It’s been one heck of a rollercoaster for the stock markets ever since the outbreak of the pandemic. Indian giants, especially the ones under the Nifty50 and the SENSEX play a huge role in moving the markets. While some have lost tremendously, some have come out of it as winners. IT giants have surely emerged as the major champions. And just recently, the mega TCS buyback was announced to pass on this win to its shareholders.

Tata Consultancy Services Ltd. announced this repurchase on 7th October 2020. They sanctioned an INR 16k cr worth of buyback to reward its stakeholders. This includes a total of 5.33 crore shares or 1.42% of the total paid-up equity. The buyback valuation is INR 3k per share making the tech giant the first company after Reliance Industries to cross INR 10 lakh cr market capitalization. 

And note, this is not the first buyback announced by the giant. The IT giant had previously made buybacks worth around INR 16k cr each in 2017 and 2018 as part of its long-term capital allocation policy of returning excess cash to shareholders. And, of course, the buybacks were conducted at a premium to the company’s market value.

But is this what was expected of TCS? The pandemic has made winners of the IT giants. TCS alone has come at 4.5% revenue growth. These companies have tons of cash lying around. So, with approx INR 50k cr net cash in their hands, TCS decided to use a small chunk of it to reward the shareholders. But is a 16k cr. worth buyback (a sheer 1.42% of paid-up equity) going to have a positive impact on the stocks of TCS? Well, stocks are currently at 27 times two years forward. In the last three months alone, the stock price has skyrocketed by 20%. Nonetheless, the buyback is a positive development for the IT sector. It could be a precursor for other IT companies to follow suit – Wipro did make an announcement a few days after the TCS buyback! It has almost INR 30k cr of net cash.

Startups and ESOPs Buyback

Taxes and Buy back of shares

They say, nothing is certain except death and taxes. Much like TCS, huge companies having high distributable cash, generally reward its stakeholders in two ways:

• Declare dividend; or
• Purchase its own shares (i.e. buyback its shares)

Earlier, the amount distributed as buyback of shares was chargeable to capital gains in the hands of shareholders while the companies were not liable to pay any tax. And being treated as capital gains, the income tax was paid at lower rates on buyback of shares. So, to avoid taxes, companies started resorting to buybacks instead of declaring dividends. As an anti-tax avoidance measure, the government introduced Section 115QA in the Finance Act, 2013. So now the companies are liable to pay tax on the buyback of shares while the shareholders do not have to pay any tax on the same. This move made buybacks and dividends alike from the tax perspective of the companies.

But after the Budget 2020, dividends and buybacks are no longer at par from the tax perspective of a company.

Section 115QA - Tax on Buyback of Shares

In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

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Section 115QA - Tax on Buyback of Shares

In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

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So what changed? The government removed the 10% DDT aka Dividend Distribution Tax payable by the companies. The dividend is now taxable at the hands of shareholders and not the companies. As a result, promoters and high shareholders now have to pay as high as 40% tax (highest tax slab) on dividends. Also since the income is taxable in the hands of the shareholder, TDS at a rate of 10% (if the amount exceeds INR 5000) would be applicable. On the flip side, shareholders are exempt from paying any taxes in case of buybacks.

This said buybacks have emerged as the better choice of returning capital to shareholders in comparison to dividends. And looks like the Indian Government agrees too. Recently, Centre has asked at least eight state-run companies to consider share buybacks in the current financial year. The companies asked include miner Coal India , power utility NTPC , minerals producer NMDC and Engineers India Ltd. Besides, being tax-friendly for promoters to take the cash out, buybacks also boost companies’ financials, which is another positive. The trending ‘buyback’ route will lure cash rich firms to fundamentally improve investor confidence.

A junkyard owner once tried to write off the cost of cat food. He claimed the feral cats it attracted helped him keep snakes and rats off the property. Did you know the government once let a bodybuilder successfully write off a huge sum in tanning oil? There’s a whole world of obscure, industry-specific income tax deduction you could be missing out on as a small business owner without even knowing it. So how do you find these lesser-known deductions?

Make sure you’ve deducted the less obscure ones first.

Did you know you can claim a tax deduction on stamp duty? Or if you use a specific part of your home exclusively for business, you may be able to claim the home office deduction?

Before you start claiming cat food on your business tax return, make sure you’ve deducted the other lesser-known expenses first. Take a look at a list of some of the lesser-known investments and expenditures that are eligible for tax breaks.

Let’s dig out some of the lesser-known ones!

Income Tax Deduction: Saving the environment with benefits to Electric Vehicle buyers u/s 80EEB

🏎️ Interest on loan for the purchase of an Electric Vehicle is exempt. This deduction is available from A.Y. 2020-21 i.e. the loan should be sanctioned between 1.4.2019 to 31.3.2020. This deduction is included under Section 80EEB.

The maximum permissible deduction is INR 1,50,000

Look out for…

• Only interest expense to be allowed as a deduction
• The assessee should be an ‘individual’

Fulfilling the dream for first time home buyers u/s 80EE and 80EEA

🏡 Claim deduction U/S 80EE and 80EEA on interest paid on a home loan taken by a first-time homeowner.

• 80EE

Interest on loan should be sanctioned between 1.4.2016 to 31.3.2017 for the purchase of the first house. It is applicable to ‘all’ taxpayers. Section 24 can be claimed to provide exemptions up to INR 2.5 lakh.

Deduction Amount – INR 50,000

Look out for:

• Loan Amount should not exceed INR 35 Lakhs

Know more.

• 80EEA

Interest on loan should be sanctioned between 1.4.2019 to 31.3.2020 for the purchase of the first house. Applicable to ‘individual’ taxpayers. Section 24 can be claimed for exemptions up to INR 3.5 lakh.

Deduction Amount – INR 1.5 Lakh

Look out for:

• Stamp duty cost should not exceed INR 45 Lakhs
• Shouldn’t have taken any deduction U/S 80EE

Know more.

Income Tax Deduction – Benefits to contributing members of society u/s 80G

💰 Donations made to certain relief funds & charitable institutions U/S 80G are tax-deductible. Additional documents like Stamp Receipts and Form 58 are also required as proof of donations.

There are 3 types of deduction eligibility:

i. 100% or 50% without any qualifying limit

ii. 100% subject to the qualifying limit of 10% of adjusted gross total income

Look out for:

• ’Cash’ payment of more than INR 10k in not eligible

Read on: https://learn.quicko.com/section-80g-deduction-for-donation-to-charitable-organisations

80C Deduction – Benefits for nurturing the children

📚 Playschool, nursery, and pre-nursery fees for children are eligible for deduction U/S 80C. The benefit is restricted to 2 children per individual. So a couple can claim a deduction for the fees of 4 kids.

Maximum permissible deduction: INR 1.5 Lakh

Look out for:

• Late fees, donations, etc are not eligible.

Income Tax Deduction – Rent to parents cuts tax u/s 10(13A)

👪 Rent paid to parents for residing in their property is tax-deductible U/S 10(13A). This can help save hard-earned money for the entire family. Also, parents are still eligible for the standard deduction.

Deduction Amount (the lowest out of the following)

• Actual HRA received
• rent paid over 10% of salary
• 50% of basic salary (40% if you live in a nonmetro)

Look out for:

• It is important to make the landlord-tenant equation official.

Read on.

Income Tax Deduction – Benefits for the better health of your parents u/s 80D

🩺 Recurring medical expenses of elderly parents can be claimed  U/S 80D. The medical expenditure incurred by parents only if they are above 60 years of age.

Maximum permissible deduction- INR 50k

Look out for- Not allowed if parents already covered by a health insurance policy.

Read on.

Income Tax Deduction – Benefits for higher education u/s 80E

🎓 Interest paid on repayment of education loan is eligible for deduction U/S 80E. The exemption is allowed only to ‘individual’ taxpayers. The loan must be for self, spouse, or children, and the repayment must be done by the taxpayer. Producing a certificate of repayment to your employer is mandatory.

Maximum deduction amount: INR 1.5 Lakh

Look out for: 

• The deduction is available only for 8 consecutive years.

Income Tax Deduction – Exemption for the Innovators u/s 80-IAC

💡 Section 80-IAC provides a deduction for 100% of the income i.e. profits and gains of an eligible startup

The following conditions are mandatory to be eligible for the above deduction:

• Should be a Pvt. Ltd. Company or an LLP incorporated after 1.4.2016
• The turnover limit should be INR 25 cr.
• Certificate from the Inter-Ministerial Board of Certification is compulsory

Deduction Amount- 100% of income for 3 out of 7 years from the year of incorporation

There’s a whole world of TAX DEDUCTIONS you could be missing out on. But these deductions will help you save up your hard-earned income. Make sure to claim them this Tax Season 2020!

Howdy Traders,👋

You have long complained about tax compliance. Its confusing, complicated & boring sometimes. We hear you.

The wait is over!!!🎉 We used the same Kite APIs that you all have grown to love & used them to simplify taxes for Zerodha Traders. 🙂

Here is how all of you can file taxes this season 🚀-

1. 📈 Import Intraday and F&O Trades

Quicko lets you import your trades simply by logging into your favourite brokerages and prepares your ITR on the fly.

Have trades with multiple brokers? Import Trades using Excel utility.

2. 💰Add other Incomes & Review 

You can add all your income like Salary by uploading Form 16, house property income, Capital Gains, and income from other sources.

3. 🚀 File your Tax Return Online

E-file your taxes instantly from the comfort of your home. We promise – no more paperwork, no more hurried visits, no more hassle.

There is a lot of confusion regarding TDS/TCS clarifications released by the CBDT. The new TDS/TCS norms are going to impact the Indian businesses, e-commerce operators, and foreign travelers. Below are the clarifications with respect to Section 194O and Section 206C of the Finance Act, 2020.

TDS/TCS Clarifications on Foreign Remittances

Starting October 1st, 5% TCS will be applicable to foreign remittances & fund transfers under the Liberalized Remittance Scheme (LRS) of the RBI. LRS is a provision under which you are allowed to send $250K outside India in any financial year.

Tax will be applicable on the amount exceeding INR 7 lakh. But the tax on foreign tour packages will be applicable for any amount (no threshold of INR 7 lakh). And for education-related remittances like loans, etc, tax will be only 0.5%.

This provision was introduced as a new sub-section (1G) in Section 206C of the Finance Act, 2020.

5% TCS on Foreign Remittances from October 1, 2020

E-commerce Sellers to Receive Tax Cut by 1% TDS

The newly inserted section 194O states that an e-commerce operator is required to deduct TDS on the facilitation of any sale by an e-commerce participant.

E-Commerce operators need to deduct TDS at the rate of 1% at the time of credit of the amount to e-commerce participants or at the time of payment for the sale of goods or services or both. The TDS would apply either at the time of credit to the e-commerce participants (or payment by any mode) or when the buyer is making the payment directly to e-commerce participants.

TDS on E-Commerce Sales

Note: The TDS is applicable on the gross amount exclusive of GST.

Applicability of TDS on E-commerce Sales:

• When an e-commerce participant is a resident Individual or HUF: E-commerce operators are liable to deduct 1% TDS for resident individual and HUF e-commerce participants. If PAN or Aadhaar are not provided then TDS is deducted at the rate of 5% as per Section 206AA.

• When an e-commerce participant is a non-resident: In the case of a non-resident e-commerce participant Section 194O is not applicable. For non-residents TDS is deducted under Section 195.

Section 194O : TDS on E-Commerce Sales

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Section 194O : TDS on E-Commerce Sales

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The need:

Prior to Section 194-0, e-commerce operators did not deduct any tax while making payments to the designated seller. The whole amount was paid out. This meant that the seller was individually required (expected) to file his/her income tax returns. However, this was not the case. Many small and medium business sellers did not file their ITRs, hence escaping tax liabilities.

Payment gateway:

According to the CBDT, on any e-commerce transaction, section 194-0 will apply twice:

• once on main commerce operator, who is facilitating sale of goods or provision of services or both and

• once on payment gateway, who also happen to qualify as e-commerce operator for facilitating service.

In order to remove this difficulty of double taxation, the payment gateway will NOT be required to deduct tax u/s 194O of the Act on a transaction if the tax has been deducted by the e-commerce operator u/s 194-0 of the Act, on the same transaction.

TDS/TCS Clarifications for Insurance Aggregators

The CBDT also clarified that if an insurance agent or aggregator is not involved in transactions between the insurer and buyer, he would not be liable to deduct tax under section 194O for those subsequent years. However, the insurance company is required to deduct tax on commission payment (if any) made to the insurance agent of aggregator for those subsequent years.

Sale of Motor Vehicle:

The provisions of sub-section (1 F) of section 206C of the Act applies to the sale of motor vehicles for values exceeding INR 10 lakh.

Sub-section (1H) of section 206C of the Act exclude from its applicability goods covered under sub-section (IF).

It may be noted that the scope of sub-sections (IH) and (IF) are different. While sub-section (1 F) is based on single sale of motor vehicle, sub-section (1 H) is for receipt above INR 50 lakh during the previous year against aggregate sale of good. While sub-section (1F) is for sale to consumer only and not to dealers, sub-section (1H) is for all sale above the threshold.

The TDS/TCS clarifications:

• Receipt of sale consideration from a dealer would be subjected to TCS under sub-section (I H) of the Act, if such sales are not subjected to TCS under sub-section (1 F) of section 206C of the Act.

• In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ₹10 lakh or less to a buyer would be subjected to TCS under sub-section (1 H) of section 206C of the Act, if the receipt of sale consideration for such vehicles during the previous year exceeds INR 50 lakh during the previous year.

• In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding ₹10 lakh would not be subjected to TCS under sub-section (lH) of section 206C of the Act if such sales are subjected to TCS under sub-section (IF) of section 206C of the Act.

Adjustment for Sale Return, Discount, or Indirect Taxes

The income tax department clarified that NO adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax under sub-section (IH) of section 206C of the Act since the collection is made with reference to receipt of amount of sale consideration.

The Threshold F.Y. 2020-21

Since Section 194O and 206C has come into effect from 1st October (and not 1st April), the following TDS/TCS clarifications were also released:

• The threshold for an individual/HUF (being an e-commerce participant who has furnished his PAN and AAdhaar) is INR 5 lakh with respect to the previous year. The calculation of sale or service or both for triggering deductions under Section 194O will be counted from 1st April 2020. Also, if the amount exceeds INR 5 lakh, the provision of Section 194O will apply on any sum credited or paid on or after 1st October 2020.

• The provision of sub-section (1H) of Section 206C of the Act will not apply on any sale consideration received before 1st October 2020.

• Since the threshold of fifty lakh rupees is with respect to the previous year, calculation of receipt of sale consideration for triggering TCS under sub-section (1 H) of section 206C shall be computed from 1st April 2020.

Section 194-0, and sub-section (I H) of Section 206C, of the Act, will NOT apply to:

• Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service. **

• Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC (aka Central Electricity Regulatory Commission)

• Sale consideration received for fuel supplied to non-resident airlines at airports in India. 

Under the new rules, companies are required to file returns by the following month’s 10th day.

Concluding Lines

These TDS/TCS clarifications with respect to 1st October were released on 29th September. But these changes were already announced 6 months back.

It is clear that the Department is trying to aim to collect a pretty penny from the winners of the pandemic and growing digital economy. The 1% TDS would become 1.8% of net revenue. This would impact the MSMEs who rely on e-commerce platforms. They help MSMEs save heavily on marketing, logistics, and delivery costs. Also keeping in mind MSMEs’ already low margins, the 1% TDS would mean blocking a quarter of their income with the taxman.

Furthermore, the department is extending the scope of both tax-deducted at source (TDS) and tax collected at source (TCS). They would now have a better idea of transactions in the Indian economy.

The question is whether this additional burden of compliances is worth it?

Refer here:

**

• “recognized clearing corporation” shall have the meaning assigned to it in clause (i) of the Explanation to clause (23EE) of section 10 of the Act
•  “recognized stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43 of the Act; and
• “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.

Source: Income Tax Archives

Section 112A, The Grandfathering Rule, Long Term Capital Gains, and tons of Scrip-Wise reporting. There has been a lot of confusion around this. It’s chaos for the Traders. Investors are facing hardships to gather and provide data. On 26th September, Income Tax India released a notification regarding Scrip-Wise reporting of capital gains. Yes, there is ‘some’ relief. But the question remains – is it enough?

The Press Release for Scrip-Wise Reporting

The IT Department released a notification saying that the Scrip-Wise reporting is NOT required in the ITR Forms for A.Y. 2020-21 for shares/units which are NOT eligible for Grandfathering (under Long Term Capital Gains) i.e. Short Term Capital Gains, Intraday, and F&O.  

CBDT issues clarification that there is no requirement of scrip wise reporting for day trading and short-term sale or purchase of listed shares. Details in press release: pic.twitter.com/M9K7cjUosN

— Income Tax India (@IncomeTaxIndia) September 26, 2020

What is the Grandfathering Rule in Long Term Capital Gains?

Do your grandfathers need to be involved? No!

What is Section 112A?

Before diving into this rule, we need to talk about Section 112A.

Under Budget 2018, the exemption under Section 10(38) was removed. And a new Section 112A (applicable from AY 2019-20) was introduced with a 10% tax on LTCG in excess of INR 1 lakh in the case of equity shares and equity mutual funds on which STT is paid.

Section 112A – Tradewise details of LTCG (Nightmare for Traders)

Example: 

• You invest INR 3 lakh in stocks or equity funds in March 2018
• You sell the investment for INR 3.50 lakh in March 2019
• LTCG= INR 50k
• Since LTCG up to INR 1 lakh is exempt, your INR 50k will not be taxed.

Section 10(38)’s removal?

Under Section 10(38) profit on the sale of listed equity shares, equity-oriented mutual funds & units of business trust held for more than a year was exempt from income tax.

This Section was introduced in the Finance Act of 2004 based on the Kelkar Committee report. The motto was to attract investments from Foreign Institutional Investors. Also, since investors paid STT, it provided relief from double taxation to such investors.

But many taxpayers misused the exemption leading to loss of revenue and tax evasion due to abusive practices.

The Grandfathering Rule

Many investors invest in equity markets with an intention to earn tax-free profits in the form of Long Term Capital Gains. Under Section 112A, CBDT introduced the grandfathering rule to ensure that gains up to 31st January 2018 are not taxed. For equity shares and equity mutual funds purchased on or before 31st January 2018 and sold after a year, the Cost of Acquisition would be:

• Fair Market Value as on 31st Jan 2018 or the Actual Selling Price whichever is lower
• Step 1 or Actual Purchase Price whichever is higher

Long Term Capital Gain = Sales Value – Cost of Acquisition (as per grandfathering rule) – Transfer Expenses

Tax Liability = 10% (LTCG – INR 1 lac)

A Simple Example:

	Case I	Case II
Purchase Date	January 1st, 2018	February 10th, 2018
Purchase Value	2,00,000	2,00,000
Sell Date	January 10th, 2020	January 10th, 2020
Sale Value	3,50,000	3,50,000
Grandfathering Rule Applicable?	Yes	No
Actual Cost*	2,40,000**	2,00,000
LTCG=Sale Value-Actual Cost	1,10,000	1,50,000
Exempt	Up to INR 1 lakh	Up to INR 1 lakh
Tax Liability	1,10,000-1,00,000=10,000 * 10% = 1,000	1,50,000-1,00,000=50,000 * 10% = 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

	Condition	Amount (INR)	Qualifying Amount
Step 1:	Higher of: Value in Step 1 or Purchase Value	Lower of: 3,50,000 or 2,40,000	2,40,000
Step 2:	Higher of: Value in Step 1 or Purchase Value	Higher of: 2,40,000 or 2,00,000	2,40,000
	Actual Cost		2,40,000

Note: indexation benefit is not available to stock and equity fund investors.

Reasons for Scrip-Wise Reporting

The grandfathering is allowed by comparing different values such as cost, sale price, and market price for each share/unit (as on January 31st, 2018). In this process, there is a need to capture the scrip-wise details for computing capital gains of these shares/units.

• Lack of understanding of the provisions – The taxpayer may not claim or wrongly claim the benefit of grandfathering.

• The correctness of the claim – If the calculation is not entered scrip-wise and is taken as an aggregate, the IT department will not be able to cross verify the details.

• Avoid further audits and scrutiny – The IT Department can electronically verify the scrip-wise details provided by the taxpayers. The details are matched with the data available from reports filed by stock exchanges, brokerages, etc.

• The intent – Providing scrip-wise details will help the taxpayer compute the Long Term Capital Gains on share and units accurately.

Challenges Faced by Traders and Taxpayers.

While filing capital gains with ITR 2 and ITR 3, individuals have to provide the following details of share sales as on January 31st, 2018:

• ISIN (aka International Securities Identification Number)
• Name of the share/unit
• Number of shares
• Sales-price per share/Unit
• Cost of Acquisition
• FMV as on 31/01/2018
• Expenditure related to transfer

Also, most brokers don’t provide with FMV of the shares. Moreover, taxpayers need to fill up these details for each item individually. They have to mechanically and accurately file the data. Boy, this can be a hassle in cases where the data is large and the time and data involved are exceptionally huge.

@IncomeTaxIndia make scrpwise reporting optional for 112A. We see hardship investors face everyday on our platform. Barring few, most brokers do not provide fmv. Isin and utilities are hassle. There has to be a better way. https://t.co/5baqvpMYM5

— Vishvajit Sonagara (@iamvishvajit) September 26, 2020

Can’t there be a better way?