Do not lose tax benefits

During the tax filing season, many of our investments in property or instruments get tax exemption, leading to considerable savings. In fact, many investors rush to make investments at the end of the financial year only to get these exemptions. However, simply buying a property or investing does not ensure exemption. Other guidelines need to be followed lest the Income Tax Department comes back with queries or even withdraws the exemptions.

Here are a few examples that will help understand this:

Property: If you purchase a property on a home loan, you can claim exemption on the principal up to Rs 1.5 lakh and up to Rs 2 lakh on the interest amount. However, if you sell the house within five years of buying, you will lose the exemption on the principal in the following year. There is no mechanism for tax authorities to know, as filing is self-declaration. But, since there is one per cent tax deduction at source for any transaction above Rs 50 lakh, the information will go to tax authorities. Also, the registrar has to report purchase and sale of all immovable property exceeding Rs 30 lakh to the I-T authorities. “So, If the case comes up for scrutiny and there if it’s found that the property was sold and the exemption was wrongfully availed, then the taxpayer will be charged interest and penalty that can be as much as 200 per cent, if proved to be a case of mis-reporting,’’ says Amit Maheshwari Partner, Ashok Maheshwary & Associates.

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If you sell your house, you can claim capital gains exemption under Section 54, provided you purchase another house within two years or construct one within three years. Again, if you sell this house within three years, you will lose the exemption. You are also allowed capital gains exemption up to Rs 50 lakh if you invest the proceeds from selling the house in capital gains bonds. Again, if you don’t hold the bonds for three years, that is, if you sell the bonds or borrow against there, the benefit will be withdrawn.

“Today, you have to transfer the money from selling your house to a Capital Gain Account Scheme. If you withdraw for any other purpose you need a no objection certificate from the I-T department. This is one way the authorities will be able to trace if funds are being used for purchase of property,’’ says Suresh Surana, founder, RSM Astute Consulting Group. In addition, since the property is sold within three years the seller will have to pay short-term capital gains tax, which is higher. So, it is a double disadvantage, Surana adds.

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Life insurance: Life insurance premium paid on the life of self/spouse/child is eligible for deduction under section 80 C. However, there is minimum period of holding of two years for the policy. If the policy is surrendered before two years, the deduction claimed will be reversed and has to be offered as income.

Tax-saver bank fixed deposit: Investment in an eligible fixed deposit (five-year lock in period) can be claimed as deduction under section 80 C. If the lock in period condition is not met, the amount claimed as deduction in the past needs to be offered as income in the year in which the FD is redeemed (without meeting the five-year lock in period).

“In case the holding period conditions are not met and the assessing officer finds out, the taxpayer can be subjected to a penalty during the assessment proceeding. The quantum of penalty may vary from 50 per cent to 200 per cent of the tax liability on the under-reported/misreported income,” says Amarpal Chadha, of EY.


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