FoxMandal Little
India: Holding And Subsidiary Company Regulations - A Complicated Matrix
Article by D. K. Prahlada Rao
1. Introduction
Section 4 of the Companies Act, 1956 (the Act) prescribes dual test and conceptually defines the Holding-Subsidiary company relationship. This is a special provision extending the provisions of the Act to intra-company relationships. Two significant factors which determine the relationships are control and ownership. The business conduct of such companies are regulated in certain respects and the effect of such regulations will result in treating another company as a Subsidiary of the Holding company. With the result, the provisions of the Act applicable to a public company will also apply to the subsidiary private company. However, the character of private remains unchanged..
2. Board Control
The most common form of control in the case of bodies corporate is controlling the composition of the Board without being a member of the company. This may happen by direct control of the Board or through one or more Subsidiaries. Be that as it may, the Board occupies a pre-eminent position in the corporate hierarchy from the point of the view of enormous power it exercises and control it secures over the management of another company. It is not merely an economic unit but a power house. Considering these and other factors, the Act rightly recognizes the structure of the Board as a manifestation of its inherent strength and standing in the corporate structure.
3. Section 4 of the Act
The composition of Board of a company is deemed to have been controlled, by another company if, but only if, that other company, without the consent or concurrence of any other person, can appoint or remove the holders of all or majority of the directors by virtue of exercise of some power exercisable by it, at its discretion. Further, the other company shall be deemed to have such a power of appointment
if the person thereto cannot be appointed without the exercise of the said power in his favor by the other company
that a person's appointment thereto follow necessarily from his appointment as director or manager or to any other office or employment in that other company or
that the director-ship is held by an individual nominated by that other company or a Subsidiary thereof.
This is the sum and substance of sub-section (2) of section 4 of the Act. If the conditions specified in the said sub-section are satisfied, then the first mentioned company is deemed to be Subsidiary of the other company by virtue of Board control.
4. Holding & Subsidiary Company Relationship
The manner of securing Board control is not envisaged as it is a matter relating to business practice. However, this is possible if the Articles of Subsidiary company specifically provide for a power to the other company to nominate all or majority of directors on the board of first mentioned company. The moot question is, can the Articles provide for such a provision if the other company does not hold all or majority of shares.
However, there can be an arrangement between the lender and borrower companies as part of financing under which the lender may nominate all or majority of directors with or without a specific provision in the Articles for the purpose of ensuring proper utilization of funds. This is possibly one of the reasons why section 4 provides for Board control as a means of creating Holding & Subsidiary company relationship. The immediate effect of such an arrangement is that lending company becomes a Holding company by virtue of section 4 of the Act.
5. Examination of Section 4 in relation to Section 255
Another dimension relates to the validity of section 4 vis-a-vis section 255 of the Act which deals with appointment and retirement of directors by rotation. At least two-thirds of the total number of directors of a Public Company or a Subsidiary Private Company should be persons whose period of office is liable to retire by rotation. However, Section 255(1)(b) saves the arrangement in section 4 of the Act. With the result, prima facie, there is no conflict between section 4 and section 255 of the Act.
Does this mean that the directors appointed by virtue of section 4 are not liable to retire by rotation, more so in the case a public company or Private Subsidiary Company?
While sub-section 255(1) (b) saves the arrangement envisaged in section 4 by using the words "save as otherwise expressly provided in this Act", section 255(1)(a) provides that not less that two-thirds of total number of directors shall be persons whose period of office are liable to retire by rotation. This is a mandatory provision.
6. Case law on the subject;
There is an interesting case on the above subject. In the case of Oriental Industrial Investment Corporation of India vs Union of India (1981)51 Com Cases 487(Del), the effect of section 4 in relation to sections 255,256 and 257 came up for consideration. The facts of the case is that by an agreement dated August 19, 1975 between Oriental Limited and Poonam Hotels, Oriental was given full and absolute power to appoint five directors on the board of directors of Poonam Hotels. This gave power to Oriental to appoint majority of directors on the board of Poonam Hotels with power to remove such directors and to appoint another in his place. Poonam also amended its Articles suitably and Oriental appointed five of its directors on the board of Poonam Hotels. This brought about holding and subsidiary relationship in terms of section 4 of the Act. Thereafter Oriental acquired 88% percent shares of Poonam Hotels in two tranches. Oriental made an application to the DCA for extending the financial year of its Subsidiary to bring it in line with its accounting year for complying with section 212 of the Act. The Department rejected the application on the ground that Article included by Poonam conferring authority on Oriental to appoint majority of directors is violative of sections 255,256 and 257of the Act and treated it as void as per section 9 of the Act and consequently Poonam cannot be treated as Subsidiary company. Request of Oriental for reconsideration did not evoke positive response and the Department reiterated its stand whereupon Oriental filed a writ in the High Court of Delhi.
7. Decision of Delhi High Court
The High Court observed, inter alia, that the contention of the counsel for the Union of India that "the control of Oriental over the composition of the Board of Poonam Hotels which they exercise by virtue of their agreement dated August, 1975 is in contravention of the provisions of Sections 255,256 and 257 of the Act overlooks the important fact that section 255 excludes from its purview cases which have been otherwise expressly provided in the Act. The words "save as otherwise expressly provided in this Act" used in section 255(1)(b) are of commanding significance. Section 4(2) is an express provision for the appointment of the directors on the Board of Subsidiary. This provision is not hit by Section 255 because it is expressly excluded."
The High Court also observed that "there is no denying the fact that the right of the members of a public company to appoint directors of their choice at a general meeting is greatly abridged when there comes into being a relationship of a Holding and Subsidiary Company. But this restriction inheres in the definition of the Holding Company. It is firmly embedded in section 4 of the Act. The ability to control the conduct of the Subsidiary is the hall-mark of the Holding Company. The Holding Company is the controlling company. The controlled company is called a Subsidiary."
8. Revised clarification by DCA
Following the Judgment of the Delhi High Court, the Department of Company Affairs (DCA) issued a clarification modifying their earlier views on the above matter which is reproduced below;-
"Department views";- The Department has issued a circular 14\74 dated 28-8-1974 to the effect that the Articles of a company which confer upon another company the right to make provisions for appointment of director upon another company with a view to make the company a subsidiary is invalid under section 9 of the Companies Act. On a combined reading of the provisions of sections 255, 256 and 257 and because section 257 is a mandatory provision, this view does not seem to be well founded. The appointments made pursuant to an arrangement whether by the Articles or by an agreement is not invalid merely because any shareholder may seek election at an annual general meeting. Section 257 only deals with the right of a person other than a retiring director to stand for election at the annual general meeting. The agreement or Article of a company, in so far as it or they invest a company with the status of holding company in relation to the company of which the board is controlled cannot be said to be inconsistent with section 257 which comes into operation only when elections are to be held at the annual general meeting.
It follows from the above that a public company is not required to comply with the requirements of sections 255 to 257, if it is a Holding Company having the right to appoint majority of directors on the Board of the Subsidiary company pursuant to section 4 of the Act.
9. Shareholding Control- Direct ;
This is the second method by which Holding & Subsidiary company relationship can be established. This is possible if one company holds more than half in nominal value of equity capital of another company as per section 4(1)(b)(ii) of the Act. This is a case of direct investment and indicates the financial interest and stake of the Holding Company in its Subsidiary. This is however subject to sub-section 4 (3) of the Act which seeks to exclude certain shareholdings for the purpose of reckoning half the nominal value of equity shares aforesaid.
They are;-
any shares held or power exercisable by that other company in fiduciary capacity is considered as having not been held or exercisable by it. What is referred to is the equity shares carrying voting rights. Fiduciary capacity creates a relationship under which one owes to another the duties of good faith, trust and confidence. It is a company to company relationship;
any shares held by a nominee of that company, except as a fiduciary is considered as having been held by that company;
any shares held by a nominee for a Subsidiary of that company, not being a Subsidiary connected as a fiduciary is considered as having been held by that company;
any shares held or power exercisable by any person as security for the debentures of the first mentioned company or of a trust deed for securing any issue of debentures is to be disregarded;
any shares held or power exercisable by or by a nominee for that other or its Subsidiary shall be treated as not being held or exercisable by that other ,if such holding or power is by way of security only for the transaction of lending in the ordinary course of business.
10. Indirect Control
This is envisaged in section 4(1)(c) of the Act as third type of relationship applicable mainly in the case of group companies. A Subsidiary of a Subsidiary becomes a Subsidiary o f the ultimate Holding Company. This may be second or third generation Subsidiary by virtue of management or shareholding control and the linkage is endless.
Another distinctive feature can be seen in sub-section (5) of the Act. For the purpose of section 4, the expression "company" is defined to include any body corporate, whereas for other provisions of the Act, "body corporate or corporation" includes a company incorporated outside India as defined in section 2(7) of the Act.
11. Extension of the Principle of Control.
Sub-section (6) seeks to extend the principle of control in the case of a body corporate incorporated in a country outside India, a Subsidiary or Holding Company of such a company shall be deemed as Subsidiary or Holding Company of the body corporate within the meaning and for the purposes of Indian law, whether the requirements of section 4 are fulfilled or not. In this case, the same status is accorded under the Indian law to a body corporate as in the country of its incorporation in relation to its Holding or Subsidiary relationship. Here the shareholding control or management control discussed above are not relevant.
12. An Indian Private Company as Subsidiary of foreign body corporate
Sub-section (7) of section 4 provides for a deeming provision. The intention is to place a Private Company registered in India which is a Subsidiary of a foreign company on par with a Private Company which is a Subsidiary of Public Company registered in India. To achieve this purpose, sub-section (7) provides that a Private Company which is a Subsidiary of the company incorporated outside India, which if incorporated in India would be a Public Company within the meaning of the Act shall be deemed as Subsidiary of a Public company, provided that the entire share capital in that Private Company is not held by the body corporate, whether alone or together with one or more bodies corporate incorporated outside India. This provision is based on the recommendation o f the Joint Company Law Committee as it considered unnecessary to treat an Indian Private Company, the entire share capital of which is held by one or more bodies corporate incorporated outside India as a Private Company which is a Subsidiary of a Public Company for the purposes of the Act.
A close look at the provision indicates that the exemption is based on a similar position as in the case of private company whose entire share capital is held by one or more companies and none of them hold 51% or more of share capital o f the private company. Even if all these companies are public companies, the private company continues to be a private company, particularly in the context of deletion section 43A of the Act from the statute book.
Needless to say that a private company whose entire capital is held by one or more bodies corporate, whether incorporated in India or outside stands on a different footing, as such holding amounts to indirect public holding. Such companies have to have greater degree of accountability and transparency in their operations for the benefit of their shareholders. It is therefore necessary that legal framework to address this requirement should be in place.
13. Conclusion
A look at the path we have traversed indicates that what started as direct or indirect control, be it shareholding or otherwise has inevitably resulted in having to rope in Subsidiary Companies being increasingly set up by foreign companies. That these companies should, no doubt, be brought within the regulatory provisions as applicable to Indian companies but the matrix of Holding-Subsidiary Company relationship has become more complex and complicated. This appears to be inevitable in the context of globalisation of Indian economy and increasing flow of foreign exchange into our country through Foreign Direct Investment (FDI) in joint ventures or Subsidiary companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Friday, June 11, 2010
Thursday, June 10, 2010
10 most overlooked tax deductions
10 most overlooked tax deductions
It is that time of the year again when people start looking for ways to lower their tax bill. After all, there's nothing more demoralizing than watching your hard-earned income get slashed by taxes.
Still, every year lakhs of taxpayers overpay their taxes just by overlooking the breaks they deserve. The prime reason being that tax claims and deductions have been the most cumbersome process for an individual, and one is more likely to forget some breaks while making a claim.
You can, however, cut your tax bill just by claiming all the breaks you deserve. Here we take a look at some of the most overlooked tax deductions:
1) Tuition fee paid for the education of children
Believe it or not, but many taxpayers often forget to claim deduction in respect of the tuition fee paid for the education of their children.
Deduction, however, is available to an individual under Section 80C of the I-T Act in respect of tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether paid at the time of admission or thereafter to any university, college, school or other educational institution situated within India for the purpose of full-time education of any of the children of the individual.
2) Interest on loan taken for higher education
Taxpayers also tend to forget that the interest paid on an education loan taken for higher studies qualifies for deduction under Section 80E of the I-T Act. Also, effective April 1, 2008, "the said deduction is also available where the loan is taken for the purpose of higher education of spouse or children of the individual or the student for whom the individual is a legal guardian," says Sonu Iyer, tax partner, Ernst & Young. Thus, if you have taken a loan for higher education, don't forget to make your claim. Also remember that the deduction benefit on interest is allowed for maximum eight years, or till the interest is fully paid.
3) Charitable deductions
Deduction is also available under Section 80G of the I-T Act in respect of donations made by an individual to certain funds, charitable institutions and so on. There is no restriction on the amount of charity.
The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust. Also, donations must be made to registered institutions only.
Taxpayers generally forget to claim such deductions "as they generally do not have the receipts or simply tend to lose the receipts by the end of the year, when they file the return," says Vikas Vasal, executive director, KPMG.
4) Home improvement
Expenditure incurred by an individual on repair and maintenance of house property and interest paid on loan taken for such repairs and maintenance of house property are allowed as deduction while computing income from house property. Thus, if you have gone for any home improvement project, don't forget to make your claim.
5) Deductions in respect of rent paid
Deduction to the extent of Rs 2,000 per month or 25 per cent of total income (whichever is less) is available under Section 80GG of the I-T Act in respect of rent paid by an individual on his accommodation, provided the individual does not get any house rent allowance.
6) Foreign taxes paid
Foreign Tax Credits may be claimed by an individual in respect of doubly-taxed income which is taxed in India as well as in a foreign country provided the conditions as prescribed under the Double Taxation Avoidance Agreement between India and the foreign country are satisfied.
Further, "if there is no Double Taxation Avoidance Agreement between India and the foreign country, credits may also be claimed under the Act, subject to specified conditions," informs Iyer.
7) Per diems
Per diems (allowance for daily expenses) are exempt from tax under Section 10(14)(i) of the Act read with Rule 2BB(1)(b) of the Income-Tax Rules, 1962, if the same are actually incurred on ordinary daily charges while the employee is on tour and absent from his normal place of duty.
8) Person with disability
Under Section 80U of the Act, an individual who is certified by the prescribed medical authority to be a person with disability shall be allowed a deduction of Rs 50,000 and an individual, who is certified as a person with severe disability, shall be allowed a deduction of Rs 75,000.
Further, "under Section 80DD of the Act, where an individual has incurred expenditure for the medical treatment, training and rehabilitation of a dependant, being a person with disability or has paid or deposited any amount under prescribed scheme for the maintenance of dependant, such individual will be allowed a deduction to the extent of Rs 50,000. However, if the dependent is suffering from severe disability, a deduction of Rs 75,000 will be allowed," says Iyer.
9) Medical treatment of specified ailments
Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB.
The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.
In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.
10) Profit on sale of property used for residence
It would also help to remember that capital gains arising from the transfer of residential property is exempt from tax in the hands of individual under Section 54 of the Act to the extent "expenditure is incurred on the purchase of another residential house within a period of one year before or two years after the date of transfer or expenditure is incurred on construction of a house property within a period of three years after the date of transfer," says Iyer.
It is that time of the year again when people start looking for ways to lower their tax bill. After all, there's nothing more demoralizing than watching your hard-earned income get slashed by taxes.
Still, every year lakhs of taxpayers overpay their taxes just by overlooking the breaks they deserve. The prime reason being that tax claims and deductions have been the most cumbersome process for an individual, and one is more likely to forget some breaks while making a claim.
You can, however, cut your tax bill just by claiming all the breaks you deserve. Here we take a look at some of the most overlooked tax deductions:
1) Tuition fee paid for the education of children
Believe it or not, but many taxpayers often forget to claim deduction in respect of the tuition fee paid for the education of their children.
Deduction, however, is available to an individual under Section 80C of the I-T Act in respect of tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether paid at the time of admission or thereafter to any university, college, school or other educational institution situated within India for the purpose of full-time education of any of the children of the individual.
2) Interest on loan taken for higher education
Taxpayers also tend to forget that the interest paid on an education loan taken for higher studies qualifies for deduction under Section 80E of the I-T Act. Also, effective April 1, 2008, "the said deduction is also available where the loan is taken for the purpose of higher education of spouse or children of the individual or the student for whom the individual is a legal guardian," says Sonu Iyer, tax partner, Ernst & Young. Thus, if you have taken a loan for higher education, don't forget to make your claim. Also remember that the deduction benefit on interest is allowed for maximum eight years, or till the interest is fully paid.
3) Charitable deductions
Deduction is also available under Section 80G of the I-T Act in respect of donations made by an individual to certain funds, charitable institutions and so on. There is no restriction on the amount of charity.
The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust. Also, donations must be made to registered institutions only.
Taxpayers generally forget to claim such deductions "as they generally do not have the receipts or simply tend to lose the receipts by the end of the year, when they file the return," says Vikas Vasal, executive director, KPMG.
4) Home improvement
Expenditure incurred by an individual on repair and maintenance of house property and interest paid on loan taken for such repairs and maintenance of house property are allowed as deduction while computing income from house property. Thus, if you have gone for any home improvement project, don't forget to make your claim.
5) Deductions in respect of rent paid
Deduction to the extent of Rs 2,000 per month or 25 per cent of total income (whichever is less) is available under Section 80GG of the I-T Act in respect of rent paid by an individual on his accommodation, provided the individual does not get any house rent allowance.
6) Foreign taxes paid
Foreign Tax Credits may be claimed by an individual in respect of doubly-taxed income which is taxed in India as well as in a foreign country provided the conditions as prescribed under the Double Taxation Avoidance Agreement between India and the foreign country are satisfied.
Further, "if there is no Double Taxation Avoidance Agreement between India and the foreign country, credits may also be claimed under the Act, subject to specified conditions," informs Iyer.
7) Per diems
Per diems (allowance for daily expenses) are exempt from tax under Section 10(14)(i) of the Act read with Rule 2BB(1)(b) of the Income-Tax Rules, 1962, if the same are actually incurred on ordinary daily charges while the employee is on tour and absent from his normal place of duty.
8) Person with disability
Under Section 80U of the Act, an individual who is certified by the prescribed medical authority to be a person with disability shall be allowed a deduction of Rs 50,000 and an individual, who is certified as a person with severe disability, shall be allowed a deduction of Rs 75,000.
Further, "under Section 80DD of the Act, where an individual has incurred expenditure for the medical treatment, training and rehabilitation of a dependant, being a person with disability or has paid or deposited any amount under prescribed scheme for the maintenance of dependant, such individual will be allowed a deduction to the extent of Rs 50,000. However, if the dependent is suffering from severe disability, a deduction of Rs 75,000 will be allowed," says Iyer.
9) Medical treatment of specified ailments
Deductions of expenses on medical treatment of specified ailments (such as AIDS, cancer and neurological diseases) can be claimed under Section 80DDB.
The maximum amount of deduction allowed from gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on condition that no medical reimbursement is received from any insurance company or employer for this amount.
In order to claim this deduction, however, you will have to submit Form 10-1 from a specialist doctor working in a government hospital in India, confirming the treatment of the disease.
10) Profit on sale of property used for residence
It would also help to remember that capital gains arising from the transfer of residential property is exempt from tax in the hands of individual under Section 54 of the Act to the extent "expenditure is incurred on the purchase of another residential house within a period of one year before or two years after the date of transfer or expenditure is incurred on construction of a house property within a period of three years after the date of transfer," says Iyer.
How are home loans treated for tax?
How are home loans treated for tax?
If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply. Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
The Income Tax Act, 1961 provides for tax benefits for assessees that have home loans. Typically a home loan is repaid to the bank / lender in monthly installments (EMIs). The installment consists of two parts - interest and principal repayment. The bank gives a detailed worksheet of the loan calculation and of the bifurcation of the EMIs paid by the borrowers. These monthly repayments are qualified for deductions from income tax. Here is the tax treatment for EMIs paid by the borrower:
Deduction under Section 80C of the Income Tax Act
The portion of the EMI paid towards repayment of principal amount of the loan can be deducted from income. The borrower can get a tax deduction for a maximum amount of Rs. 1L each year under this section irrespective of his tax bracket. The Act requires the home loan to be towards a property for self occupation. However if the assessee’s city of employment is different from the city where he has purchased a home, he is still eligible for this deduction. So if Sunil works in Mumbai but has purchased a home in his hometown Nagpur, he can still claim a deduction under this section even if he is not actually staying in this home.
Deduction under Section 24(b) of the Income Tax Act
The interest paid towards home loan is treated as an ‘expense’ under ‘Income from house property’ and is deductible under Section 24(b) from the total income of the assessee. The maximum deduction permitted under this section is Rs.1.5L per annum.
In case of partial disbursement of loan
In cases where some part of the loan is disbursed by the bank during construction stage of the property, the tax treatment is slightly different. This portion of the interest paid prior to completion of construction of property cannot be claimed as a deduction in the year in which it is paid. However, upon completion of construction, the assessee can claim deduction for this interest under Section 24(b) in 5 equal installments, i.e., 1/5th for each of the five years after the end of construction period. Note that the upper limit on deduction each year remains Rs. 1.5L. Assume Mr. Sunil purchased a home from Suraksha Developers in FY. 2005-2006.The property was still under construction and was completed only in F.Y 2008-2009. Some amount of loan was disbursed by the bank in FY2005-2006 and Sunil made interest payments of Rs. 1L between FY 2005-2006 and FY 2007-2008. Sunil can claim deduction of Rs. 0.2L for 5 years starting from FY 2008-2009.
In case of total disbursement of loan
If Sunil received the entire loan money in FY 2005-2006, and started paying EMI immediately, he would lose on the principal repayment deduction under Section 80C for the 3 years until construction of the property ends. This is because deduction under Section 80C can be availed only after getting possession of the property.
In case of more than one home loan
If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply. Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
In case of joint home loan
What is the tax impact if Sunil has taken the home loan jointly with his father?
In this case both Sunil and his father can claim tax deduction on their return if the home too is jointly owned by them. Tax benefit can be availed in the same proportion as the burden of EMI borne by each. If Sunil pays 80 percent of the EMI and his father contributes towards the remaining 20 percent, the tax deduction will be available in the same proportion. So if principal repaid during a year is Rs.1L then Sunil can claim Rs. 0.8L under section 80C and his father can claim Rs.0.2L under the even section. If Sunil’s father does not co-own the home, then he will not get any tax deductions for EMIs paid on such loan.
If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply. Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
The Income Tax Act, 1961 provides for tax benefits for assessees that have home loans. Typically a home loan is repaid to the bank / lender in monthly installments (EMIs). The installment consists of two parts - interest and principal repayment. The bank gives a detailed worksheet of the loan calculation and of the bifurcation of the EMIs paid by the borrowers. These monthly repayments are qualified for deductions from income tax. Here is the tax treatment for EMIs paid by the borrower:
Deduction under Section 80C of the Income Tax Act
The portion of the EMI paid towards repayment of principal amount of the loan can be deducted from income. The borrower can get a tax deduction for a maximum amount of Rs. 1L each year under this section irrespective of his tax bracket. The Act requires the home loan to be towards a property for self occupation. However if the assessee’s city of employment is different from the city where he has purchased a home, he is still eligible for this deduction. So if Sunil works in Mumbai but has purchased a home in his hometown Nagpur, he can still claim a deduction under this section even if he is not actually staying in this home.
Deduction under Section 24(b) of the Income Tax Act
The interest paid towards home loan is treated as an ‘expense’ under ‘Income from house property’ and is deductible under Section 24(b) from the total income of the assessee. The maximum deduction permitted under this section is Rs.1.5L per annum.
In case of partial disbursement of loan
In cases where some part of the loan is disbursed by the bank during construction stage of the property, the tax treatment is slightly different. This portion of the interest paid prior to completion of construction of property cannot be claimed as a deduction in the year in which it is paid. However, upon completion of construction, the assessee can claim deduction for this interest under Section 24(b) in 5 equal installments, i.e., 1/5th for each of the five years after the end of construction period. Note that the upper limit on deduction each year remains Rs. 1.5L. Assume Mr. Sunil purchased a home from Suraksha Developers in FY. 2005-2006.The property was still under construction and was completed only in F.Y 2008-2009. Some amount of loan was disbursed by the bank in FY2005-2006 and Sunil made interest payments of Rs. 1L between FY 2005-2006 and FY 2007-2008. Sunil can claim deduction of Rs. 0.2L for 5 years starting from FY 2008-2009.
In case of total disbursement of loan
If Sunil received the entire loan money in FY 2005-2006, and started paying EMI immediately, he would lose on the principal repayment deduction under Section 80C for the 3 years until construction of the property ends. This is because deduction under Section 80C can be availed only after getting possession of the property.
In case of more than one home loan
If Sunil works in Mumbai and has a purchased a home in Mumbai for which he has taken home loan. Will he still get benefit under the Act for this second home in Nagpur? The answer is ‘Yes’. Benefits under Section 80C and Section 24(b) can be taken for more than one home if all these homes satisfy the requirements of the Act. The home in Mumbai satisfies the condition of self occupancy while the home in Nagpur comes within the exception of the self occupancy rule that the city of work is different. Irrespective of the number of homes the maximum limit of Rs.1L for Section80C and Rs.1.5L for Section 24(b) still apply. Note that it does not matter if Sunil gives one home on rent. He will still be able to get the tax break.
In case of joint home loan
What is the tax impact if Sunil has taken the home loan jointly with his father?
In this case both Sunil and his father can claim tax deduction on their return if the home too is jointly owned by them. Tax benefit can be availed in the same proportion as the burden of EMI borne by each. If Sunil pays 80 percent of the EMI and his father contributes towards the remaining 20 percent, the tax deduction will be available in the same proportion. So if principal repaid during a year is Rs.1L then Sunil can claim Rs. 0.8L under section 80C and his father can claim Rs.0.2L under the even section. If Sunil’s father does not co-own the home, then he will not get any tax deductions for EMIs paid on such loan.
PWC Partners Network as on 1.04.2009-Source
| 012754N | 301112E | 016844N | 050032S | 304026E | 007567S | 007568S | 301056E | 116150W | No.of firms | |||||||||
| 13390 | DEB SUJITENDRA KRISHNA | 13390 | DEB SUJITENDRA KRISHNA | 13390 | DEB SUJITENDRA KRISHNA | 3 | ||||||||||||
| 14128 | DATTA SANKAR | 14128 | DATTA SANKAR | 14128 | DATTA SANKAR | 3 | ||||||||||||
| 17866 | GUJARATHI VASANT VITTHALDAS | 17866 | GUJARATHI VASANT VITTHALDAS | 2 | ||||||||||||||
| 17982 | HINGWALA RAJENDRAKUMAR DWARKADAS | 1 | ||||||||||||||||
| 18675 | SIVASUBRAMANIAN N | 1 | ||||||||||||||||
| 18863 | GOPALAKRISHNAN S | 18863 | GOPALAKRISHNAN S | 1 | ||||||||||||||
| 22311 | RAMESH RAJAN N | 22311 | RAMESH RAJAN N | 2 | ||||||||||||||
| 22795 | RAMAKRISHNA P | 22795 | RAMAKRISHNA P | 2 | ||||||||||||||
| 23800 | SEKAR J | 23800 | SEKAR J | 23800 | SEKAR J | 3 | ||||||||||||
| 23886 | NATESAN M S | 1 | ||||||||||||||||
| 23997 | USHA A NARAYANAN | 23997 | USHA A NARAYANAN | 23997 | USHA A NARAYANAN | 3 | ||||||||||||
| 25516 | RADHAKRISHNAN B | 25516 | RADHAKRISHNAN B | 2 | ||||||||||||||
| 29864 | SRINIVAS TALLURI | 29864 | SRINIVAS TALLURI | 29864 | SRINIVAS TALLURI | 3 | ||||||||||||
| 30798 | VACHHA KERSI HOMY | 30798 | VACHHA KERSI HOMY | 2 | ||||||||||||||
| 33220 | RANE VILAS YESHWANT | 33220 | RANE VILAS YESHWANT | 2 | ||||||||||||||
| 33596 | DALAL ASHISH SHARAD | 1 | ||||||||||||||||
| 34300 | THAKKAR HARESH GANPATRAI | 1 | ||||||||||||||||
| 37310 | DALAL SHISHIR VASANT | 1 | ||||||||||||||||
| 37942 | VENKATESH SUBRAMANIAN | 1 | ||||||||||||||||
| 40451 | AMIN ANISH PRAFUL | 1 | ||||||||||||||||
| 43229 | KARVE SHARMILA ABHAY | 43229 | KARVE SHARMILA ABHAY | 43229 | KARVE SHARMILA ABHAY | 3 | ||||||||||||
| 45668 | GORADIA HIMANSHU TRIBHOVANDAS | 45668 | GORADIA HIMANSHU TRIBHOVANDAS | 2 | ||||||||||||||
| 46061 | SHAH UDAY AMRITLAL | 46061 | SHAH UDAY AMRITLAL | 46061 | SHAH UDAY AMRITLAL | 3 | ||||||||||||
| 48102 | PUNJABI LALIT THAWARDAS | 48102 | PUNJABI LALIT THAWARDAS | 48102 | PUNJABI LALIT THAWARDAS | 3 | ||||||||||||
| 48125 | MIRCHANDANI JEETENDRA GOBIND | 48125 | MIRCHANDANI JEETENDRA GOBIND | 48125 | MIRCHANDANI JEETENDRA GOBIND | 3 | ||||||||||||
| 48393 | IYER SUNDER VENKATESHWARAN | 1 | ||||||||||||||||
| 50081 | DUTTA SAGAR | 50081 | DUTTA SAGAR | 50081 | DUTTA SAGAR | 3 | ||||||||||||
| 50087 | MATHEW THOMAS | 50087 | MATHEW THOMAS | 50087 | MATHEW THOMAS | 50087 | MATHEW THOMAS | 4 | ||||||||||
| 50497 | BAGCHI TUHIN | 50497 | BAGCHI TUHIN | 2 | ||||||||||||||
| 50553 | MITRA PARTHA | 50553 | MITRA PARTHA | 2 | ||||||||||||||
| 51790 | LAW PRADIP | 51790 | LAW PRADIP | 51790 | LAW PRADIP | 51790 | LAW PRADIP | 4 | ||||||||||
| 51912 | JAYANTA MAJUMDAR | 51912 | JAYANTA MAJUMDAR | 51912 | JAYANTA MAJUMDAR | 3 | ||||||||||||
| 52340 | SARKAR PRABAL KUMAR | 52340 | SARKAR PRABAL KUMAR | 2 | ||||||||||||||
| 55000 | BASU SUNIT KUMAR | 1 | ||||||||||||||||
| 55158 | GUPTA NEERAJ KUMAR | 55158 | GUPTA NEERAJ KUMAR | 55158 | GUPTA NEERAJ KUMAR | 55158 | GUPTA NEERAJ KUMAR | 1 | ||||||||||
| 55866 | SEN SANJOY | 1 | ||||||||||||||||
| 55892 | GUPTA NIRMALYA | 1 | ||||||||||||||||
| 55913 | GHOSH PARTHA | 55913 | GHOSH PARTHA | 55913 | GHOSH PARTHA | 3 | ||||||||||||
| 56155 | MUKERJI AVIJIT | 56155 | MUKERJI AVIJIT | 56155 | MUKERJI AVIJIT | 3 | ||||||||||||
| 57084 | MUKHOPADHYAY SAUGATA | 1 | ||||||||||||||||
| 57105 | DASGUPTA KUMAR KANTI | 1 | ||||||||||||||||
| 57687 | MAJUMDER DIBYENDU | 57687 | MAJUMDER DIBYENDU | 57687 | MAJUMDER DIBYENDU | 3 | ||||||||||||
| 58507 | DUTTA AMITESH | 2 | ||||||||||||||||
| 58991 | VENKAT RAMAN S | 58991 | VENKAT RAMAN S | 2 | ||||||||||||||
| 77779 | RARA ABHISHEK | 1 | ||||||||||||||||
| 84451 | DHAWAN ANUPAM | 84451 | DHAWAN ANUPAM | 2 | ||||||||||||||
| 86994 | HARINDERJIT SINGH | 86994 | HARINDERJIT SINGH | 86994 | HARINDERJIT SINGH | 3 | ||||||||||||
| 87191 | USHA RAJEEV | 87191 | USHA RAJEEV | 87191 | USHA RAJEEV | 3 | ||||||||||||
| 87228 | NIJHAWAN VALENTINE | 87228 | NIJHAWAN VALENTINE | 87228 | NIJHAWAN VALENTINE | 87228 | NIJHAWAN VALENTINE | 4 | ||||||||||
| 88540 | DUTTA KAUSHIK | 88540 | DUTTA KAUSHIK | 88540 | DUTTA KAUSHIK | 3 | ||||||||||||
| 90196 | VARADARAJAN N K | 90196 | VARADARAJAN N K | 90196 | VARADARAJAN N K | 3 | ||||||||||||
| 93044 | GUPTA CHARAN SEWAK | 1 | ||||||||||||||||
| 100681 | KEDIA ALPA SUBODH | 1 | ||||||||||||||||
| 103211 | DESAI MEHUL HARSHAD | 1 | ||||||||||||||||
| 104941 | PRASAD VIVEK RATNESHWAR | 104941 | PRASAD VIVEK RATNESHWAR | 104941 | PRASAD VIVEK RATNESHWAR | 104941 | PRASAD VIVEK RATNESHWAR | 4 | ||||||||||
| 200479 | VENKATESWARAN T S | 1 | ||||||||||||||||
| 202660 | ASHA RAMANATHAN | 1 | ||||||||||||||||
| 203637 | SHAIKH ABDUL MUJID JAINULABBEDDIN | 203637 | SHAIKH ABDUL MUJID JAINULABBEDDIN | 203637 | SHAIKH ABDUL MUJID JAINULABBEDDIN | 3 | ||||||||||||
| 204076 | SIVA PRASAD PULAVARTHI | 1 | ||||||||||||||||
| 204627 | SHIVAKUMAR HEGDE R | 204627 | SHIVAKUMAR HEGDE R | 204627 | SHIVAKUMAR HEGDE R | 3 |
Subscribe to:
Posts (Atom)
