A well-planned sale of property could save you from hefty taxes. The first and foremost critical aspect while selling a house to be kept in mind is the time for which the property has been held. The period of holding determines the benefits that are available and the exemptions that can be utilized to eventually determine the tax outflow.
Property held for less than two years – tax implications
The sale value of the property, reduced by related sale expenses and cost of acquisition or improvement incurred is the resultant capital gains earned from the property. Such profit earned from the property which is held for less than two years will be subject to Short Term Capital Gains (STCG). The STCG on sale of the property is added to the total income of the seller and is taxed at normal slab rates applicable to such an individual. To understand better, those earning more than 10 lakhs a year would shell out 30% tax on such profits from the sale of property. Neither benefit of inflation index can be taken, nor any exemption for the investment of the profits be utilized to reduce the tax burden.
Property held for more than two years – tax implications
On the other side if the property is held for a period beyond two years the profit would be subject to tax at a flat rate of 20% after indexation. While computing such profits, the cost inflation indexation benefit would be given for the period held. Indexation takes into account the inflation for the period held and thereby adjusting the cost of acquisition.
Also, in case of longterm capital gains the seller can avail the various investment options available and claim exemption from payment of taxes. The various re-investment options available are as follows:
- Section 54 -Buy/ construct another house property
- Section 54 EC – Invest in specified Government Bonds
Exemptions and conditions
There are two exemptions which can be utilized by the person selling a house property to save himself from hefty taxes, they are as follows:
The Indian Trust Act, 1882, governs a Private Trust. Private trust is a vehicle through which property can be transferred from one person (owner) to another for the benefit of an individual or an ascertainable group of people.
A private trust is created for the benefit of specific individuals i.e., individuals who are defined and ascertained individuals or who within a definite time can be definitely ascertained. A family trust set up to benefit members of a family is the most common purpose for a private trust. The purpose of the family trust is for the settlor to progressively transfer his assets to the trust, so that legally the settlor owns no assets himself, but through the trust, beneficiaries get the benefit of these assets.
Private trusts can act an effective estate planning tool if you have a special child, a large business to be transferred to the next generation or a large estate to protect. Although the formation of a private trust resolves many issues, a lot needs to be considered in making a private trust, especially from the taxation point of view. As the income of a trust is taxed differently in different structures, careful planning is required to reap benefits without draining much money in the form of income-tax.
As the income of a private trust is available only to the beneficiaries, taxation is carried out according to the structure in which the income has been received.
From tax point of view, there are two structures under which the income of a private trust is taxed:
Specific trust: Here the income is received by the representative assesses on behalf of a single beneficiary. As the individual share of the beneficiary is known, taxation is done accordingly. For instance, it should be clearly stated in the trust deed that XYZ would get 50 per cent of the total income of the trust or the author’s son will draw the entire benefits from the trust.
Discretionary trust: With more than one beneficiaries, the individual shares are not known. Here the income of the trust is not received by a representative but determined by the trustees.
Taxability of Private Specific/Determinate Trust.
- Status of the Trust –would take the same status as the beneficiaries to the extent of their share
- Residential status of the Trust –would take the same status as the beneficiaries to the extent of their share
- Taxability in the hands of the Trustee or beneficiary? –in so far as the private non-discretionary trust is concerned, the shares of the real owners of the income i.e. the beneficiaries is known and therefore, the income can be taxed either in the hands of the beneficiaries directly or in the hands of the trustees in their capacity of representative assessee. However, there would be no double taxation. This has been clarified by the Board in Circular No. 157 dt. 26.12.1974.
- Taxability in the hands of the trustee – in a representative capacity u/s 161(1) r.w.s. 160 of the Act. Tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
The Supreme Court in case of Nizams (supra) has held that
“It is also necessary to notice the consequences that seem to flow from the proposition laid down in s. 21, sub-s. (1), that the trustee is assessable” in the like manner and to the same extent “as the beneficiary. The consequences are three-fold. In the first place, it follows inevitably from this proposition that there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though, for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee….And, lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly.”
- Benefits available –All the benefits, deductions or allowances which an individual beneficiary could have obtained are also available to the trustees assessed in representative capacity– for instance benefit u/s 54 of the Act. (See 237 ITR 82 (Bom) Mrs. Amy P. Cama, Trustee of the Estate of Late M. R. Adenwalla v. CIT)
- Rate of tax –If taxable in hands of the beneficiaries then the normal rates applicable to the beneficiaries. Similar position to apply even if tax recovered from the Trustee in representative capacity. Section 161(1A) states that, where the income consists of any profits or gains of business, then the same is to be taxed at MMR, subject to certain exception. Further, special rates as are applicable to special category of income like long term capital gain would continue to apply. [See in favour – Mahindra & Mahindra Employees’ Stock Option Trust  44 ITR(T) 658 (Mumbai – Trib.), Jamsetji Tata Trust v. JCIT  148 ITD 388 (Mumbai – Trib.). Against – DCIT v. India Cements Educational Society  46 ITR(T) 80 (Chennai – Trib.) and Companies Incorporated in Mauritius, In re  224 ITR 473 (AAR)]
Taxability of Private Discretionary Trust.
- Status of the Trust –would take the same status as the beneficiaries since the representative assessee has to be taxed in the like manner and to the same extent as per section 161 [See the judgment of the Apex Court in case of CIT v. Smt. Kamalini Khatau – 209 ITR 101(SC)]. Therefore, if all the beneficiary are of same status i.e. either individual or company etc. then the trustees would take the same status.
However, if the beneficiaries are carrying different status, then the status of the trustees cannot be determined. In such cases, the Courts have held that the trustees should be taken an assessable unit liable to be taxed as an individual (as discussed above).
Proviso to section 164(1) states that, in certain cases tax would be leviable as if it were the total income of an AOP. Proviso to section 164(1) only lays down that the rate of AOP would apply and it cannot be inferred therefrom that the trust would be considered as an AOP.
- Residential status of the Trust –would take the same status as the beneficiaries. If all are resident, the Trustees would be treated as a resident and vice versa. However, in case where some of the beneficiaries are resident and some are not, then determination of the residential status of the trustees is a grey area with no reasonable certainty. Though there are opinions to the effect that the residential status of the trustees would be taken into consideration, however, there is no or less legal backing.
- Taxability in the hands of the Trustee or beneficiary –
In so far as the private non-discretionary trust is concerned, the shares of the real owners of the income i.e. the beneficiaries is not known. Where the income of the trust accruing in a particular year is not distributed amongst the beneficiaries, one would not be aware about the income of any particular beneficiary. In such a case, the tax has to be paid by the trustee in representative capacity u/s 164(1).
In case where the income has been distributed to the beneficiaries, tax can be recovered from the trustee u/s 164(1). Further, in such cases, the Courts have held that the tax can be recovered from the beneficiaries also.
However, as already specified earlier there cannot be any double taxation.
- Taxability in the hands of the trustee –in a representative capacity u/s 161(1) r.w.s. 160 of the Act. Tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
- Benefits available – it will be difficult to argue that all the benefits available to the individual would be available to the trustee, unless any specific condition to claim the deduction etc. has been fulfilled on behalf of any specific beneficiary. However, since the trustee would be assessable as individual, all benefits so available to an individual would be available to the trustee.
- Rate of tax –
Section 164(1) states that the income of an indeterminate trust would be taxable at MMR. Though it uses the word ‘charge’, section 164 does not create a charge [See Kamalini Khatau (supra)].
Proviso, to section 164(1) provides for exceptions to the above rate of MMR and in case of such exceptions, the rate applicable to AOP would apply.
If tax is recovered from the beneficiaries, it is doubtful whether the rates as applicable to the beneficiaries would apply or whether MMR would apply in accordance with section 164(1).
Further, section 161(1A) which provides for taxation of business income at MMR, would equally apply in case of indeterminate trust.
Also, as discussed earlier, special rates as are applicable to special income like long term capital gain would continue to apply.
The various points to be kept in mind for tax planning purpose while opening a family trust are as follows:
- You must refrain from carrying out any business activity from the private trust.
- Ensure that the same set of beneficiaries are not created in more than one trust.
- If the trust is for your minor child or spouse, ensure that the funds are not through father/mother or husband/wife because in that case the income will get clubbed with them.
- Make private trust 100 per cent specific beneficiary for major son or daughter so that money cannot be misused by son in future or relatives of the daughter when she gets married.
1. Negligent Accounting Practices
Most entrepreneurs will admit that they are not expert accountants. Yet, these same entrepreneurs try to handle their finances in house. This costly mistake forces startup founders to focus their attention on things like payroll and bank reconciliation rather than solely focusing on how to grow their business.
A trained professional will ensure your records are up to date, record transactions properly, and keep track of your accounts receivable and payable. This will allow you to spend your time and resources into expanding your business.
2. Mixing Business and Personal Finances
One of the most common accounting mistakes business owners make is to mix their business and personal finances. Keep these separate and distinct to provide a more precise track record of what was really used for business and what was specifically related to personal use only.
3. Accounting Software
When searching for the best accounting softwares, startups should look for the ones that serve their business objectives, are affordable and are easy to use for them. A business accounting software keeps your data organized and provides you the relevant information whenever you need it.
Choosing a good business software is a tedious task as it involves a lot of research on your part. This selection can make or break a business, as an accounting solution helps small businesses to take informed decisions. Being an startup you wouldn’t want a complex solution for your accounting operation.
At present, a lot of accounting solutions are available in India like Zoho, Quickbooks, etc. in the online model and Tally ERP 9, Marg, Busy, etc. in the offline mode.
4. Poor Record Keeping
When you ask owners of startups what their biggest problem is for their tax preparation and bookkeeping, there is one common answer that you will likely receive — tracking small expenses and finding lost receipts/challans/counterfoils etc.
Accounting is very time-consuming. The majority of startup owners are busy with business development as well as other essential functions, so when it comes to recording transactions — they have a tendency to procrastinate.
Not having an efficient system for filing documents also results in receipts getting lost. Proper documentation is necessary for CA audits and to generate accurate financial reports. Installing invoicing software of having small lock-up boxes throughout your work area can make it convenient to scan and save important receipts. Also, take the time to do periodic accounting and bookkeeping.
5. Confusion between employees and contractors
Many owners of startup businesses view taxes as something that only occurs at the end of their fiscal year. However, that overlooks other critical tax payments.
The majority of small business owners are confused about payroll tax preparation. They don’t understand the differences between employees and independent contractors/ professionals. If you fail to accurately calculate and pay the taxes you owe, you can be held liable and also be charged expensive fines. These problems can be prevented by becoming knowledgeable about the tax laws that relate to your business or you can hire an accountant or tax service in order to prevent heavy fines and losses.
- The new section 206C(1H) of the Income Tax Act, 1961 has been introduced by the Finance Act, 2020 for Tax Collection at Source(TCS) on sale of goods.
- The provisions of this sub section is applicable and notified from 1.10.2020.
- The provisions of this sub section is applicable in following circumstances:
a) It is applicable to all the sellers who are engaged in sale of goods. The term “seller” has been defined in the act.
b) The term “seller” means a person whose total sales, turnover or gross receipts from the business carried on by him exceeds Rs. 10 crores during the financial year immediately preceding financial year in which the sale of good is carried out.
c) Thus, the sellers who had a turnover/sales/gross receipts exceeding Rs. 10 crores in financial year 2019-20 will be required to collect TCS in financial year 2020-21.
d) If any person has turnover/sales/gross receipts below the above mentioned limit then it is out of scope of the term ‘seller’, meaning thereby the provision of this sub section shall not be applicable on that type of assessee.
e) The applicability criterion for TCS has to be considered & checked for every year
4. The provision of this subsection will not be applicable in the following circumstances:
- This sub section is not applicable for export of goods & goods already covered under the existing provisions i.e., 2O6C(1), 206C(IF) and 2O6C(IG) governing TCS under chapter XVII-BB of the Income Tax Act,1961.
- 206C(1) covers alcoholic liquor, tendu leaves, timber, other forest produce, scrap, coal, lignite and iron ore. 206(1F) covers motor vehicle of the value exceeding Rs.10,00,000/-. 206C(1G) covers overseas tour program package.
- This subsection is not applicable in a case where value or aggregate value of sale consideration to an entity is below or equal to Rs. 50 lakhs during the year.
- This subsection is not applicable if the buyer is Central Government / State Government / Local Authority / an Embassy / High Commission / Consulate & the representative of foreign states.
- This sub section is not applicable on import of goods.
- This sub section is not applicable on a person who is notified by Government, (nothing is notified till date)
- This subsection shall not apply if the buyer is liable to deduct TDS under any other provisions of the Act on the goods purchased by him from the seller and he has deducted such amount.
- The rate of TCS will be 0.1% of the value or aggregate value of the sale consideration if the buyer furnishes the PAN/AADHAR and in other cases it shall be considered as 1% of the value or aggregate value of the sale consideration.
- However, for financial year ending 31.03.2021, the rates of TDS and TCS are reduced to 75% and therefore the rates will be 0.075% and 0.75% respectively.
- Every person who is collecting tax at source under this sub section is required to submit a quarterly TCS return in Form 27EQ. The TCS collected by the seller will be reflected in the Form 26AS of the buyer.
- The tax is to be collected at source from the buyer at the time of receipt of the amount from the buyer towards sale consideration.
- The TCS is to be collected at the time of receipt of the sale consideration. Therefore, it will be required to keep track of the receipt of sale consideration for the bills/invoices made after 01.10.2020.
- Though the provisions is effective from 01.10.2020, for calculating the Rs.50,00,000/- limit, sales of entire financial year will have to be taken into consideration.
- The TCS has to be collected only on the figure of sale exceeding Rs.50,00,000/-.
- The TCS amount collected after every month is to be remitted to the Government by 7th of the next month.
- Though TCS is collectible on receipt basis practically it would be prudent to mention the TCS as a separate line item in the bills/invoices.
- In the context of law, even on the advances received TCS will have to be collected.
The Annual General Meeting (AGM) due date for the financial year ended 31st March 2020 for all companies has been extended to 31st December 2020. A huge relief has been granted by the Ministry of Corporate Affairs by way of granting an extension of 3 months for holding the Annual General Meetings. Companies with the AGM due date of 30th September 2020 can conduct their AGM by 31st December 2020. The company is not required to file a separate application in form GNL-1 for an extension.