Q. I am planning to start SIP in the NPS Tier 2 account instead of investing in mutual funds. On redemption, how will the capital gains be taxed?
Kumaravel K.S.
Aarati Krishnan answers: NPS Tier 2 account offers an opportunity to choose from among equity, corporate bond and government bond options and is a very low-cost vehicle like the Tier 1 account.
The corporate and government bond options have also tended to beat comparable options from mutual funds. The corporate bond option invests mainly in high-quality bonds rated AA and above. However, the equity option has not managed to consistently beat benchmarks like the Nifty50. Do look at index funds as an alternative before opting for equity under the Tier 2 account. The NPA Tier 2 account is not specifically mentioned in the Income Tax Act. But given that the account offers no tax benefits on your contributions, some tax experts believe that your redemption amount will not be subject to any special restrictions. NPS being a market-linked vehicle, its maturity proceeds should be subject to capital gains taxation.
As NPS units are not chargeable to securities transaction tax, long-term capital gains will apply if they are held for 3-years plus and short-term capital gains, if held for a shorter period. The long-term capital gains tax rate would be at 20% with indexation benefits. But this is just an interpretation of the tax rules and could be subject to debate.
Q. I am 25 and work in a PSU bank. Recently, I received salary arrears payment in one lump sum on which a greater portion was deducted under the head ‘Income Tax’. I am of the view that the deducted tax amount will be refunded by ITR filing. I want to know how far it is correct and how and on what basis it will be refunded. Also, in the present monthly-salary sheet, after an increase in salary, a portion of salary credited is also being deducted as income tax. Will this deduction in monthly salary be nullified by any investments in tax-saving schemes? If so, how much do I have to invest in tax-saving schemes? Also, will the deducted tax amount be refunded; and by when?
Rajesh Ande
N. Sree Kanth answers: Your employer, the PSU bank, is obligated to deduct tax (known as TDS) on its employee’s total income if the total income exceeds the taxable limits (above ₹5 lakh where rebate u/s 87A of the Income Tax Act, 1961 cannot be claimed). Depending on your salary structure, your employer will compute your tax obligation based on the slab rates after considering all the components such as deductions, exemptions, other income, rental income, among others, and deduct the same over the year at the time of disbursement of salaries each month.
In case of arrears of more than 12 months’ salary, wherein the salaries are assessed at a rate higher than that at which it would otherwise have been assessed in the respective previous years, relief under Section 89 of the Income Tax Act, 1961 can be claimed, for which you are to file form 10E.
If the arrears are less than 12 months’ salary, the same will be included in your total income and the corresponding additional tax will be deducted from that. Usually, you have to declare your investments/spending that qualify for tax deduction to your employer so that the TDS is deducted accordingly and no excess TDS is deducted. At the end of the year, your employer will provide you with Form 16 which contains the particulars of your salary, corresponding tax liability and the TDS deducted over the year. Post that, you as an income tax assessee are required to file your respective ITR by incorporating these details along with any other income which will not be covered in your Form 16 such as capital gains.
In case you have missed out any, you may include the same at the time of filing your ITR and avail of the corresponding refund if it applies. You will be entitled for refund only if your employer has deducted TDS more than your tax liability and not otherwise. This may be on account of non-consideration of your deductions/exemptions. A few examples of deductions that you may avail of are: payment of life insurance premium for self, spouse and children; investing in ELSS, ULIPs, PPF and NSC among others, payment of tuition fee for children etc.
You may refer Chapter VI-A of the Income Tax Act, 1961, to further know the various exemptions and deductions that may be suitable to you and the corresponding conditions.
Q. My husband is a senior citizen and a regular income tax payer. For the assessment year 2021-2022, he plans to opt for ‘yes’ with IT Sec.115 BAC . In case he opts for ‘yes,’ can he get the benefit of deduction of ₹50,000 u/s 80 TTB , an additional boon for senior citizens?
Lakshmi Vishwanath
A. Under Section 115BAC of the Income Tax Act, 1961, deductions under Chapter VI-A cannot be claimed except Section 80CCD(2) and 80JJAA. Deduction under Section 80TTB falls under Chapter VI-A, thereby opting to pay tax under the new tax regime will restrict the benefit of deduction in respect of interest on deposits in case of senior citizens.
(N. Sree Kanth is partner, GSS & Associates, Chartered Accountants, Chennai)
