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What not to do for tax exemptions, deductions to stay
January, 20th 2015

The Income tax Act, 1961 (the Act), provides for certain deductions and exemptions that are available upon the fulfilment of certain conditions. However, to ensure that such benefits don’t encourage short-term investments, the provisions also have conditions for withdrawal of the deductions/exemptions claimed earlier. Here are some key deductions/exemptions that may be reversed for non-fulfilment of the prescribed conditions.

PF withdrawals within 5 years. An employee’s contribution to PF is eligible for deduction up to R1.5 lakh per tax year. However, if the amount is withdrawn before five years of continuous service (except when service is terminated due to employee’s ill health or by contraction or discontinuance of employer’s business or for reasons beyond the employee’s control), the deduction claimed stands withdrawn. In such a case, the contribution would become taxable in the year of withdrawal. Even employer’s contribution, together with the accrued interest thereon, which was exempt earlier, would become taxable as ‘profits in lieu of salary’ and the interest on the employee’s contribution would get taxed as ‘Income from other sources’.

Selling a house bought on loan within five years. If an individual sells a house acquired with a home loan within five years from the end of the tax year in which the possession is obtained then, upon such sale, the deduction under Section 80C towards principal repayment of the house property (to the extent claimed in earlier years) would be taxable in the year of sale. However, the deduction for interest claimed on the housing loan would not be withdrawn.

Discontinuance of a life cover within two years. The premiums paid towards a life insurance policy are eligible for deduction under Section 80C. However, if the policy is discontinued within two years, the deductions claimed in earlier tax years would become taxable in the year in which the policy is discontinued.

Non-fulfilment of conditions for LTCG exemption. Under the Act, gains on sale of certain long-term capital assets may be claimed as exempt by investing them towards acquisition of another prescribed asset. The asset(s) needs to be acquired within the time prescribed. The amount unutilised towards the acquisition of the prescribed asset(s) needs to be deposited in a Capital Gains Account Scheme within the due date of filing the return or the date of filing the return, whichever is earlier. If the amount so parked in the aforementioned scheme is not utilised within the prescribed time towards acquisition of the prescribed asset, the unutilised amount would become liable to capital gains tax at the end of the specified period.

Further, if the asset so acquired is sold within three years from the date of purchase, then, for the purpose of computing capital gains in respect of the new asset, the cost of the asset will be reduced to the extent of capital gains claimed as exempt.

The non-fulfilment of conditions for claiming deduction/exemption need to be reported in the return for the tax year, and tax thereon needs to be paid. The taxpayer could invite penalty if the same is not disclosed in the return.

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