Earn more return through Tax Arbitrage

What is Tax Arbitrage?
The difference in tax rate due to various reasons on similar investments is tax arbitrage. That means two or more types of investments are earning similar rate of returns whereas you are paying more tax on one type as compared to other types.

How do you gain?
You will gain if you choose the lower taxed investment. However, the savings could differ from one individual to another depending upon which tax slab your income falls in. For example if your income is falling in highest tax bracket i.e. 30%, you may gain more as compared to others whose incomes are lower and fall in lower tax brackets of 20% or 10%.
That gives you all the more reason to read this carefully and implement for yourself.

Where is this arbitrage available and how to make use of that?
If you invest your funds in bank FDRs which is earning an interest of 8.5% p.a.and if you are taxed at 30% the net return on your would be calculated as => 8.5% minus tax i.e. 30% of 8.5% = 8.5% minus 2.55% = 5.95%. You may be surprised but this is the net rate of return which you are receiving currently.

Now the question is - how this return can improve?
There are similar variable interest bearing instruments called Debt / Liquid Mutual Funds which earn similar returns as compared to FDR but are taxed at much lower rates if the funds are invested for more than a year. The sample calculation of return from a debt fund is as under:

Gross Gain on Debt / Liquid MF earned in a year = 8.5%
Capital Gain on Debt MF would be calculated after indexation of purchase cost, if sold after a year as this is treated as Long Term Capital Gain (This is not taxed as interest)
This gain after indexation would be either zero or negative and there would be nothing to pay tax on.

Hence the Net return on Debt MF, if growth option is chosen = 8.5% p.a.
The growth option does not give your earnings in instalments and is paid to you at the time of closure / withdrawal of the fund. You may choose dividend payouts also, but the tax arbitrage is not applicable as the dividend is taxed at a higher rate.
Additionally, if there is any long term capital loss as calculated above, the same can be used to set off other capital gains (non STT paid) and can reduce your tax liability further.

In case, there is any gain after indexation as calculated above (though the chances are almost zero in the present infaltion situation), it would be very less and the tax would be payable on that @20% regardless of your tax slab and therefore the return would be high as compared to FD.

How safe are Debt / Liquid MF  as compared to FDR?
This is almost as safe as FDR and can be relied upon.

Additional Advantage in cash flow planning?
This offers additional advantage when you are unsure of the period for which the money can be spared for investment by you / you are saving for some specific objective in mind such as purchase of car / house / marriage / education of children etc. and not sure when you may need the funds. In FDR the return is linked to period of investment which is high if the period is 1 or more years and could be as low as 6% if the period is less e.g. 3 months or so and if you pre-mature your FDR, there is a interest rate penalty which reduces the return.
In Debt / Liquid funds, the return is earned daily and would not vary due to period / duration of investment. Therefore, if you plan to keep your money for undefined period, the rate would not be affected much due to this inability to predict the duration of investment.


Needless to mention that you can now call your MF agents if any and learn about these even more.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Have you received a Notice of Income Tax Demand?

As explained in the previous blog, if there is any difference in the tax as per ITR filed by us and the calculations made by CPC / Income Tax officer while processing the ITR, the same is intimated to us vide intimation u/s 143(1). If this difference results in some tax payable by us, this is called Income Tax Demand and a notice u/s 156 may be issued. Even intimation u/s 143(1) is sufficient for you to get alert and understand that some additional tax liability has arisen.

Now, what should you do when a Demand of Income Tax has been ascertained and communicated?

No need to panic as this can all be corrected if there is a mistake!

You need to first read the intimation line by line, compare with the ITR filed and try to understand the cause of demand. The demand is generally due to following reasons:

a) Credit for TDS / Advance Tax paid by you / on your behalf is not allowed by CPC
b) Difference in interest payable calculated u/s 234A, 234B and 234C as compared to interest calculated by you
c) Some income has been taken twice / wrongly by CPC
d) Some deductions u/s 80C / other chapter VIA deductions are not allowed by CPC


What should be done if the demand is incorrect / is the result of some mistake by CPC?

If the demand is due to error in processing of ITR by CPC, you should file a "Rectification Request u/s 154". This should be filed online for all ITR filed online. There is a comprehensive procedure for doing this and you have to select the reason of error from the drop down lists and file it.

This Rectification Request is processed by CPC and the error should get corrected in due course of time. This is communicated to you by a order u/s 154.

If the error still persists / is only partially corrected, you may file Rectification Request once again following the same process.


What if there is no error in the order and Demand is actually payable?

If you are satisfied with the order and accept that the demand is payable, you may pay this through challan ITNS280 as per order. The payment should be done under the Type of Payment "Tax on regular Assessment (400)".


Is it enough to just pay and relax or what should I do further to ensure that it is nullified in IT records?

The demand once paid should be intimated to CPC by filing a Rectification Request online and mention the challan paid. This should be ensured that all the challans paid including the ones paid by you earlier for this assessment year as advance tax / self assessment tax should be mentioned here.

The other alternative is to file a letter with your assessing officer mentioning the details of demand raised and the challan paid and get the acknowledgement.

Both should result in nullifying the demand.

I hope the demand notices will not give you sleepless nights now.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Are you done with filing? Is it complete yet?

I hope most of us who were to file their ITR in Jul would have done that or would be doing that in next couple of days as the date is extended to 5th Aug. But is your filing really over at uploading the ITR on Income Tax website (which we commonly know as e-filing now). The answer is "No".

What is left then if this uploading does not complete the filing process?

The uploading of ITR only completes part of the obligation. The ITR ones uploaded generates an Acknowledgement "ITR V" which needs to be printed and signed within 120 days of uploading it and to be sent physically (not scanned) to CPC, Bangalore at the address mentioned in the ITR V itself. If this does not reach CPC within 120 days, the return uploaded becomes invalid and is treated as if it is never filed.


Does this sending completes my part of work or it gets completed when it reaches CPC?

Since it is sent through post and CPC handles bulk, the chances of this getting lost somewhere in the process exist and you need to track this till it reached CPC, Bangalore and a confirmation is issued by them. This can be checked online in your e-filing login. Now, CPC sends confirmation through SMS and e-mails both. If it does not reach, even if you have sent it, you may have resend it and track it till receipt is issued by CPC.


Is it over now, after receipt is issued by CPC?

Yes, the filing process is over and now you can wait for your refund / confirmation that there is no demand from CPC which takes few months. CPC processes these ITRs filed by you and confirms if the ITR filed is accepted by them as it is / some changes are made by them.
An intimation u/s 143(1) is issued by CPC after it is processed which has 2 columns - 1 shows the numbers as mentioned by you in your ITR and the other mentions the numbers as calculated by CPC. If both are same, it is accepted as it is, but if CPC has calculated separate numbers, there is some issue and you may have to get that corrected / pay extra tax as demanded by CPC in the intimation u/s 143(1).

How to get the demand rectified if there is any mistake in CPC calculations, we shall discuss in next blog.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

31st July deadline for filing ITR - how relevant

What is the significance of this buzz about filing ITR by 31st July? Is it the last date? All of us face many such questions and are puzzled that if we do not file ITR by 31st July, what will be the implications. Here is a summary.

To whom this due date is applicable?

So far as individuals are concerned, this date is the specified due date for those who have income other than income from partnership firms as partners and should be complied with so far as possible.

What if you cannot file due to some reason? 

The implications of non filing are :

1. If some tax is payable even after deduction of TDS / payment of advance tax by you, penal interest would be charged @1% p.m. from the due date of filing to the actual date of filing. This interest u/s 234A is in addition to interest already being charged for short payment of TDS / advance tax u/s 234B and 234C.

That means if no tax is payable and entire tax liability is discharged either through TDS or through advance tax, there is no issue except the one mentioned below.

2. The ITR can be filed even after 31st July due date but this would be considered "Late or After Due Date" and this Late ITR cannot be revised if you identify some income is misreported / not reported.

3. There is another implication that if you have any loss under any head of income such as Business Income, Capital Gains etc., and if you fail to file return before 31st July, the loss cannot be carried forward for set off against income of future years.


Hope this enables you to take informed decision about the pressure which you should take to file it by 31st July.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Understanding PAN - Addendum

This is important and I think all must know this specially those who are new to Tax.

What happens if you do not have the PAN and your tax is deducted. 

If you do not have PAN but your tax is deducted, the rate of Tax deduction would be @20% regardless of your income slab or the nature of income.

That means if your TDS is deducted on income such as salary, interest, professional fees etc.and you do not have  PAN, the rate of TDS would be 20% on the total amount.

This is regardless of the prescribed rates for deduction of TDS, if you have PAN. The rate of TDS for interest income is 10%, professional fees is also 10% whereas for salary it is calculated as per income tax slabs and is lower than 10% for salaries upto Rs.8,50,000/- generally.

The other big disadvantage is that you cannot get the benefit of this TDS as the credit does not reach your account in absence of PAN.

Even if you feel that the TDS is more, you should get the credit by giving your PAN and get the refund from IT department when you file your ITR.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Housing Loan Benefits under Income Tax

I assume those who have taken housing loan would have considered the tax benefits while taking the decision to buy the house through loan. Still, I feel there are some issues which are ignored causing claim of wrong deductions in ITR. Let us understand those issues.

What is allowable as deduction?

The allowable deductions under 2 different sections are:

1. Housing loan Principal repayment can be claimed u/s 80C (commonly known as 1 lac saving). The limit of course is Rs. 1 lac maximum.
EMI has 2 components - Principal i.e. the loan itself and Interest thereon. Usually the interest is higher in the initial years of payment and decreases over the years and the principal amount is lower initially and increases gradually.

2. Housing Loan Interest can be claimed u/s 24 upto a maximum of Rs. 1.5 lacs (Rs. 30K if the loan is received prior to 1-4-99) if the house is self -occupied (i.e. you / your family is staying in this). What if you are not staying in this? Even then this is considered as self-occupied, if you have only 1 house and not rented this out.

3. There is no limit for claiming interest u/s 24 if the house is rented out.

What are the prior conditions for claiming these deductions?

1. First condition is that the possession of the house should be received in the financial year in which the deductions are claimed. If the housing loan is received in year 1 and the possession is received in year 2, the Housing Loan Principal cannot be claimed at all. Whereas the Interest can be accumulated and all interest upto the date of possession can be claimed in next 5 financials years in equal installments in addition to the interest paid during these 5 financials years. This is subject to the limits of Rs. 1.5 lacs (or Rs. 30K) in case of self-occupied property.

2. Deductions are available only if it is actually paid and cannot be claimed if you have not paid the EMI i.e. in case you have defaulted / delayed some payments, the deduction is available only to the extent of amount paid.

3. Housing loan deduction are claimed and HRA deductions also availed. This can be claimed only subject to certain conditions if the house for which you are paying rent for claiming HRA benefits and the place of your own house for which the housing loan benefits are claimed are in the same city. It can be claimed without any issue if both the house as mentioned above are in different cities.

Common mistakes in claiming deductions

1. The deductions are claimed even if the possession is not received. This is incorrect and should not be availed.

2. The HRA deductions and housing loan both are claimed without fulfilling the condition mentioned above.

3.  Joint housing loans payments are claimed by both the borrowers fully.Ideally it should be split in the ratio of payments made by each party or it should be claimed 50% by each party. In any case it should not exceed 100% of the payments made. That means no double benefits for the same amount.

4. Interest benefit is claimed only to the extent of Rs. 1.5 lacs even if the house is rented out. There is no limit for claiming deduction u/s 24. The calculation has to be done as per the Income Tax provisions.

Hope this given you enough idea to avoid these mistakes as these may haunt you in case your case is selected for Income Tax scrutiny.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Form 26AS and issues related to Tax (TDS) credit

What is Form 26AS. I think those who are already filing ITR must be knowing about this and its importance.  Still, a small introduction would not be out of place before I start on the issues relating to this.

What is Form 26AS?

Form 26AS is a tax credit statement which is linked to your PAN. All the Income Tax paid by you or TDS deducted by your employer, bank or any other person on your behalf gets reflected in this. This is like a Passbook of your Income Taxes paid.


Why is this so important to check this before filing ITR or periodically?

As I mentioned Income Taxes paid by you or on your behalf must get reflected in this statement as these would be used for settling your Income Tax liability at the time of filing your ITR. That means if some credit of tax paid is missing from this, the Income Tax department while processing your ITR would not accept that credit and may ask you to pay more tax.

This is extremely important and this statement is checked at the time of filing your ITR to make sure that the entire Income Tax paid by you or TDS deducted by your employer (reflecting in your Form 16) should appear in Form 26AS.

When should I check Form 26AS?

It is updated quarterly based on the TDS statement filed by your employer / other party. It  is typically updated by the end of 1 month from the end of each quarter i.e. for Apr-Jun quarter, it should be updated by 31st July. However, there could be delay of "Few Days" as there are processes involved on part of IT Department. Delay should not be of months. If Form 26AS is not updated within 2 months of the end of quarter, you should get alarmed.

Finally, it should be checked around end of June after the close of Financial year as the last quarter TDS is updated by end of June and also because you need to file your ITR in Jul.

What should I do if TDS credit is not updated in my Form 26AS?

If TDS credit is not updated in your Form 26AS within the time as mentioned above, you should approach your employer / other party deducting TDS to mention that your tax credit is not reflecting in your Form 26AS. This could be because of the following reasons:

• Your PAN is not correctly mentioned by employer / other party deducting TDS in the quarterly TDS statement filed by them. 
• Your credit is given to some other PAN by mistake in the quarterly TDS statement.
• The TDS is not paid by employer / other party deducting TDS. They are supposed to pay TDS deducted by 7th of following month in which the TDS is deducted.
• Other mistake in quarterly TDS statement filed

What is the remedy?

When you approach the employer / other party deducting TDS, they must get the cause of non credit verified and get the quarterly TDS statement revised to make sure that the TDS credit is allowed to you. This may require some persuasion and follow up on your part to make sure it is done.

What if the employer / other party deducting TDS does not do so?

The first implication is that in case you have filed your ITR based on Form 16 issued (in which the tax credit is reflecting), the IT department will raise a demand of Income Tax on you for the credit which is not reflecting and they may charge interest on this Income Tax also.

If the employer / other party deducting TDS fails to rectify your Form 26AS, you may approach your Income Tax assessing officer and also the TDS assessing officer by writing to them about this default. This may help but may not necessarily work. 

You may also consider some legal recourse against the defaulter.


Hope this gives you enough idea about making sure that you do not end up paying Income Tax twice because of your ignorance and the default of others.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Basics of Filing Income Tax Returns

I felt there could not have been a better time to write this blog as the time for Income Tax return filing for Salaried individuals now and here. (31st July is the due date of filing return)

Let us understand first WHO is liable to file a Income Tax Return (ITR) as per Indian laws and we would understand this in the context of a Salaried Individual.

1. Those who have taxable income of  more than Rs. 2 lacs in a financial year (you may check Serial No. 11 of Form 16 "Total Income ") for the purpose of this. This income is after allowing you various deductions (u/s 10, 24 and Chapter VI of the Income Tax Act).  Hence, if this Serial No. 11 is below Rs.2 lacs, you are not liable to file return.
Financial year in India starts from 1st April every year and ends on 31st March of the following year. For example current Financial Year started on 1st April 2013 and would end on 31st March 2014)

2. Now, there could be case when you have earned less that Rs.2 lacs but the Income Tax (TDS) has been deducted because of some reason by your employer. Should you file ITR in this case. The liability to file ITR does not arise as per above, but to get the extra tax refunded by Government (IT Department), you must file ITR and get your TDS back. (will explain the process of filing and getting refund also later in this blog)

3. There could be scenario where you have earned Income as per Form 16 below Rs.2 lacs but you have also earned Interest Income from bank FDR, savings bank account etc. and the total of these exceed Rs.2 lacs, you must file ITR in such a case after paying taxes due on your Total Income (Interest income + Salary Income).

4. There could be a scenario where you have earned income from more than 1 employer during the year and your income from both Form 16 (S.No.11) exceed Rs.2 lacs. Even though , there is no TDS deducted by either of the employers, you must pay your taxes and file your ITR. I feel, you must take help of a professional in this case unless you know how to calculate taxes correctly.

There is another Circular of IT department as per which the ITR is not required to be filed if the Total Income (Salary + Interest) is not more than Rs. 5 lacs and the TDS has been deducted by employer on the Total Income including interest income. I see very little utility of this as the TDS is not deducted by employer on your interest income, also, I feel filing ITR allows you to avail many facilities such as housing / car loans and also helps in getting visa for travel abroad etc. (Please see detailed circular, if you need to know more about eligibility and conditions etc.)

Now, let us understand the procedure for filing ITR and discharging your tax liability.

Once you know that you have to file ITR, the outline of the process of filing is as under:

1. Obtain your Form 16 from your employer / employers
2. Obtain the details of Interest Income from your banks for your savings and FDR. There could be TDS deducted by banks also.
3. Check the TDS in your online Form 26AS at Income Tax e-filign website. All TDS deducted as shown in Form 16 and as shown by bank in TDS certificate issued by them should appear in Form 26AS.
4. Compute tax as per the tax rates for FY 2012-13 as per Income Tax Act
5. If the TDS is deducted sufficiently (i.e. your computed tax exceeds TDS, you do not have to pay taxes)
6. Pay balance Income Tax in case TDS is less than you computed tax
7. Prepare ITR in Form ITR1 as prescribed for FY 2012-13 (FY 2012-13 is called Assessment Year 2013-14 also)
8. Generate xml file and file it online. It is compulsory to file online at e-filing web site of Income Tax department, if your income exceeds Rs. 10 lacs.
9. Generate the acknowledgement and sign and send it to Bangalore address given in the Acknowledgement.
10. Others can file it offline by filling a manual form ITR 1 from the Income Tax website and deposit it at the Income Tax department after ascertaining their jurisdiction.

Let us also understand the meaning of filing ITR. What are the effects and benefits.

• If you have filed your ITR, that means you have discharged your income tax liability. This is confirmed when the Income Tax department sends you intimation u/s 143(1).
• If you have paid extra taxes either through TDS or otherwise, shall be refunded to you by Income Tax department.
• Filing ITR gives you proof of your income which is acceptable to banks and based on ITR you can approach banks for availing housing / car / other loans. 

What if I do not file ITR even if I am covered;  the TDS has been deducted by my employer fully?

The common misconception is that I am not required to file ITR as the TDS is already deducted by my employer fully. The liability to file ITR is different from paying taxes and ITR is a statement of the fact that you have discharged your Income Tax liability. In the absence of this, the IT department would not know your actual liability and may not consider your liability discharged.

There are separate penalties for not filing ITR even though your taxes may have been paid in full.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

House Rent Allowance (HRA)

What is the Significance of HRA in tax savings?

I think the amount of tax saved through the use of HRA tax planning is more that 80C or commonly known as 1 lac savings. That is the significance and the need for understanding details about HRA.

What is HRA?

Those of you who are earning salaries must know that it is given as a salary component. This is assumed part of salary to take care of your housing expenses. Rent paid by you is allowed to be deducted from the taxable HRA (based on a certain calculation shared in this blog), which saves you taxes.

What is the formula for claiming deductions from taxable HRA or calculating non taxable HRA?

The non taxable HRA is calculated as least of the following 3 calculations:

1. Actual HRA received
2. 50% of Basic Salary in case you reside in Metros (defined metros are only Delhi, Mumbai, Chennai, Kolkata) else 40% of Basic Salary
3. Rent paid minus 10% of Basic Salary

Therefore, if your Basic Salary is Rs.30,000/- p.m. and HRA is Rs.15,000/- p.m. and you pay rent of Rs.12,000/- p.m. in a metro, the exempt HRA would be least of the following:

1. Actual HRA received - Rs.15,000/- p.m.
2. 50% of Basic Salary in case you reside in Metros - Rs. 15,000/- p.m.
3. Rent paid minus 10% of Basic Salary - = Rs. 12,000/- - Rs.3,000/- = Rs. 9,000/-

Hence Rs. 9,000 p.m. would be exempt and Rs. 6,000 p.m. of HRA would be taxable.

What documents are needed for claiming HRA benefits?

Now, all of us struggle to figure out what is the sufficient proof of payment of rent which can be submitted to your company and get you the tax benefits. The requirement may be defined by each company and may very.
However, as a general guideline you can given Rent receipts issued by your landlord as a proof. You may also submit lease agreement with your bank statement copies wherein the rent payments are appearing, in case the physical copies of rent receipts cannot be produced. There is no need to submit any proof of rent payment if your rent is upto Rs. 3,000 p.m.

Do's and Don'ts for claiming HRA

While HRA is the single biggest contributor to saving your taxes, it is also one of the areas where most manipulations appear to happen. While the government has notified last year that any payment of rent of more than Rs. 2,00,000 in FY, the landlord PAN or other proof of identity should be submitted to claim HRA benefits.

The common mistakes I have noticed while claiming HRA are :

1. Fake rent receipts while no actual payment of rent is made.
2. Paying rent to family members but not actually transferring money.
3. Rent paid to family members way above market rates.
4. Paying Rent as well as claiming Housing loan interest benefits within same city (specially when the own house in closer to place of work as compared to rented house).
5. Paying rent to a family member above taxable limits and not filing / showing in their tax returns.

These could prove disastrous if your tax return comes under scrutiny.

While the don'ts mentioned above have the do's hidden in there, a world of advise is that the HRA benefits should be claimed but with proper documentation in place and keeping all legal aspects even for the recipient in mind as in a lot of cases the recipient is a family member.


These are my personal views and cannot be treated as tax advise. Please consult your specific case with a qualified tax adviser before you act on this.

Understanding PAN

For those who are new to taxation and have started earning now, must have heard a lot about PAN (Permanent Account Number). We also fear Taxes specially Income Taxes a lot as we hear that the tax guys  keep a watch over your finances etc. from our elders and seniors.


What is this PAN and what are implications of having a PAN for us? 

Let us understand in a simple to understand language. PAN or Permanent Account Number is your identity for Income Tax purposes. It is like your Income Tax Account number which keeps your record of taxes paid by you or deducted by companies from your salaries and for settling your income tax liabilities.

It has 10 characters with first 5 characters as alphabets, next 4 numbers and last character also a alphabet.

Now the question is - Is this only for filing of Income Tax returns and settling tax liability?

PAN now a days has evolved as a tool for many other purposes. Such as - acceptable proof of identity at almost all places like opening of bank account, getting a Passport etc. to name a few, tool for government to allow many other registrations such as VAT, Service Tax, IEC etc., tool for government to monitor high value transactions such as buying of immovable property (houses etc.). So, getting a PAN is not necessarily for filing tax returns only.

Now another question arises - Is is necessary to file tax returns if you have PAN (you may have to get a PAN because of this being accepted as identity proof or any other reason as mentioned above).

By getting a PAN itself, you do not become liable to file income tax return or pay taxes or become answerable to Income Tax department as is commonly believed. There are separate rules for filing of tax returns and you can safely keep a PAN without either filing a return or pay taxes unless you fall in the category of those who are required to file income tax return as required by Income Tax law in India.

PAN is good for all of us and it is desirable to have it.