Category Income Tax

Gift tax is an act introduced by the Parliament of India in 1958. It was introduced to impose tax on giving and receiving gifts under certain circumstances which is specified under the act. if the value of the gift exceeds Rs.50,000 then the gift is taxed as income in the hands of the person who receives the gift under the head ‘Income from other sources’ at normal tax rates. (Refer this link for the meaning of ‘Gift Tax’: https://consultcaonline.com/index.php/2022/05/20/what-do-you-understand-by-gift-tax/)

In case of Transfer of Shares & Securities by an individual:

• Any gift whose value is upto Rs.50,000 is exempt in the hands of both the sender as well as the receiver.
• Even if the monetary value of the gift received by a close relative exceeds Rs.50,000, it would be exempt and would not be taken under Income from Other Sources.
• However, if the monetary value of the gift exceeds Rs.50,000 in case on non-relative, it is taxable under the head Income from Other Sources at the Fair market value and taxed at the respective slab rates.

And, in case of Sale of shares & securities by an individual which were earlier received as a gift :

• It is taxable in the hands of receiver under the head Income from Capital Gain.
• In case the gift had been given by any of the close relative, the taxable amount under Capital Gain would be calculated as the difference between the Sale Value as on the date of the transaction occurring and the Cost of Acquisition as on the date it was purchased by the previous owner (since FMV on the date of receiving the gift would be zero in case of relative).
• However, in case the gift has been given by any non-relative, it would be taxable under IFOS at the time of receiving the gift, and capital gain would arise only when the shares or securities are sold.
• The taxable amount under Capital Gain in case of non relative would be calculated as the difference between the Sale Value and the Fair Market value as on the date of receiving the gift.
• Capital Gain can be Long-term or short-term depending upon the date of purchase of the sender.
• If there is Short term capital gain, it would be taxable at the rate of 15% as per section 115A of Income Tax Act.
• However, based on the purchase date of the sender, if there is long term capital gain, taxability would arise at the amount exceeding Rs.1,00,000 at a rate of 10% as per section 112A.
• REPORTING: Sale of shares, ETFs, Mutual funds, etc. received as a gift would be taxable as Capital Gain under Schedule CG of ITR-2 of the taxpayer.

In case of sale of shares and securities in an HUF:

In case of Hindu Undivided Family (HUF) Business, all the members would be considered as “relatives”. However, the provision applicable for relative of an individual would not be applicable here.

In this case, if any shares or securities are transferred (as gift) from its members to the HUF, it is exempt and would not be liable to tax.

However, it is not the other way around. Any gift transferred from the HUF to its members would be liable to tax since this transaction would be suspicious and improper in the place of Karta to give any gift to its members without any personal motive.

India is a nation of close-sewn families and have a great deal of motivations to praise its diversified culture, customs and religion. Various events emerge where gifts are traded. As a matter of fact, gifting each other is a symbol of adoration and warmth and can likewise be an image of societal status.

Be that as it may, numerous times, gifts can likewise be a part of tax planning/tax avoidance. While tax planning inside the structure of law is admissible, tax avoidance is disallowed and can be penalized.

 WHAT IS GIFT TAX?

Gift tax is an act introduced by the Parliament of India in 1958. It was introduced to impose tax on giving and receiving gifts under certain circumstances which is specified under the act. These gifts can be in any form including cash, jewelry, property, shares, vehicle, etc.

As per the Income tax act of 1961, if the value of the gift exceeds Rs.50,000 then the gift is taxed as income in the hands of the person who receives the gift under the head ‘Income from other sources’ at normal tax rates.

Income Tax on Gift received by an Individual or HUF is governed by provisions of Section 56(2)(x) of the Income Tax Act. As per the provisions of this Section, Gift Tax will not be levied under the subsequent 7 circumstances: –

1.     Gifts received from Relatives:

Any gifts received from the ‘close’ relatives are exempted irrespective of the amount. Following people are covered under the definition of ‘close’ relatives:

•       Spouse of the Individual
•       Brother or Sister of the Individual
•       Brother or Sister of the spouse of the Individual
•       Brother or Sister of either of the parents of the Individual
•       Any Linear ascendant or descendent of the Individual
•       Any Linear ascendant or descendent of the spouse of the Individual
•       Spouse of the person mentioned above

 NOTE:

Ø  In case of HUF, all members would be considered its relatives.

Ø  However, despite the fact that the actual gift is exempted in the possession of the recipient, any income earned from the gift might be taxable under the provisions of Clubbing of the Income Tax Act.

 2.     If the aggregate value of gifts received is upto Rs. 50,000

If the aggregate value of gifts (whether in cash or in kind) received from a person or persons (except relatives as specified above) in any financial year does not exceed Rs. 50,000/-, then such gifts aren’t susceptible to Gift Tax.

However, if the value of gifts received exceeds Rs. 50,000/-, then the whole gift so received is taxable as Income from other sources

3. On the occasion of Marriage of the Individual

Gifts received from any person (whether relative or non-relative) on the occasion of marriage is exempt from tax (irrespective of amount). But note that gifts are exempted only on the occasion of own marriage, and not on the marriage of anyone among the family.  

4.     Gift Tax on Property received

* In case of Immovable Properties, the stamp duty value would be considered and in case of Movable Properties, the fair market value would be considered.

KIND OF GIFT COVERED	MONETARY THRESHOLD	QUANTUM TAXABLE
Any immovable property such as land, building etc. without consideration	Stamp duty value* > Rs 50,000	Stamp duty value of the property
Any immovable property for inadequate consideration	Stamp duty value* exceeds consideration by > Rs 50,000	Stamp duty value Minus consideration
Any property (jewelry, shares, drawings etc.) other than immovable property without consideration	Fair market value *(FMV) > Rs 50,000	FMV of such property
Any property other than immovable property for a consideration	FMV exceeds consideration by > Rs 50,000	FMV Minus consideration (Same example in case of immovable property can be referred

The meaning of Property in the above-mentioned table has been defined as: –

• Immovable Property being land or building or both
• Shares and Securities
• Jewelry
• Archaeological Collections
• Drawings
• Paintings
• Sculptures
• Any other work of Art

PROVISION RELATED TO STAMP DUTY:

To calculate gift taxes on immovable property or land stamp duty on gift deeds as on the date of agreement fixing is considered if the value of stamp duty exceeds 50,000. It is done to avoid higher stamp duty because of the time gap between the agreement date and date of registration within the following scenarios:

• Date of agreement and the date of registration is different.
• If the consideration is paid either wholly or partly through any modes such as cheque, bank draft or electronic mode before the date of agreement for transfer.

Also, in case of disputes in the calculation of stamp duty, the stamp duty valuation authority calls for records and passes an order in writing of value as per Section 500 and lower of the stamp duty value or value arrived by Valuation officer (VO) is considered.

5.     Gifts received under a Will or by way of Inheritance or in contemplation of Death of the payer

Any amount received under a will or via legacy or in contemplation of death of the payer is completely exempt in the possession of the recipient. There is no maximum cap in this case and the whole amount in cash/kind, received as gift is considered as tax free.

6. Gifts received from any Local Authority as defined in Section 10(20) are completely exempt.

7. Gifts received from any Fund or Foundation or University or other Education Institution or Hospital or other Medical Institution or any other Trust or institution referred to in Section 10(23C) or Gifts received from any fund or Institution registered under Section 12AA are also exempt, irrespective of value.

Key points:

The Finance Act, 2020 came with the change in registration process of charitable and religious organizations and also all the existing trusts or institutions registered under section 12A/12AA need to be re-registered themselves under section 12AB. And section 12A &12AA are omitted.

• Section 12A(1) speak about the conditions to be fulfilled by any trust or institution subject to which exemption under sections 11 and 12 shall be available. One of the conditions is that the trusts or institutions are required to registered under section 12AB [Section 12A(1)(ac)].

• The registration process of every trust or institution under the new scheme shall be completely electronic and a 16 digit unique registration number (URN) shall be allotted to each application of Registration or Re-registration.

• The registration validity under section 12AB shall be for 5 years except in the case of provisional registration which shall be valid for 3 years. All registrations made under section 12AB are required to be renewed as specified under new scheme of registration.

• Initially all the Trust and Institutions those already registered under the previous law “and” Trust and Institutions not registered under the previous law and want to make an application for fresh Registration or Approval under the new law or any other case need to file FORM 10A and the time limit is within 3 months from 1st April, 2021 i.e. up to 30th June, 2021

• Once the Trust and Institutions Registered initially under 12AB with the new law then for re-registration they have to file FORM-10AB and the time limit is at least 6 months before the expiry of the said period.

Registration Process:

Step-1 Visit www.incometaxindiaefiling.gov.in

Step-2 Login with the User ID and password.

Step-3 Go to e-file>Income Tax Forms.

Step-4 Select ‘Form 10A’ from the dropdown menu of ‘Form Name’ and click ‘Continue’.(Form 10AB is not available yet)

Step-5 On the landing page, you will find 3 tabs:

1. Instructions: This tab has general instructions for the applicant to fill the details in Form 10A. It is advisable to read the instructions carefully before filling the form.
2.  Form 10A: Fill the required information in Form 10A.  
3.  Verification: Fill the details in verification tab.

Step-6– Type of Constitution :Trust, Society, Company, Others.

              Nature of Activities : Charitable Religious Religious cum Charitable.

Step-7– Once all data filled, Submit the form with DSC or EVC.

Section to be discussed with relevant Rules:

Section 44AB	Audit of Accounts
With Section 44AD	Presumptive Income from Business
With Section 44ADA	Presumptive Income from Profession
Rule- 6G	Audit Report
Section 271B	Penalty

Section 44AB. Every person-

(a)  Carrying on business and his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds “One crore (1 Crore) rupees” in any previous year:

Provided that in the case of a person whose-

(a)  Aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed five per cent  (5%) of the said amount; and

(b)  Aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent (5%) of the said payment,

Above clause shall have effect as if for the words “one Crore (1 Crore) rupees”, the words “five Crore (5 Crore) rupees” had been substituted; or]

Note:

• The Finance Act-2021 has increased the threshold limit under this section from Rs. 5 Crores to Rs. 10 Crores
• Where cash transactions do not exceed 5% of total cash transactions. It is further clarified that transactions settled through non-account payee Cheque and Demand dreaft shall be treated as “Cash Transactions” for the purpose of computing the threshold limit of 95% digital transactions.

(b)  Carrying on profession and his gross receipts in profession exceed fifty lakh (50 Lakh) rupees in any previous year; or

(c)  Carrying on the business and the profits and gains from the business are deemed to be the profits and gains of such person under Section 44AE or Section 44BB or Section 44BBB, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year; or

(d)  Carrying on the profession and the profits and gains from the profession are deemed to be the profits and gains of such person under Section 44ADA and he has claimed such income to be lower than the profits and gains so deemed to be the profits and gains of his profession and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year; or

(e)  Carrying on the business and the provisions of sub-section (4) of Section 44AD are applicable in his case and his income exceeds the maximum amount which is not chargeable to income-tax in any previous year

Section 44AD(4) Where an assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

Provided that this section shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore (2 Crore) rupees in such previous year:

Provided further that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BBA, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later :

Provided also that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report by an accountant in the form prescribed under this section.

Summary:

For Resident Professionals (Sec 44AB + Sec 44ADA)

For Business (Sec 44AB + Sec 44AD) (Resident Individual /HUF/Firm (excluding LLP)

For Business (Sec 44AB + Sec 44AD) (Other Assessees)

Rule 6G- Report of audit of accounts to be furnished under section 44AB

Penalty u/s 271B

According to section 271B, if any person who is required to comply with section 44AB fails to get his accounts audited in respect of any year or years as required under section 44AB or furnish tax audit report, the Assessing Officer may impose a penalty. The penalty shall be lower of the following amounts:

(a) 0.5% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such year or years.

(b) Rs. 1,50,000.

However, according to section 271B​, no penalty shall be imposed if reasonable cause for such failure is proved.

Examples: Applicability of 44AD/44ADA & 44AB

Provision under Section 9B of Income Tax Act:

Where a specified person receives any “capital asset or stock in trade or both” from a specified entity during the previous year in connection with the “dissolution or reconstitution” of such specified entity then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.

Explanation:

In this Section 9B (1) it’s says that deemed transfer at a time of:

• At a time of Dissolution or Reconstitution
• Transfer of capital assets or stock in trade or both and,
• The tax to be payable by the specified entity not in the hand of the specified person.

In case of transfer of Capital assets:

Capital Gain Tax to be charged in the hand of the specified entity under the provision of Sec. 45(1).

For this sale consideration is the fair market value (FMV) of the capital assets at the time of transfer (-) minus Cost of Acquisition/ indexed Cost of Acquisition  

In case of transfer of Stock in Trade:

For this sale consideration is the fair market value (FMV) of the capital assets at the time of transfer (-) minus Cost of Acquisition

Provision under Section 45(4) of Income Tax Act:

Notwithstanding anything contained in sub-section (1) of section 45 of Income Tax Act, where a specified person receives any money or capital asset or both from a specified entity in connection with the “reconstitution” of such specified entity during the previous year, then any profits or gains arising from such receipt by the specified person shall be chargeable to income-tax as income of such specified entity under the head “Capital gains and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person.

 Such profits or gains shall be determined as per this formula :-“A=B+C-D”

Where,

A = income chargeable under the head “Capital gains” in the hand of the entity,

B = value of any money received by the specified person from the specified entity (on the date of receipt),

C= the amount of fair market value of the capital asset received by the specified person from the specified entity (on the date of receipt),

D = the amount of balance in the capital account of the specified person in the books of account of the specified entity (at the time of its reconstitution)

if the value of ‘A’ in the above formula is negative then its deemed to be zero.

Explanation:

In this Section 45(4) it’s says that:

• At a time of Reconstitution only
• Transfer of capital assets or money or both and,
• The tax to be payable by the specified entity not in the hand of the specified person.

Let’s understand with the help of an Example:

Mr. “A “who is retired from a partnership firm (consider as Reconstitution of partnership firm) get:

Capital Assets of Rs. –     6 Crores      Cost of Acquisition of Rs –             4 Crores

Stock in Trade od Rs.-     1.5 Crores   Cost of Stock of Rs.-                        1 Crore

Cash of Rs.                         2 Crores     Capital in books Rs.                         5 Crore

Then Partnership firm is liable to pay tax on an amount calculated as under-

Capital Gain u/s 45(1) = 6-4=2 Crores

Business profession u/s 28 = 1.5-1=.50 crore

Capital Gain u/s 45(4) = 2+6-5= 3 crores

Definitions:

1) “Reconstitution of the specified entity” means where:

(a) One or more of its partners or members, as the case may be of such specified entity ceases to be partners or members,

(b) One or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity before the change, continue as partner or partners or member of members after the change or

(c) All the partners or members, as the case may be of such specified entity continue with a change in their respective share or in the shares of some of them.

(ii) “Specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society)

(iii) “Specified person” means a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year.

What Is a Unit Linked Insurance Plan (ULIP)?

ULIP is a product issued by Insurance Companies. It’s a product combination of insurance coverage and investment exposure. Like all other insurance policy, Policyholder requires to pay the regular premium. There are many different ULIP plans available (Equity / Debts) in the market like life insurance, retirement income, and education expenses.

Exemptions, Tax Deduction & Taxability:

Exemption under Section 10 (10D) can be claimed only fulfillment of the following conditions:

1. In the case of ‘Death Claim’, any amount of claim received by the nominee is entirely tax free.
2. In the case of ‘Maturity Claim’, any amount of claim received by policyholder is subject to tax and the tax is deducted under Section 194DA (TDS on the maturity of Life Insurance Policy) at the rate of …..by the insurance company if the annual premium payment is more then 10% of sum assured and the policy issued on or before 1st April ‘2012.(as per sub section (d) of Section 10 (10D))
3. Deduction under Section 80C is available for the premium paid for ULIP subject to the condition of 10% of the sum assured and has a lock-in period of 5 years.
4. If annual premium payment is more then 10% of the sum assured and the policy issued on or before 1st April ‘2012 than the amount of claim is added to total income (Income from other sources) and the tax calculated as per the Income tax slab.

In Finance Bill 2021, Proviso 4 and 5 of Section 10 (10D) added and the explanation as follows.

Fourth proviso to Section 10(10D)

Fourth proviso to clause (10D) of section 10 is inserted to provide that the exemption under this clause shall not apply with respect to any ULIP issued on or after the 1st February, 2021, if the amount of premium paid for any of the previous year during the term of the policy exceeds amount Rs. 2,50,000.

It means all the policies issued before 1st Feb,2021 are not considered in this Proviso and Exemptions, Tax Deduction, and taxability same as we discussed before.  

Fifth proviso to Section 10(10D)

Fifth proviso to clause 10(10D) is proposed to be inserted to provide that, if premium is paid by a person for more than one ULIPs, issued on or after the 1st February, 2021, exemption under this clause shall be available only with respect to such policies aggregate premium whereof does not exceed the amount of Rs. 2,50,000, for any of the previous years during the term of any of the policy.

It means if the policyholder has more than one ULIP policy then aggregate premium consider for calculation of 2,50,000 limit as referred in the forth proviso.

If proviso 4th and 5th applicable then Taxability:

As per new amendments ULIP is treated as “Equity Oriented Funds”. So now Capital gain tax arises on the maturity of ULIP’s if Proviso 4 and 5 applicable under section 45(1B) of Income Tax Act.

Under Section 112A, Long-Term Capital Gains (LTCG) arising out of the sale of units of equity-oriented mutual fund schemes are taxed @ 10% without any indexation benefit, if the LTCG exceeds Rs. 1,00,000 in a financial year.

As per Section 111A -In case the equity oriented mutual fund units redeemed are held for 12 months then it qualifies for short term capital gain and taxable at a flat rate of 15%.

Accordingly, Section 2(14) is amended and ULIP is defined as a ‘Capital Asset’ and Section 45(1B) included “Proceeds from the redemption of ULIPs are taxable under the head ‘Capital Gains’

TCS Provisions on Sale of Goods under Section 206C(1H) along with TDS Provision on Purchase Transactions under Section 194Q

TCS Provisions on Sale of Goods under Section 206C(1H):

Finance Act 2020 had inserted a new sub-section (1H) under section 206 of the Income Tax Act. This new provision specifies the collection TCS on Sale of goods with some conditions, For this CBDT issued a circular No. 17 on 29th Sept 2020 for a better understanding of this provision. This section came into force with effect from 1st Oct 2020. 

Applicability of Section 206C(1H):

1. The tax shall be collected by the seller only if turnover is more than 10 crores in the preceding financial year.
2. The seller “receives” any amount for consideration for the “sale of goods” of the value or aggregate of such value exceeding INR 50 lakhs in any previous year from such buyer.

Then TCS collected by the seller at the rate of 0.1% on the sale consideration received exceeding Rs.50 lakhs on and after 1st Oct, 2020 and deposited the same within 7 days from the end of the month. The limit of 50 lakhs is per buyer per year.

The Guidance note clearly said that any transaction with various exchanges like recognized stock exchanges, recognized clearing corporations, and transaction with power exchanges not considered for the provision of Sec 206C(1H) as there is no one to one contract of buyer and seller.

In short, if the turnover of the seller exceeds 10 crores in the last year and the amount received from a buyer in the current year exceeds 50 lakhs then TCS should be collected on such sum exceeding 50 lakhs on and after 1st Oct,2020.

TDS Provisions on TDS on Purchase Transactions Section 194Q :

Finance Act 2021 had inserted a new Section 194Q- TDS on Purchase Transactions. This new section says Tax to be deducted on transactions with some conditions; this section is effect from 1st July 2021.

Applicability of Section 194Q:

1. The tax shall be deducted by the buyer only if turnover is more than 10 crores in the preceding financial year.
2. a buyer who is responsible for paying any sum to the seller for “purchase of goods” of the value or aggregate of such value exceeding INR 50 lakhs in any previous year, 

Then TDS to be deducted by the buyer at the rate of 0.1% on the payment exceeding Rs.50 lakhs on and after 1st July, 2021 and deposited the same within 7 days from the end of the month. TDS deducted at the time of payment and Seller must be resident.

In short, if the turnover of the Buyer exceeds 10 crores in the last year and the amount need to pay to the seller by such buyer in this year is exceeds 50 lakhs then TDS should be deducted on such sum exceeding 50 lakhs on and after 1st July,2021.

Summary:

Seller

Buyer

T/O last Year	Sale Value	TCS	T/O last Year	Purchase Value	TDS
Less than 10 CR	Less than 50 Lakhs	N.A	Less than 10 CR	Less than 50 Lakhs	N.A
Less than 10 CR	More than 50 Lakhs	N.A	Less than 10 CR	More than 50 Lakhs	N.A
More than 10 CR	More than 50 Lakhs	Yes	Less than 10 CR	More than 50 Lakhs	N.A
Less than 10 CR	More than 50 Lakhs	N.A	More than 10 CR	More than 50 Lakhs	Yes
More than 10 CR	More than 50 Lakhs	No	More than 10 CR	More than 50 Lakhs	Yes

Why section 194-Q and section 206 C (1H) was required by Law?

The motive behind Govt. having implemented these sections seems to be very clearly brought about a change where large amount of transactions are being traced without any trail where GST amounts is being misappropriated. Govt. intends to bring all such purchase and sales transactions under some audit trail so that fake or frivolous transactions could be tracked or bring under the trail of TDS and TCS provisions and checked in future, if required.

The Central Board of Direct Taxes (CBDT) was issued Notification No. 21/2021, dated 31-03-2021and notify the changes in ITR Forms for the Assessment Year 2021-22. 

First understand what is ITR-1?

 ITR-1 (Sahaj), A simpler forms and filed by the small and medium individual taxpayer having income up to Rs 50 lakh and who receives income from salary, one house property or other sources like  interest income etc.

In this Pandemic time there is no such significant changes done.

Changes in ITR-1 from AY 2021-22 are as follows:

• ITR-1 shall not be available to an individual taxpayer whose tax has been deducted on cash withdrawal under Section 194N.

Under section 194N of the Income Tax Act, tax is required to be deducted by any bank, banking institution, cooperative bank or post office if the amount of cash withdrawn by individual person from one or more account during the year exceeds Rs 20 lakh in case of certain non-filers of return and Rs 1 crore in other cases.

Rule 12 of the Income tax rules has been amended and Consequential changes have been made to ITR-1.

• ITR-1 shall not be available to an individual taxpayer in case of deferment of tax on ESOPs, Deferment the payment or deduction of tax on ESOPs allotted by an eligible start-up referred under Section 80-IAC has allowed in the Finance Act, 2020

Under section 80-IAC (applicable for eligible start-ups) of the Income Tax Act, Tax is required to be deducted or paid of such ESOP’s within 14 days from the following period:

Under section 80-IAC (applicable for eligible start-ups) of the Income Tax Act, Tax is required to be deducted or paid of such ESOP’s within 14 days from the following period:

1. After expiry of 48 months from the end of AY relevant to the financial year in which ESOPs are allotted;
2. From the date of sale of shares allotted under ESOP ; or
3. From the date the assessee ceases to be an employee of the organization.

Rule 12 of the Income tax rules has been amended and Consequential changes have been made to ITR-1.

• ITR-1 changes due to change in taxability in Dividend Income.

The Finance Act 2020 Finance Minister abolished the Section 115-O – Dividend Distribution Tax (DDT) and Shift the burden of tax on the shareholders by withdrawing the Section 10(34) and accordingly section 115BBDA has no relevance as entire dividend is taxable in the hands of shareholders from 1st April 2020.

From 1st April 2020 Companies deducted TDS @ 10% under section 194 of Income tax Act if dividend payout is more than Rs.5000.

Now Dividend Income comes in Schedule SI (Special Income) of ITR-1 and taxable with special rate. Corresponding changes have been made to Schedule SI.

Provision & Computation with Example’s

The Finance Act, 2020, has allowed to defer the payment or deduction of tax on ESOPs allotted by an eligible start-up referred under Section 80-IAC. The tax is required to be paid or deducted in respect of such ESOPs within 14 days from the earliest of the following period:

1. After expiry of 48 months from the end of Assessment year relevant to the financial year in which ESOPs are allotted;
   1. From the date the assessee ceases to be an employee of the organization; or
   1. From the date of sale of shares allotted under ESOP.

Reporting of amount deferred in respect of ESOPs

If an employee has received ESOPs from an eligible start-up referred to in Section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

The ITR Form does not provide any guidance on the computation of the tax to be deferred. In such a situation, the tax to be deferred can be computed in accordance with the guidance give below.

Applicable rate of tax

As the perquisite arising from ESOPs shall be taxable in the year in which shares are allotted or transferred by the employer to employees, the tax shall be calculated on the basis of rates applicable in the year in which shares are allotted or transferred.

Example, X Pvt. Ltd launched an Employee Stock Option Scheme for its employee in year 00 under which shares of the company would be allotted to employees at free of cost. Mr. A, one of the employees of X Pvt. Ltd., exercises his option to apply for the shares of the company in year 01. At the time of exercising of option, the fair market value of shares was Rs. 100. However, the company allots shares to Mr. A in Year 02. What shall be the amount of perquisite and in which year it shall be chargeable to tax in hands of Mr. A and at what rate?

In the above example, the amount of perquisite chargeable to tax in the hands of Mr. A shall be the fair market value of shares on the date of exercising of option, i.e., Rs. 100 and it shall be chargeable to tax in the year in which shares are allotted by the company, i.e., Year 02. Thus, tax on perquisite shall be calculated at the rate as applicable in Year 02.

How to calculate the amount of tax to be deferred?

An employee is required to disclose the value of perquisite from ESOPs in his return of income (Schedule TTI) of the year in which shares are allotted. However, due to the deferment of payment of tax, the employee shall not be required to pay tax on perquisite arising from ESOPs in such year. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, should be computed as per following formula.

Tax payable on salary income excluding ESOPs perquisite	=	Tax on total income including ESOPs perquisites	X	Total income excluding ESOPs perquisites ———————— Total income including ESOPs perquisites

Example, Mr. A, working in a start-up company, has been allotted 100,000 shares at the rate of Rs. 10 per share under ESOP scheme in the Financial Year 2020-21. The fair market value of shares at the time of exercising of option by Mr. A is Rs. 100. The perquisite value of ESOPs taxable in the hands of Mr. A shall be Rs. 90 Lakhs [100,000 shares* (Rs. 100 – Rs. 10)]. The annual salary of Mr. A (excluding perquisite value of ESOPs) in that year is Rs. 40 Lakhs. He continues with the company even after expiry of 48 months from the end of the assessment year in which shares are allotted and he does not sell the shares even after expiry of said period. What shall be the mechanism for deferment of TDS and tax on perquisite value of ESOPs in such a case?

Assessment Year 2021-22
Mr. A would be required to disclose the perquisite value of ESOPs, i.e., Rs. 90 lakh in his return of income but he shall not be liable to pay any tax thereon in the year of allotment of shares. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, shall be computed in the following manner:

Particulars	Amount (in Rs.)
Total Income before including perquisite value of ESOPs (A)	40,00,000
Add: Perquisite Value of ESOPs (B)	90,00,000
Total Income after including perquisite value of ESOPs  (C)	1,30,00,000
Tax on Rs. 1.30 crore  as per slab rates applicable for Assessment Year 2021-22 as per old taxation regime (D)	37,12,500
Add: Surcharge [E = D * 15%]	5,56,875
Add: Education Cess [F = (D + E) * 4%]	1,70,775
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs [G = D + E + F]	44,40,150
Tax liability attributable to salary income (excluding the perquisite of ESOPs) [G * A / C]	13,66,200

Assessment Year 2026-27
As Mr. A continues with the company after expiry of 48 months from the end of the Assessment Year in which shares are allotted and he does not sell the shares even after expiry of said period, the liability to deduct tax or make payment of tax on perquisite value of ESOP will arise in the Assessment Year 2026-27, i.e., after expiry of 48 months from the end of the Assessment year (2021-22) in which shares are allotted. The TDS shall be deducted within 14 days from the end of the assessment year 2025-26. The tax liability for the Assessment Year 2026-27 shall be computed as under:

Particulars	Amount (in Rs.)
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs	44,40,150
Less: Tax already paid at the time of filing of return for the Assessment Year 2021-22	13,66,200
Differential amount to be deducted or paid by the employer or employee in the Assessment Year 2026-27	30,73,950

Timeline to file belated Income Tax Return (ITR) under section 139(4):

As per the Finance Act 2016 amendment from AY 2017-18 anyone can file a belated return on or before the relevant Assessment Year if missed the due dates mentioned in section 139(1) of the Income tax Act.

Example: For AY 20-21 last date to file a belated return on or before 31^st Mar 2021.  

File Income Tax return under section 119:

This section 119 authorized to Central Board of Direct taxes -CBDT to direct Income tax authority to allow the assessee to file ITR even missed deadline under section 139(4). The Taxpayer can claim for exemption, deduction, refund, and any other relief even after the expiry of the time limit to make such claims.

Conditions:

• Taxpayers have to file an Application in writing to the relevant Authorities.
• Time limit to file the application within next 6 years from the end of the assessment year
• The authorities accept the application to file the return under sec. 119 only if there is a genuine reason otherwise they have right to reject.

How to file returns under section 119(2)(b):

Once the application is accepted an order should be passed by the authorities.

Then follow the below steps:

• Login to  income tax e-filing portal
• Go to the “e-file” tab and select “Income tax returns”
• Select the assessment year for which you have to file the return under this section
• Then, choose the filing type – “Filing against notice/order”
• Select the filing section – “139 read with section 119(2)(b)”
• Then upload an XML and file return by verifying it.