Mr. Chandrakanth, like any other ambitious father, wants to send his son for higher studies abroad. However, he is short of funds and he wants to avail Rs.40 Lakhs loan from the bank. So, his obvious question is whether he will be eligible for any tax deduction towards the interest and principal repayment of this loan.

• Eligibility – for an Individual Tax payer [Which means no deduction for firms, companies and HUF]
• The entire Interest paid on education loan is deductible from the total income of an individual.[Which means, no deduction for principal repayment]
• Loan for full time higher education in India or abroad [which means part time courses are not eligible]
• Loan to be taken from banks in India, branches of foreign banks in India such as Citibank, approved financial institutions such as HDFC or approved charitable institutions. [which means loan from banks abroad, or loans from father, employer, relatives or friends are not eligible]
• Loan can be taken for the education of self, spouse or children. [which means education loan for brother, sister or father are not eligible]

As per the Income tax Act, an individual who is a Resident in India has to pay Income Tax on his worldwide Income. The individual taxpayer is required to report income earned abroad while filing the annual Income Tax Return.

Further, the individual taxpayer has to report foreign assets such as foreign bank accounts, immovable property, financial interest in any entity and other assets held for investment purposes. Details of any foreign trust of which an individual is a trustee are also to be reported.

Please note that any individual who holds assets abroad is required to file Income Tax return even if he does not have any income in India.

In sum, an individual needs to file his return to comply with the changed reporting requirements for income earned and assets held abroad.

In case the property is transacted at a price lesser than the guidance value, but the stamp duty is paid for guidance value, the income tax to be calculated on ‘guidance value and not on sale value. This can be better explained with an example –

Mr. Somanna purchased a property from Mr.Ashwath for Rs.50 Lakhs. However, the guidance value of this property is Rs.60 Lakhs.

Tax treatment in the hands of Mr. Ashwath [seller] – Rs.60 lakhs would be deemed to be the sale price and taxed under head ‘Income from Capital Gains’ [This provision [Section 50C of Income Tax] is in force]

Tax treatment in the hands of Mr. Somanna [buyer] – Rs.10 lakhs [Rs.60 Lakhs – Rs.50 lakhs]would be deemed as income of the buyer and taxed under head ‘Income from Other Sources’ [this provision [Section 56(2)(vii) is applicable from April 2014]

An example to understand the provisions of the act in a simpler way – Mr. Ramesh, residing at Koramangala, Bangalore wants to purchase a site at HSR Layout, owned by Mr. Peter, an NRI for Rs. 80 lakhs. Mr. Ramesh is unsure whether he is required to comply with any requirement of the Income Tax Act.

He comes to us with these questions :

• “Should I deduct any tax from the sale consideration?”

Yes. At the time of purchase of any property from a non-resident, you have to deduct tax at the rate of 20% from the sale consideration. Thus, Mr. Ramesh should deduct a sum of Rs. 16 lakhs (Rs. 80 lakhs X 20%) and remit the balance to Mr. Peter

• “But I have heard that TDS is applicable at only 1%”

TDS at the rate of 1% applies only if the purchase was from a resident u/s 194IA. Mr. Peter is non-resident and tax has to be deducted u/s 195 of the Act at 20%.

• “Mr. Peter does not want to lose out on Rs. 16 lakhs, as he is planning to reinvest the proceeds in another property. Is there anything that he or I can do to reduce this amount?”

Yes, if Mr. Peter wants to reduce the tax percentage [i.e. 20%], then either he or Mr. Ramesh, can apply to the Assessing Officer, Income Tax, for a lower or NIL TDS rate certificate. If such a certificate is issued, TDS will be done at that lower rate or at NIL rate.

• Finally, Mr. Ramesh came out with an interesting question – If he decides not to deduct TDS, what will happen?

As per section 163(1) of the I T Act a buyer through whom the income to non-resident arises can be treated as agent of the non-resident and therefore can be assessed as “representative assessee” as per section 160(1) of the I T Act and hence Mr. Ramesh have to make good Rs.16 lakhs to the department, over and above his sale consideration paid to NRI.

• Tax needs to be deducted @ 1% on purchase value of immovable property if the same exceeds Rs.50 Lakhs per property.
• If the seller doesn’t have PAN, tax needs to be deducted @ 20% instead of 1%
• The buyer of the property needs to deduct tax before making the payment to the seller
• This new rule is brought into effect from 1st June 2013
• Both residential and commercial property are covered under this provision

Generally, sale of goods attract Sales Tax [VAT] and provision of services attract Service Tax. However, there are some exemptions and exceptions to this general rule. If you have not discharged the Tax liability, you have to pay interest and penalty to the government.

 So, if you are providing services and you have failed to collect Service tax or collected and not paid to the department, there is a scheme introduced by the Government called – Service tax voluntary compliance encouragement scheme (VCES), 2013.  

Highlights of this scheme  –

• The defaulters can pay service tax dues voluntarily without any penalty, interest and prosecution, inquiry or investigation
• Any entity who has failed to pay, as of 1st March 2013, service tax liability relating to the period 1st October 2007 to 31st December 2012 can take advantage of the Scheme
• If the entity  wishes to take benefit of the Scheme, a Declaration will have to be filed with the designated officers on or before 31st December 2013
• The entity will have to pay a minimum 50% of the declared tax on or before 31st December 2013 and the balance by 30th June 2014.

 This is a welcome Scheme and defaulting taxpayers would find it very attractive to take advantage!