Things to keep in mind during tax assessment

While announcing the budget this year, one particular announcement was greeted with particular cheer by high-income group (with an annual income equal to ₹50 lakh or more) earners: they would not have to pay extra towards coronavirus related cess. While there were no changes in income tax slabs, tax rates, or deductions, some investments that were tax-free will now be taxed, which means the investments we make from a taxation point of view will need to be revisited. With the deadline for self-assessment of tax fast approaching, here’s what you need to know.

EPF contributions

Contributing regularly towards employee provident fund (EPF) is one of the few investments that several of us rely upon. However, the Budget 2021 surprised many high-income taxpayers as the non-taxable portion of the fund’s interest has been capped at ₹2.5 lakh. Budget 2020 had capped the non-taxable PF contribution and interest each to ₹7.5 lakh. To save on taxes, the best way out is to stop making large voluntary employee provident fund contributions.

ULIP investments

ULIPs investments had an EEE (Exempt-Exempt-Exempt) feature: The three exempts referred to the annual premium towards ULIPs; the interest accumulated over the period; the income generated from the investment However, now, ULIPs bought or issued on or after February 1, 2021, will not be exempt from tax if the annual premium payable on them every year exceeds ₹2.5 lakh. For taxation, these ULIPs will be treated like equity-oriented mutual funds.

“The government is seeking to ensure that all investment options are treated similarly. However in case of the unfortunate death of the insured person, the death benefit will continue to remain tax-free,” Vivek Jain, head of investments, Policybazaar.com, a financial services marketplace, explained.

In case the total annual premium of ULIPs bought after February 2021 is greater than ₹2.5 lakh, then the gains at maturity will be considered as long term capital gain. The current tax rate is 10% tax beyond a gain of ₹1 lakh in any financial year. This will be applicable whenever the policyholder makes partial or full withdrawals any time after five years. The idea behind this rule is to encourage people to stay invested in ULIPs for prolonged periods.

Tax on property

The government is trying hard to boost the real estate sector. Even home loans have been reduced to boost people’s interest in residential property. Tax norms have been eased on purchase of residential property in which the property price varies with the stamp duty charges. During property purchase, taxpayers should check if the stamp duty charges exceed the agreement value by 20%. If the stamp duty costs more than the agreement value by 20% or more, the difference will be taxable. This means taxpayers buying residential property, sold in distress, can heave a sigh of relief as the stamp duty would not be more than the agreement value.

However, this tax relief is subject to certain conditions.

“The increase of gap between the circle rate and the notional deemed sale consideration for taxation purpose will help the developers liquidate their existing inventory. This is a relief for distressed sellers,” Sudarshan Lodha, Co-founder, a commercial real estate investment platform said.

“In times of Covid-19, when property values under stamp duty laws are higher than what a property can get, a notional tax on a deemed value is a significant deterrent for the correction of property prices. A 20% deviation from the stamp duty value allows for prices to be reasonable and benefits both the seller and the buyer,” Sridhar R, Partner, Grant Thornton Bharat, an integrated Assurance, Tax and Advisory firm, said.

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