AFFORDABLE HOUSING

AFFORDABLE HOUSING

Budget 2019 has brought some relief and hopes for the home buyers and the developers as it was anticipated. After a long low spell, finally some silver linings could be seen as a good number of direct and indirect measures were proposed for the revival of the real estate industry.

Section 80-IBA of INCOME TAX ACT, 1961:

What is Section 80IBA of the Income Tax Act?

Section 80 IBA allows for income tax deduction for assessees who have any gains or profits from the business of building and developing housing projects in the affordable housing segment. The key reason for insertion of Section 80 IBA in the Income Tax Act is to incentive the development of affordable housing for the builders and promoters of these projects. The amount of deduction is equal to hundred per cent (100%) of the profits and gains derived from such business.

Conditions to be satisfied by such housing projects:

(i). Assessee must have the profits and gains derived from the business of building and developing housing projects.

(ii). The concerned authority has approved the housing project after 1st June 2016 but on or before 31st March 2019.

(iii). The assessee must complete the project within 5 years from the date of receiving approval from the competent authority.

(iv). The particular housing project will only be considered as complete when the certificate of project completion as a whole is received in writing from the concerned authorities.

(v). The carpet area of the commercial establishments such as shops within the housing projects should not exceed three per cent of the aggregate carpet area.

(vi). Following are the qualifying criteria regarding size of the plot, residential units and minimum utilization of the Floor Area Ratio (FAR) for a project to qualify for tax benefits u/s 80 IBA.

 

Project Location Area of Land on Which the Project is Located Carpet Area of the Residential Units   Utilisation of Permissible FAR
Delhi, Mumbai, Kolkata and Chennai Not less than 1,000 square metres Not more than 30 square metres Not less than 90%
Project located in locations than the cities listed above Not less than 2,000 square metres Not more than 60 square metres Not less than 80%

 

(vii) No residential unit in the housing project will be allotted to an individual, their spouse or minor children if they already have an allotted residential unit in the project.

(viii) The assessee has to maintain a separate book of accounts for the housing project.

 

  Project Eligible  u/s 80-IBA Other Project Total Income
Gross Total Income 100 100 200
Less: Deduction u/s 80-IBA 100 0 100
Net Profit 0 0 100

 

(ix)  The project is the only housing project on the plot of land as specified in clause (vi)

  • If the project is not completed within 5 years from the date of approval, the profits which were allowed as deduction under this section shall be deemed to profits of the year in which such time limit of completion expires and chargeable to tax under the head “Profits and gains of business or profession”.
  • This deduction is not applicable to an assessee who completes the project as a work contract who executes the housing project as a works-contract awarded by any person (including the Central Government or the State Government).
  • The provisions of Minimum Alternate Tax us.115JB or Alternate Minimum Tax us.115JC, depending on the status of the assesse, will be applicable on the profits of the housing project which is eligible for deduction under section 80-IBA are available.

Where the projects approved on or after the 1st day of September, 2019, the condition specified in point (vi) above shall be substituted by the following condition

Project Location Area of Land on Which the Project is Located Carpet Area of the Residential Units            Utilisation of Permissible FAR
Metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Mumbai Metropolitan Region); Not less than 1,000 square metres Not more than 60 square metres Not less than 90%
Project located in locations than the cities listed above Not less than 2,000 square metres            Not more than 90 square metres Not less than 80%

 

The stamp duty value of a residential unit in the housing project does not exceed forty-five lakh rupees in respect of the projects approved on or after the 1st day of September, 2019.

Deduction eligible even if Developer not “owner” of land under Joint Development Agreement:

Section 80IBA allows deduction to an assessee engaged in the business of building and developing housing projects in the affordable housing segment. There is no requirement that the land must be owned by the assessee seeking the deduction. Under the development agreement, the assessee had undertaken the development of housing project at its own risk and cost. However land owner (under Joint Development Agreement) cannot avail deduction under this section.

 

Section 80EEA of INCOME TAX ACT, 1961:

In order to provide an impetus to the “Housing for all”, the government has now extended the interest deduction allowed for low-cost housing loans taken during the period between 1 April 2019 and 31 March 2020. Accordingly, a new Section 80EEA has been inserted to allow for an interest deduction from AY 2020-21 (FY 2019-20).

This deduction of Rs. 1.5 Lakhs would be applicable from Financial Year 2019-20 onwards and would be over and above the tax deduction of Rs. 2,00,000 under Section 24 and Rs. 1,50,000 under Section 80C.

There are certain conditions for claiming this deduction under the newly inserted Section 80EEA and only a person who satisfies all these conditions would be eligible to claim deduction under this section. These conditions are:-

  • Deduction is available to individual taxpayers only. (Both resident and non-resident)
  • Loan has been sanctioned by a financial institution during the period beginning on 1-4-2019 to 31-3-2020.
  • The stamp duty value of house property does not exceed 45 lakhs.
  • Assesse does not own any residential house property on the date of sanction of loan.

Also, that where a deduction under this section is allowed for any interest, deduction shall not be permitted of such interest under any other provisions of the act for the same or any other assessment year.

 

Compiled By  CA SRIRAM V. RAO.

DATE:  31st October 2019.

BUY BACK OF SHARES

BUY BACK OF SHARES

 

TAXABILITY OF BUYBACK OF SHARES OF COMPANIES AS AMENDED BY FINANCE (NO. 2) ACT 2019 AND TAXATION LAWS (AMENDMENT) ORDINANCE, 2019.

EXISTING PROVISION OF TAX ON BUY BACK OF SHARES

The government introduced the concept of buyback tax under Sec 115QA vide the Finance Act 2013, wherein tax at the rate of 20 per cent (excluding surcharge and cess) was levied on the amount of income distributed by unlisted companies to the shareholders in the form of buy back of unlisted shares. Consequent to levy of tax u/s 115QA paid by the company, the amount of consideration received by the shareholder is exempt as per the provision of Section 10(34A) of the Act. In other words, the liability to pay tax on the event of buy back has shifted from the shareholders to the company.

The term ‘distributed income’ means the difference between considerations paid by the company on buyback less the amount received by the company on issue of such shares.

It is pertinent to note that this tax was applicable to income distribution by unlisted companies, and not listed companies. In other words, income distributed by listed companies was not covered under the purview of buyback tax. Instead, shareholders were liable to capital gains tax on the same.

AMENDMENT MADE BY FINANCE ACT (NO.2) 2019

The Finance (No. 2) Act, 2019 had extended the provisions of section 115QA and section 10(34A) have been extended by the Finance (No. 2) Act, 2019 to the shares of listed companies with effect from 05-07-2019.

The Explanatory Memorandum to Finance (No. 2) Bill, 2019 explains the above amendments as under:

This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.

In order to curb such tax avoidance practice adopted by the listed companies, the existing anti abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognised stock exchange, is proposed to be extended to all companies including companies listed on recognised stock exchange. Thus, any buy-back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act and would be liable to pay additional income tax at the rate of 20 percent. Accordingly, it is also proposed to extend exemption under clause (34A) of section 10 of the Act to shareholders of the listed company on account of buy-back of shares on which additional income-tax has been paid by the company.

AMENDMENT MADE BY TAXATION LAWS (AMENDMENT) ORDINANCE, 2019

The amendment by the Finance (No. 2) Act, 2019 extended the tax under section 115QA to all buy-back of shares by listed companies on or after 05-07-2019 irrespective of whether public announcement was made by listed company prior to 05-07-2019. This caused undue hardships to those listed companies whose buy-backs were announced on or before 05.07.2019.

In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, the Ordinance inserts a proviso in sub-section (1) of Section 115QA of the Act to provide that tax on buy-back of shares in case of such companies shall not be charged under section 115QA.

WHETHER BUY-BACK OF LISTED SHARES ARE EXEMPT IN SHAREHOLDER’S HANDS U/S 10(34A) IF MADE ON OR AFTER 05-07-2019 FOR WHICH PUBLIC ANNOUNCEMENT WAS MADE BEFORE 05-07-2019?

In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, the Ordinance inserts a proviso in sub-section (1) of Section 115QA of the Act to provide that tax on buy-back of shares in case of such companies shall not be charged under section 115QA. However, no corresponding amendment has been made by the Ordinance to section 10(34A) to bring the buy-back consideration to tax in shareholder’s hands in such cases.

In terms of amendment made by the Finance (No. 2) Act, 2019, any buy-back made on or after 05-07-2019 by listed company shall be exempt in the hands of shareholders. This is regardless of whether public announcement was made prior to 05-07-2019. The position continues unchanged even after the Ordinance.

The position is summarised as under:

Public announcement for buy-back of shares when made by listed co Buy-back of shares when made by listed co. Taxability in company’s hands u/s 115QA Treatment of buyback consideration in shareholder’s hands u/s 10(34A)
Before 05-07-2019 Before 05-07-2019 Not taxable Not exempt. Taxable in shareholder’s hands
Before 05-07-2019 On or after 05-07-2019 Not taxable [Proviso to section 115QA(1) inserted by the Ordinance] Any income arising to shareholder from buy-back of listed shares on or after 05-07-2019 is tax-exempt u/s 10(34A) of the Act. No change made by Ordinance in this.
On or after 05-07-2019 On or after 05-07-2019 Taxable Exempt u/s 10(34A)

 

Compiled By  CA DHANUSH D BOLAR.

DATE: 30th November 2019.

Corporate Social Responsibility (CSR) Policy

The Ministry of Corporate Affairs, Government of India has notified the Section 135 of the Companies Act, 2013 along with Companies (CSR Policy) Rules, 2014 and other notifications related thereto which makes it mandatory (with effect from 1st April, 2014) for certain companies who fulfill the criteria as mentioned under Sub Section 1 of Section 135 to comply with the provisions relevant to CSR.
Corporate social responsibility may be referred to as “corporate citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change.
The companies on whom the provisions of the CSR shall be applicable are contained in Sub Section 1 of Section 135 of the Companies Act, 2013. According to the section, the companies having Net worth of INR 500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during the immediately preceding financial year shall be required to constitute a Corporate Social Responsibility Committee of the Board having three or more directors, out of whom at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director, it shall have in its CSR Committee two or more directors (Inserted by the Companies (Amendment) Act, 2017, with effect from 19-9-2018). The companies under this section will be performing following activities:
• The companies shall be required to Constitute CSR Committee of the Board. The CSR Committee shall be comprised of 3 or more directors, out of which at least one director shall be an independent director. Provided that where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee two or more directors.
• The Board’s report shall disclose the compositions of the CSR Committee.
• All companies in every financial year shall spend at least two percent of their average net profits made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy. It has been clarified that the average net profits shall be calculated with the provisions of Section 198 of the Companies Act, 2013. Also, proviso to the Rule provide 3(1) of the CSR Rules that the net worth profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013.
• Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities
The companies shall be required to incorporate an annual report on CSR containing a brief outline of company’s CSR Policy, Composition of CSR committee, company’s net profit for last three immediately preceding financial years, prescribed CSR Expenditure, details of CSR spent during the financial year and need to mention the reason in case the company has failed to spend prescribed CSR Expenditure.
Any amount remaining unspent, pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII (contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women), within a period of thirty days from the date of completion of the third financial year.
If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount and unless the unspent amount relates to any ongoing project referred above, transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Any contravention of this provision, the company shall be punishable with fine of fifty thousand rupees but it may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall be fifty thousand rupees but which may extend to five lakh rupees, or with both.
The CSR committee shall be required to formulate and recommend to the board a CSR policy which shall monitor the company’s activities, recommend the expenditure to be incurred on activities and timely monitor the company’s CSR policy. The CSR Committee will consist of three Directors, who shall meet at least twice in a year to discuss and review the CSR activities and policy.
The Policy recognizes that CSR is not just compliance; it is to support initiatives that improve the lives of underprivileged by eradicating basic problems like hunger, poverty etc.; promoting education, promoting gender equality, increasing provisions of hospitals, implementing rural development projects, protection of national heritage and above all, ensuring environmental sustainability etc.
Scope of CSR policy is to provide education and required training to all; ensuring proper drinking water supply through hand pumps, tube wells and taking proper steps for its maintenance; organizing health care camps to educate people about chronic diseases, managing and maintaining environment and pros and cons of addiction etc.; prominent steps to save environment; provide electricity and latest technologies in rural areas and proper training to farmers; and several more essential steps for the growth and development of the country.
The investment in CSR should be project based which are to be implemented by specialized agencies comprising of NGOs, elected local bodies like panchayats, academic organizations, trusts, missions, Government, Semi Government and autonomous Organizations, Mondals and Samitis etc.
The Board of Directors on its own and/or on the recommendation of CSR committee can amend its policy as and when required deemed fit. Any or all provisions of CSR Policy would be subjected to revision/amendment in accordance with the regulations on the subject as may be issued from relevant statutory authorities, from time to time.

CAPITAL GAINS NOT CHARGEABLE TO INCOME TAX ON INVESTMENT IN CERTAIN BONDS [SECTION 54EC]

CAPITAL GAINS NOT CHARGEABLE TO INCOME TAX ON INVESTMENT IN CERTAIN BONDS [SECTION 54EC]
Introduction:
 
The gain that arises on the sale of a Long Term Capital Asset is known as Long Term Capital Gain and Capital Gain Tax is levied on such gain. Many investors, who sell properties, end up paying huge tax because they have not invested the proceeds from sale on time. Tax saving on long-term capital gain is possible by investing the capital gain amount in long term specified bonds, also called as Capital Gains Bonds specified under Section 54EC.

Section 54EC of Income-tax Act, 1961, provides that capital gain arising from the transfer of a Land and/or Building (Whether residential or commercial ) which was held for more than 24 months shall not be charged to tax, if such capital gains are invested in long term specified bonds within a period of six months from the date of such transfer.  If the Land/Building that has been sold was held for less than 24 months, it would be classified as Short Term Capital Asset and tax would be levied on such sale as per applicable Income Tax slab Rates. From FY 2018-19, the benefit of this deduction has been restricted to Long Term Capital Gains (LTCG) arising from the transfer of land and/or building only.

 

Capital Gain Bonds
These Capital Gain Bonds redeemable after 5 years, which help in saving tax can only be issued on or after 01.04.2018 by the

·        National Highway Authority of India (NHAI)

·         Rural Electrification Corporation of India (REC)

·        Power Finance Corporation Limited. (PFC)

·        Indian Railway Finance Corporation Limited (IRFC).

 

Capital gain shall be exempt to the extent of amount of investment in such specified bonds upto a maximum of Rs.50 Lakhs.

 

The Interest Rate on the Capital Gains Bonds is 5.75% for all bonds purchased after 01st April 2018. The Interest @ 5.75% is payable annually. Before 1st April 2018 – the Interest Rate was 5.25%.

 

It is important to note that the interest is not exempt from income tax. Interest would be liable to be taxed as per the income tax slabs of the taxpayer. Only the amount invested is exempted from Capital Gain Tax.

 

The face value of the Bonds issued by NHAI, REC, PFC and IRFC is Rs. 10,000. Hence the maximum no. of Bonds that can be purchased by an investor is 500 since the maximum investment allowed in these bonds in a year is limited to 500 x 10,000 i.e. Rs. 50 Lakhs.

Benefit of Investing in Capital Gain Bonds
The interest on these Capital Gain Bonds of 5.75% is lower as compared to the Interest paid on a Fixed Deposit which is around 7% . However, the benefit of investing in capital gain bonds is the income tax on long term capital gain which is being saved.

For better understanding of the benefit of investing in Capital Gain Bonds, an analysis of the benefit which would arise to the taxpayer if he invests in Capital Gain Bonds is produced here below:-

 

Option 1: Investment in Capital Gain Bonds

 

Particulars  
Capital Gains 50,00,000
Less : Investment in Bonds 50,00,000
LTCG Tax NIL
Post Tax Amount 50,00,000
Investment Tenure (years) 5
Rate of Interest (Per Annum) 5.75%
Benefits  
Tax saved on above investment (incl cess)   – (A) 10,40,000
Interest earned for 5 years @5.75% per annum in Rs

(Rs.2,87,500*5 years)                               – (B)

14,37,500
Total Benefit (A+B)                                    – (C) 24,77,500
Total Benefit in Percentage (2477500/5000000) 49.55%
Annualised Return (49.55/ years) 9.91%

 

Option 2: Invest in any other option after paying tax

Particulars  
Capital Gains 50,00,000
LTCG Tax @20.8% 10,40,000
Post Tax Amount 39,60,000
Investment Tenure (years) 5
Total Benefit Required to match (C) above 24,77,500
Total Benefit in Percentage (2477500/3960000) 62.56%
Annualised Return (62.56/5 years) 12.51%

 

If the rate of return is higher than 12.51% in the other option, then investing in them makes sense. If the return is lower, then 54EC bonds may be more suitable.

 

*Effective LTCG Tax for the FY 2018-19 is 20% + Education Cess @4% = 20.8%.

 

Other Key Features of Capital Gain Bonds

 

1. The Capital Gain Bonds are AAA rated, non-transferable, non-negotiable and cannot be offered as a security for any advance or loan.

2. The Bonds are issued for a period of 5 years. One cannot transfer or convert or avail loan or advance on the security of such bonds for a period of 5 years from the date of acquisition of such bond. In case where the Capital Gain Bonds are transferred or converted into money (otherwise than by transfer) within a period of five years from the date of their acquisition, the amount of Capital Gain exempt earlier under section 54EC shall be deemed to be long-term capital gain of the previous year in which such bonds are transferred or converted into money. (Prior to FY 2018-19, the lock in period was 3 years)

3. Bonds are not listed on any stock exchange.

 

4. Documents needed at the time of purchase of bond:

·        self-attested copy of the PAN Card

·        self-certified copy of Address Proof

·        One Cancelled Cheque.

5. Available in Physical as well as Demat form.

6. There is no online mechanism of purchasing these bonds and a person would be required to fill in the physical form.

7. Bonds will be automatically redeemed, without the surrender of Bond Certificate(s) and the proceeds would be paid by cheque or NECS/ECS.

 

Compiled by Dhanush D Bolar,

Associate Nitin J Shetty & Co