Tax Column

I am an individual working with a private company as an employee for almost 10 years. I have not availed much leave and, therefore, as on today, I have a credit of leave of almost nine months, which is equivalent to Rs.6 lakh. As per the company’s rules, I can encash the same even if I am in continuation of service. Kindly let me know whether there is any tax implicationif I encash the unavailed leave and receive Rs.6 lakh?

Under the Income Tax Act, cash equivalent of leave salary in respect of earned leave to the credit of an employee only at the time of retirement, whether on superannuation or otherwise, is exempt to the extent provided under section 10(10AA)(ii) of the Income Tax Act. 

Jayesh Dadia 
Chartered Accountant

From your question, it is very clear that you are encashing leave entitlement while continuing in the service, i.e. you are not retiring from the job. Therefore, the entire Rs.6 lakh being the cash equivalent of leave salary is taxable. For your information, even If you encash the leave at the time of retirement, then also the cash equivalent of leave salary is exempt only to the extent of Rs.3 lakh. I am an individual resident in India. I own a property which I have given on rent for residential purpose. My annual rental income is Rs.6,00,000.Whether the tenant is under obligation to deduct TDS. I am likely to become non-resident from the next financial year, then what would be the tax implications in my hand ?

Your rental income is taxable in India under the head ‘Income From House Property’. You are entitled to deduct municipal taxes, if any paid, out of the gross rent. You are also entitled to 30% flat deduction on the net rent, i.e. after deducting municipal tax. Tax Column

Under Section 194IB of the Income Tax Act, if the rental income exceeds the statutory limit, i.e. Rs.50,000 per month, the tenant (if individual) will deduct tax at source at 5%. You will get credit of TDS deducted by the tenant when you file your tax return offering rental income.

However, if the tenant is corporate, then the TDS on rent will be deducted at 10% under specific provision of Section 194I of the Income Tax Act.

When you become non-resident next year and your rental income continues, then the tenant is under obligation to deduct TDS at 30% plus applicable charges. However, the TDS can be deducted at a lower rate if you furnish a certificate that your income is below the exemption limit or you obtain a certificate from the Income Tax Office regarding lower rate of deduction of tax under section 197 of the Income Tax Act.

I have created a family trust where beneficiaries are my son and daughter. The trust is indeterminate as no specific share has been allotted to any of the beneficiaries. The trust is likely to receive dividend of Rs.30 lakh during the financial year 2019-20. What is the tax implication on the dividend income in the hands of private family trust?

Dividend income received from domestic companies are exempt in the hands of shareholders under section 10(34) of the Income Tax Act, provided the company has paid dividend distribution tax. However, the Finance Act 2016 has introduced a new section 115BBDA which was further amended from April 1, 2019. Under this section, if an assessee, other than specified assessee, receives dividend exceeding Rs.10 lakh in aggregate in a particular financial year, then he is liable to pay additional tax at 10% on the amount in excess of Rs.10 lakh.The provision of Section 115BBDA is very clear and categorical. It is applicable to resident individuals, HUF, partnership firms, LLPs, private trusts, AOP and BOI etc. Since you are a private trust and in the nature of AOP, therefore the provisions of section 115BBDA are applicable to your private trust. Therefore, if your trust receives dividend income of around Rs.30 lakh, then you have to pay 10% tax on Rs.20 lakh. Kindly note that only dividend income received from the domestic companies would be subject to tax under this section. Any dividend received from mutual fund is not subject to tax.

I am an individual holding equity shares in closely held company “X Pvt. Ltd.” for more than 10 years. I have decided to sellall myshares to the existing shareholders. At the time of sale of my shares, I also have to give an undertaking not to carry out similar business activity which is being carried out by “X Pvt. Ltd.” . The non-compete clause is for a period of 5 years

For agreeing to non-compete clause, I will be paid additional compensation of Rs.1 crore, in addition to the sale consideration of shares of Rs.1 crore. Should I take the entire Rs.2 crore of sale consideration or should I take two separate cheques? What are the tax implications in my hand?

From your query, it is very clear that you are selling your shares which you hold in a“X Pvt. Ltd.” Theshares are capital assets and, therefore, any consideration received on their sale is taxable as capital gain under the Income Tax Act. Since you are holding the shares for more than two years, the entire capital gain will be long term which is subject to indexation as well as taxed at 20%. Therefore, if you take Rs2crore as a sale consideration, then after reducing the indexation cost, the surplus will be subject to tax as long term gain @20%.

However if you take two separate considerations, one for sale of shares and the other for non-compete, then the noncompete fees/compensation shall be taxed as business income in view of specific section of 25(va) of the Act, which is taxable @30%. Thus, you will be taxed 10% extra on Rs1 crore. It is therefore advisable to sellshares for lumpsum consideration only. For your information, the sale consideration of Rs2 crore should be higher than the fair market value as determined under Rule11UA of the Income Tax rule. Any shortfall between actual consideration and FMV will be taxed as deemed capital gain under the section 50CA of the Income Tax Act.