TAX TALK-09.03.2015-THE HITAVADA
TAX TALK
CA. NARESH JAKHOTIA
Chartered Accountant
USING THE CONCEPT OF DIVERSION OF INCOME BY OVERRIDING TITLE
Query 1]
I am a government employee working at Amravati. I have borrowed the loan from state Govt. for purchasing the flat at Rs. 15,00,000/-. Sale deed is in my name. I am receiving the rent from it at Rs. 10,000/- per month. My spouse is house wife. If the rent agreement is executed by my wife with tenant and she only receive the rent which is to be deposited in her account then is it necessary for me to show the said income as income from house property in my IT return? Whether the income would be treated as her income? If yes, then is it necessary for her to file her return? At present I am showing the said income in my IT return regularly. [sudhir*********1970@gmail.com]
Opinion:
With a view to reduce the tax liability, most people resort to several devices of reducing the liability. One such method is to transfer a part of the income directly to other person from its source. Without overriding title over the assets itself, the income would be taxable in the hands of the legal owner only. Assignment of income may not divert the incidence of taxability. The tax incidence would shift only if it is diversion of income by overriding title i.e., title over the property or source is itself transferred.
In your case, you would continue to be the owner of the property. The legal right to receive the rental income vests upon you only. Mere diversion of income by executing the rent agreement by your wife in favor of tenant would not make her legal owner of the flat for the purpose of taxing the rental income in her hands. The income would continue to accrue in your hands even though it is ultimately receivable by your wife under the terms of the lease deed.
In your case, rental income would be taxable as your income only. Your wife would not be required to file the return of income if her individual income is below the basic exemption limit.
[The principle of diversion of income by overriding title is that income must reach a person other than the assessee by reason of a pre-existing title over it. Diversion of income by overriding title needs to be segregated with the application of income. In normal course, in case of diversion of income by overriding title, income is taxable in the hands of receiver whereas in case of application of income, income is taxable in the hands of the person who has legal right to receive the income. Existence of legal right before the income accrues is a pre-condition for the concept of diversion of income by overriding title. Liability to tax arises only when there is a legal right to receive the same. In the Indian context, it may further be noted that where an asset is transferred by an individual to his spouse or minor Child or Daughter-in-law, directly or indirectly, otherwise than for an adequate consideration, any income from such asset is deemed to be the income of the transferor by virtue of section 64(1A) / 64(1) (iv) / 64(1)(vi) of the Income Tax Act-1961. Effectively, overriding title may not serve the purpose of saving tax if asset is proposed to be transferred by an individual to his/her spouse, daughter in law or Minor Child. However, the concept of diversion of income by overriding title could be effectively used by gifting the amount/property in favor of father/mother/major son-daughter, Brother, Sister etc].
Query 2]
In the latest budget, Finance Minister Shri Arun Jaitley has introduced new pension scheme. So, I want to ask that can we claim double deduction under section 80C & 80CCD i.e., Rs. 1,50,000/- under 80C & 50,000 under 80CCD which makes total of Rs. 2,00,000/-. Kindly help me out. [adityapatel025@gmail.com]
Opinion:
To provide social safety net and the facility of pension to individuals, an additional deduction of Rs. 50,000/- for contribution to the New Pension Scheme is proposed to be offered in the recent Union Budget-2015 by adding sub-section (1B) to section 80CCD. The proposed deduction of Rs. 50,000/- is over & above the aggregate deduction of Rs. 1.50 Lacs otherwise available u/s 80C, 80CCC & 80CCD(1). It may be noted the deduction would be admissible from the AY 2016-17 (FY 2015-16) & not in the current AY 2015-16 (FY 2014-15).
Query 3]
Is there any limitation of amount of deduction that is available against educational loan? I have availed the education loan for my son. Whether deduction could be claimed by my wife if she repays the loan? [R.Y.]
Opinion:
Education loan carries a tax benefit subject to various other terms & conditions attached thereto. For the mass benefit, I am elaborating the provisions related to education loan as under:
- Deduction U/s 80E towards interest on loan taken for higher education is available U/s 80E of the Income Tax Act-1961. It is available only to an Individual who has taken the loan and not to any other person.
- The loan could be availed from the specified financial institution or approved charitable institution for the higher education of self or specified relatives. In short, no deduction U/s 80E shall be available in respect of loan taken by an employee from employee co-operative society or from private sources. [Financial institution, for the purpose, means a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf. HDFC Ltd & Credila Financial services private limited are notified financial institution for the purpose of section 80E].
- The higher education means any course of study pursued after passing senior secondary examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authorized authority.
- “Relative” for the purpose of deduction means spouse & children of that individual. Even legal guardian of student can claim the deduction u/s 80E.
If all above conditions are satisfied, entire amount of interest paid would be available as deduction. The deduction would be available from the year in which individual starts paying the interest and seven subsequent assessment years. There is no ceiling on the upper limit for claiming interest amount as deduction. No deduction towards the repayment of the principal portion of the loan is available as deduction. In your specific case, repayment of loan by your wife would not make her eligible to claim the benefit of deduction bestowed by section 80E of the Income Tax Act-1961.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at cassrpn@gmail.com or upload it at www.ssrpn.com].
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