Common myths & misconceptions about tax

We all do tax planning and some of us might also have become well versed with many provisions of the I-T Act that are relevant to us. Still there are many myths and misconceptions about personal tax. These are perceptions that have been formed through the opinions of the near and dear ones and other self-professed experts who themselves have not grasped the provisions of the I-T Act properly.

We take a look at some common myths and misconceptions about personal tax:

Myth No. 1: Gifts are totally tax-free

Fact: Gifts received from specified relatives are exempt from income tax, and there is no upper limit also. Similarly, gifts of any amount and from anyone received during your marriage are totally tax-free. Similar is the case with the gifts received under a Will or by way of an inheritance, or from a registered charitable or education organisation or in contemplation of death of the donor. Also, in case an individual receives any gift from any local authority as specified under the Act, the same would not be taxable.

However, if one gets any other cash gifts from non-relatives exceeding Rs 50,000 in a year, one is required to pay tax on the excess amount exceeding Rs 50,000. Also, earlier, only cash gifts were taxed, but now, with the latest amendments in the I-T laws, even non-cash gifts will be taxed in the hands of the recipient with effect from October 1, 2009. For instance, the scope of the taxability provisions in respect of the gifts has been enlarged to include immovable property, including land or building or both. Besides, certain other gifts received w.e.f. October 1, 2009, has also been brought under the tax net. These include shares and securities, jewellery, archeological collections, drawings, paintings and sculptures as specified under the Act.

Myth No. 2: Deduction related to housing loan is applicable to one house only

Fact: Most taxpayers generally believe that the deduction related to interest and repayment of principal housing loan is applicable to one house only. But this is not true. On the contrary, an individual can have more than one housing loan.

In case the individual has two housing loans for two separate house properties and if he resides in one of the houses, then the other house will be considered as deemed to be let out and the deemed rental value will be considered as taxable in the hands of the individual, says Sonu Iyer, tax partner, Ernst & Young.

Employee is eligible to claim a deduction under Section 80C of the Income-Tax Act for the repayment of the principal amount. However, this amount is limited to a total of Rs 100,000 (inclusive of the other investments). The interest paid on housing loan will be eligible for a deduction up to Rs 150,000 in case of a self-occupied property. However, in case a property is let out or deemed to be let out, then there is no such limit and the actual interest paid on the housing loan is allowed as deduction. This is contrary to the case of a self-occupied property, wherein the maximum interest on housing loan is restricted to Rs 150,000 p.a., subject to certain conditions.

Myth No. 3: Tax exemption is received on the actual rent paid for rented home

Fact: A tax exemption is available to a salaried employee if he receives house rent allowance (HRA) as part of his compensation from his employer. The exemption is calculated as per the limits prescribed under the law. However, the maximum exemption which can be availed will be equal to the amount of actual HRA received by the employee.

For an individual other than one receiving HRA (whether self employed or otherwise), deduction is available under Section 80GG of the Income Tax Act, 1961 for payment of rent on accommodation. In this case, however, the maximum deduction that can be availed is Rs 2,000 per month or 25 per cent of total income (whichever is less).

Myth No. 4: Donations are 100% tax-free

Fact: The belief that all donations are 100% tax-free is not true. True, deduction is available under Section 80G of the I-T Act in respect of donations made by an individual to certain funds, charitable institutions and so on. There is also no restriction on the amount of charity.

The rate of deduction, however, is either 50 or 100 per cent, depending on the choice of trust. Besides, donations must be made to registered institutions only. Also, only donations of up to 10 per cent of your total income qualify for such a deduction.

Myth No. 5: Section 80C benefits are available only on investments, or on bank FDs and insurance premiums

Fact: Under Section 80C benefits, you can get an exemption of up to Rs 1 lakh on contributions to a wide range of investments. These include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), and unit linked insurance plans (Ulips), among others.

However, you neednt always make an investment or save money to avail tax benefits under Section 80C. You can also claim a deduction for the school or university tuition fees you pay for your children provided they are enrolled in a full-time course at any institute in India. Likewise, your home loan principal repayment also qualifies for deduction under the overall limit of Section 80C.

Also, the amount you pay as stamp duty when you buy a house and the amount you pay for the registration of the documents of the house can also be claimed as deduction under section 80C. However, this can be done only in the year of purchase of the house.