cast, it is called as the RCC structure or skeleton structure.