Ask Anil: Your income tax queries answered

Do you know how to close the PAN number of a deceased person?
How capital gain tax is calculated on ESOPs on shares issued by a foreign MNC?
How tax liability is calculated on rental income?

Anil Rego, CEO, Right Horizons, answers your personal income tax queries.

Omprakash Narayan: What are the tax implications after an account holder dies without filing IT returns?

Anil Rego: If a person dies, the legal heir has to file tax returns on behalf of the deceased, to report the income earned by the deceased until the date of his death, and taxes deducted thereon. Legal heir needs to register oneself on the income tax website for filing the return on behalf of deceased. This is mandatory for e-filing of return on behalf of the deceased person.

The PAN of both the deceased person and legal heir should be registered in the e-filing portal. However, if the deceased person’s PAN is not registered, then the legal heir can register on behalf of the deceased.

Once the request for registration as legal heir is approved, then the person can file return as legal heir on behalf of deceased.

Any income earned after the date of death from the assets inherited from the deceased is taxable in the hands of the legal heir. This would mean that in the year that the person died, the income for the year would need to be segregated between the return of the deceased and the legal heir.

Legal heir should include this income inherited from the deceased in her/his own income while filing own income tax return

Praveen Godbole: I shall be grateful if you could kindly arrange reply to my following tax query.

My daughter was NRI for F.Y. 2018-19 as well as 2019-20. She had some income in India during both F.Y.s by way of Dividend/Interest from her investments, as also capital gains from sale of shares / mutual fund units, total of which was less than Rs.1,50,000 during each of these 2 years. She was a student abroad during whole of F.Y. 2018-19. She was employed during part of F.Y. 2019-20 (less than six months) and drew income by way of salary. 

1. Is she required to file return of Income in India for A.Y. 2019-20 and A.Y. 2020-21?

Anil Rego: An NRI whose income is below the basic exemption limit is required to file an income tax return in India if:

1. One has short term capital gains on equity which is taxable
2. One has long term capital gains on any asset, which are chargeable to tax
3. Has any income chargeable to tax irrespective of the basic exemption limit

Please note the above since you have mentioned that there was capital gain in her account.

If yes, which ITR forms should she be using?

Anil Rego: NRIs cannot file return of income in Form ITR-1. If an NRI has income from business or profession then return is required to be filed in Form ITR-3. In all other cases, ITR-2 can be used to file return of income.

Does she have to declare her foreign earned income in her tax return in India for A.Y. 2020-21? She has paid taxes in foreign country with which India does not have DTAA.

Anil Rego: The income which is earned or accrued in India is taxable in India. If the residency status is ‘Non Resident’ income, which is earned outside India, is not taxable in India.

Kishore Talegaonkar: Read your article in reiff.com.

My mother expired on 16th april 2020. I am her son and nominee. How do I file the income tax return? There is TDS of approximately 5000 as per her PAN account. How do I close her PAN number? 

Anil Rego: If a person dies, the legal heir has to file tax returns on behalf of the deceased, to report the income earned by the deceased until the date of his death, and taxes deducted thereon. Legal heir has to register himself at the income tax website for filing the return on behalf of deceased. This is mandatory for e-filing of return on behalf of the deceased person.

The PAN of both the deceased person and legal heir should be registered in the e-filing portal. However, if the deceased person’s PAN is not registered, then the legal heir can register on behalf of the deceased.

Once the request for registration as legal heir is approved, then the person can file return as legal heir on behalf of deceased.

Any income earned after the date of death from the assets inherited from the deceased is taxable in the hands of the legal heir. Legal heir should include this income inherited from the deceased in his own income while filing own income tax return.

Once the return is filed and all tax dues are paid, you can make a written application to the relevant AO (assessing officer) for cancellation of PAN.

The Pan number, date of birth, date of death, etc should be provided. Post submission an acknowledgment is given. The IT department will scrutinise the application. Once found in order, the PAN will be cancelled.

vinay kr rai: I am a salaried individual & file ITR1 return. I also invest in shares, so wanted to know as to how do I show my income from shares at the time of IT return filling? And also if the income from shares are taxable?

Anil Rego: Yes, gains on shares is taxable under the head Capital Gains. You may also have dividend income, which will come under income from other sources.

Capital gain is classified as long term (If held for over a year for shares listed in India) or short-term capital gain. Short term gains on listed equity shares are taxable at 15 per cent.

Long term capital gain on equity shares listed on a stock exchange is not taxable up to the limit of Rs 1 lakh, above which they are taxed at 10 per cent. There is a grandfathering rule where the cost of acquisition is based on the value of the share as on 31st January 2018 for shares purchased prior to this date.

If you are an active trader with a high frequency of trades (especially day trading), the income is classified as income from business.

In such a case you are required to file an ITR-3 and your income from share trading is shown under ‘Profit and Gains from business or profession.’

The expenses incurred relating to one’s business or profession can be reduced and profits will be added to your total income for the financial year. Consequently, the total income will be charged at tax slab rates.

If this income from shares is treated as capital gain, then, expenses incurred on transfer are deductible from the capital gain on the shares.

Shivashankar Jayaraman: I would like to know regarding the long term capital gains tax for foreign shares. 

Scenario: Employee is working in a MNC based out of US. He gets ESOP and in June 2017, it vests. He wants to sell it in 2020 (more than 24 months and hence long term capital gains). Say the total amount of incremental gain by selling the stocks that vested in June 2017 is 5 lakh INR. 

My main question is:

1) Is the LTCG tax 10 per cent of the gains - i.e 10 per cent of 5 lakh?

OR

2) Is the LTCG tax 20 per cent of the gains - i.e 20 per cent of 5 lakh?

Any reference to the income tax laws (links) will be very helpful.

Anil Rego: Foreign shares held by an individual for more than 24 months are treated as long-term capital assets and otherwise is treated as short-term capital assets. Capital gain from sale of long-term capital assets would be taxed at 20 per cent with the indexation on the purchase price or at 10 per cent flat without such indexation benefit.

Capital gains from sale of short-term capital assets would be added to income and taxed at the slab rates applicable for the individual.

Considering this as an ESOP, taxation is calculated at two stages. At the time of allotment of shares and on sale of shares.

The income is determined based on the difference of the fair market value (FMV) of shares on the date of allotment and the amount paid to acquire such shares. This income is treated as perquisite and taxed as part of salary income at the applicable slab rates.

In the second part, tax is applicable at the time of sale of shares wherein the income would be the difference between the sale proceeds and the cost of acquisition of shares (based on the FMV of the share).

Tax needs to be paid on this and tax payable is based on the tenure as explained above.

Avneet Jassal: My query is I had bought a house in the financial year 2019-20 for Rs 71 lacs and while making the payment I had deducted the relevant TDS and deposited it to the Govt Account. Wanted to know if I need to declare the purchase of property in my ITR and the TDS deducted on it. My source of Income is Salary and Interest.

Anil Rego: There is no specific requirement to file ITR returns when you purchase a property. This would however be available with the IT Department based on the TDS that was deposited and the information shared based on registrations of properties.

However, there is a reporting of assets and liabilities required if your taxable income is over Rs 50 lakh. In such cases, you would need to do so.

Fahim Ashraf: My personal information as given below:

1. Senoir citizen
2. Consultant with annual fees earning Rs. 6 lakh after deduction of tax from source
3. Owned three immovable properties; one self-occupied, other two fetching rent Rs. 4.16 lakh annually after deduction of house tax and other maintenance.
4. Three life insurance policy of annual premium Rs.50000.00, Rs.36000.00 and Rs.7000.00 respectively.

Kindly share the tax liability on above-mentioned earning.

Anil Rego: I will share with you the methodology to compute your taxes, as there are some variables based on which your tax would differ.

Your consultancy income will be around 6.5 lakh before TDS (current year TDS is 7.5 per cent). On this you can claim all expenses associated with the work. Eg. fuel costs, any business meeting expenses, travel costs, etc. It is taxable under the head ‘Profits and Gains from Business or Profession’.

The net amount after expenses would be added to taxable income.

Income from house property (Rent) before deduction of TDS is also added up and one can claim standard deduction of 30 per cent of net annual value (you would reduce municipal taxes paid from rentals to arrive at net annual value).

Assuming your rental income before deduction of TDS is Rs 4.5 lakh and your municipal taxes are Rs 50,000, then the standard deduction will be Rs 1.20 lakh. You can also claim deduction of interest on home loan of the respective properties. Eg. If home loan interest for the rental property is Rs 60,000 your taxable income would come to Rs 2.2 lakh as ‘Income From House Property’.

On your taxable income of Rs 8.7 lakh, you can claim deduction under section 80C. Rs 93k can be claimed as deduction under section 80C from the investments shown by you. This can also be increased to up to Rs 1.5 lakh. One can also claim other deductions like Medical Insurance Premiums under Section 80D.

You will then calculate the applicable taxes based on the net amount after all deductions. Before paying the taxes, you can capture the TDS that has already been done on your income which can be deducted from the computation of taxes to be paid.

We suggest you to consult a CA/Tax consultant for tax filing for better accuracy and detailed calculation. The information provided here is to help you understand the concept of how tax is computed and what are the benefits that you can claim.

Dharmendra Jani: I am unemployed during FY 2019 to 2020. I had no salary income, I had my PPF account got matures during this year. I have own house as well as second house which is on rental. 

Which ITR form to be used for filling return. Also where PPF mature amount to be shown?

Anil Rego: Even though there was no salary for FY2019-20, you need to file your returns if your taxable income is above the basic exemption limit due to the rental income. You can use the ITR -1 if there is a requirement.

While filing your income tax return (ITR), an individual is required to report incomes that are exempted from tax under the ‘Computation of income and tax’ tab in the online ITR-1 form.

Lekshminarayanan: I am using ITR 2 because I have LTCG from sale of MF units. My question is: Is it mandatory to fill in the Sec 112 A sheet in the ITR 2 form? In that sheet there is a column called ISIN code and the units that I sold belong to a scheme called UTI MEPUS and UTI does not have an ISIN code for this scheme!!

I emailed UTI asking for the code and they replied they can't help me. What do I do? Fortunately, my profits are long term and in thousands, so no tax liability. Can I skip the CG sheet altogether?

Anil Rego: As per the CBDT, scrip wise details are not required in income tax return forms for AY 2020-21 in cases where one is not eligible for the grandfathering concession. Since your capital gains are smaller, you can file your return without claiming the grandfathering benefit.

Long term capital gains from equity MF are exempt from tax up to Rs 1 lakh in a financial year. Thus, it would not have an impact on your computation either.

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Do you have any personal income tax query? Please mail us at getahead@rediff.co.in with the subject line 'Ask Anil' and Anil Rego will answer all your tax queries.

Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.