Tax Column

Jayesh Dadia
Chartered Accountant

As an individual investor I have invested a substantial amount in listed companies’ shares. I am likely to receive substantial dividend in the current financial year. Is the entire dividend taxable in the hands of individuals and at what rate?

Dividend received on or after April 1, 2020 is taxable in the hands of the recipient of the dividend. Prior to this date, dividend income was exempt under Section 10(34) of the Income Tax Act to the extent of Rs 10 lakhs in the hands of individuals. However, FY21 the entire amount of dividend is taxable at the normal rate of taxation and a surcharge is also applicable. No amount of dividend is exempt. The company will deduct TDS at 10 per cent if the dividend amount exceeds Rs 5,000. Under Section 57 of the Income Tax Act you can claim deduction of any interest incurred by you in earning dividend income restricted to 20 per cent of the total dividend income. 

A resident of Mumbai, I am employed with a private limited company and receive a salary of Rs 600,000 per annum. I stay in rented accommodation and pay rent of Rs 15,000 per month. I also receive house rent allowance (HRA) from my employer of Rs 15,000 per month. I do not receive any other benefit or perquisite from my employer other than HRA. Since I receive HRA from the employer and pay exactly the same amount to the landlord, is any portion of the HRA taxable? 

Under Section 10(13A) of the Income Tax Act, any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of rented accommodation occupied by an assessee is exempt to the extent specified in Rule 2A of the Income Tax Rules. Under this rule, the exempt amount should be less of (a) actual amount of allowance received by an assessee, (b) amount by which actual expenditure incurred by an assessee towards rent exceeds one-tenth of amount of salary, and (c) amount equal to 50 per cent of the salary due to an assessee if an assessee it located at Mumbai, Kolkata, Delhi or Chennai. You have received actual rent of Rs 180,000 (Rs 15,000 for 12 months) and you have actually an incurred an expense of Rs 180,000. This amount should be reduced by 10 per cent of the salary i.e. Rs 60,000 which comes to Rs 120,000. Further, 50 per cent of the salary comes to Rs 300,000. The lower of all these three is Rs 120,000 which you are entitled to deduction while computing the salary. Although you have paid Rs 180,000 towards rent, the exemption under HRA will be restricted to Rs 120,000 per annum. 

I, in my individual capacity, acquired a residential premise in financial year 2019-20 for Rs 2 crore. The stamp duty registration valuation of the said property on which stamp duty was paid is Rs 2.60 crore. What would be the tax implications in my hand in view of this difference? I am planning to sell the said property after a period of two years. In that case, what would be the tax implications and how does one compute capital gain in the year of sale? 

Under Section 56(2)(x) of the Income Tax Act, if you receive or acquire any immovable property at a consideration which is less than the fair market value, the difference between the actual amount paid and the fair market value is taxable in your hands as income from other sources. The ready recknor value is considered as the fair market value under the said section. Accordingly, you have to offer Rs 60 lakhs as income from other sources under Section 56(2)(x) of the Act and pay taxes for the assessment year 2020-21. When you sell the said property after holding for two years, it becomes a long-term capital asset and any surplus arising out of the sale would be treated as long-term capital gain. The cost of the said property for the purpose of calculating capital gain would be Rs 2.60 crore as per Section 49(4) of the Income Tax Act. You will also be entitled for indexation for two years. If the indexed cost is less than the sale price, you will also be entitled long-term capital loss but if the sale price is more than the indexed cost, you have to pay taxes at 20 per cent on the surplus considering that it is long-term capital gain.

I was working with an MNC under a contract of employment which is valid up to March 31, 2021. Due to COVID-19, the management decided to terminate my contract . On termination of my contract I was paid a lump sum compensation of Rs 5 lakhs on June 25, 2020. Is this taxable considering that it is nothing but capital receipt as compensation for loss of income? During the lockdown period, I received donation of Rs 1 lakh from charitable trusts to meet household expenses and medical expenses. Is this amount taxable? Further, due to financial stringencies, I entered into an agreement for the sale of my house for a consideration of Rs 1 crore. I received advance of Rs 10 lakhs in February 2020. Due to the pandemic the prospective buyer could not make the balance payment before May 31, 2020. As a result, and in view of the agreement, the advance of Rs 10 lakhs was forfeited. Is this amount taxable? 

Under Section 56(2)(xi) of the Income Tax Act, any compensation or other payment received by any person in connection with termination of his employment is taxable as income from other sources. The compensation of Rs 5 lakhs received by you is definitely in connection with termination of your employment. This clause was inserted with effect from April 1, 2019. Since you have received payment subsequent to that, Rs 5 lakhs is clearly taxable as income from other sources in FY21 relevant to assessment year 2021-22. If the charitable trust from whom you have received Rs 1 lakh as donation is registered under Section 12A or Section 12AA of the Income Tax Act, the said donation is not taxable in your hand. However, if the trust is not registered then the amount of Rs 1 lakh is taxable, subject to basic deduction of Rs 50,000 under Section 56(2)(x) of the Income Tax Act. You have mentioned that Rs 10 lakhs was received by you as advance in the course of negotiations for transfer of capital asset. It is also a fact that Rs 10 lakhs is forfeited as the negotiation did not result into transfer of capital asset. Therefore, this amount is taxable in your hands as income from other sources under Section 56(2)(x) of the Act for assessment year 2021-22.