HOW often have people planned a financial transaction meticulously — down to optimisation of tax implications, based on advice, hearsay or their own reading of the law — and then realised to their dismay that a minor detail or development having been overlooked, the entire dynamics changed significantly? Well, one can take heart from the fact that one is not alone in such a situation; many are the circumstances under which people have had to cringe at that one slip, before moving on to correction, defence or litigation.
Take, for instance, the lack of care to report appropriately the details of your income to your employer. You have moved, in the middle of a financial year, to a high-paying job, where taxes are withheld by your employer after taking into consideration the basic threshold for exemption.
That scholarships received are exempt from tax, and have been held to be so even where an employer grants scholarships to employees’ children, with no reference however, to the employment per se, is known. However, it is important that you ensure that the grant is clearly for defraying the cost of the scholarship and no part is seen as compensation for services rendered to the payer as that is not eligible for exemption. Also, such scholarships are subject to fringe benefit tax (FBT). Where the FBT element is passed on to the recipient, you could find to your disappointment, that you receive a sum less (by about 17%) than what you expect or need.
Economic slowdown — whether global, national or in a given enterprise — could see instances of salaries foregone. In such a case, it is worth remembering that salaries are taxable on a ‘due’ basis, whether paid or not, which suggests an obligation on the part of the employer to pay, and a right to the employee to claim the same. If due, any waiver of salary would tantamount to application of income, and therefore be taxable. Legal precedence suggests that a deduction is in order under genuine circumstances, and in the absence of any real income, one would do well to ensure that the salary is forgone before it actually becomes due else to pay taxes thereon would add insult to injury!
Interest on housing loans can be deducted from income from house property-in respect of self-occupied property, subject to a cap of Rs 1,50,000, and to the extent of actual outgo, otherwise. Where a person has two houses, and has the option to choose the one that would be self-occupied while the other would be treated as if it has been let.
A mistake people make is in borrowing in respect of the self-occupied property which restricts the deductible interest even while income from the other property is taxed for the whole year, without any deduction the reform. Leveraging the benefits of the interest deduction available with the use of property is therefore, important.
An expatriate, employed by a foreign company, working in India for say, less than six months, is generally given the impression that no tax is payable on account of short stay exemption available to him. Consequently, the relevant details relating to income attributable to the tenure in India are not specifically maintained. However, where the foreign employer, contrary to initial projections, creates a permanent establishment at a subsequent date, the employee becomes taxable in India. This exposes him to tax liability, interest consequences, not to speak of compliance requirements for him and his employer.
To take advantage of the rules relating to residence, where a person plans to leave India or in the case of the returning Indian, on the last day of the threshold period, his calculations could go awry if the passport is stamped after midnight, or there is an inordinate delay in the flight, and an entire additional day is counted. Despite legal precedence that could be relied upon in such a case, cutting things so fine could inevitably involve litigation.
You could be the happy recipient of gifted property held by your well-wisher for decades. Pleased at its high current value, you sell it for a substantial consideration. You need to now contend with the capital gains implications. While the law is clear as to the cost of the acquisition (cost to the donor), vis-à-vis indexation, the law speaks of the first year in which the asset is transferred to the assessee, or April 1, 1981, whichever is later. Despite decisions at the tribunal level, this has caused grief to some sellers, saddled with a low cost of acquisition, together with an unfavourable index, leading to high capital gains!
Planning does not necessarily preclude slip-ups. Nevertheless the name of the game is to strategise financial decisions as comprehensively as possible, obtain advice and be informed of precedents, not forgetting to hope that no legislation with retrospective effect spoil the theme!
