January 2023 – Taxoholic

22Jan, 2023

Tax on Virtual Digital Assets

I. Introduction to Virtual Digital Assets and Cryptocurrencies.

To establish a solid foundation, let’s begin by defining virtual digital assets and cryptocurrencies. Virtual digital assets are digital representations of value that can be digitally traded or transferred, typically using blockchain technology. Cryptocurrencies, on the other hand, are a specific type of virtual digital asset that employs cryptographic techniques for secure transactions and control the creation of additional units. Prominent examples include Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP) Including Non-Fungible tokens or any other digital assets as may be notified by the government.

II. Legal Framework for Taxation of Cryptocurrencies in India.

In recent legislative developments, the Indian government has introduced a significant amendment to the Income Tax Act, of 1961. This amendment takes the form of Clause (47A), which has been inserted into Section 2 of the Act. Clause (47A) has been incorporated to address the taxation of specific transactions related to virtual digital assets or cryptocurrencies.

With the introduction of Clause (47A), the Income Tax Act now encompasses provisions that define the tax treatment of virtual digital assets, bringing them under the purview of the existing tax regime. The inclusion of this clause ensures that income arising from transactions involving cryptocurrencies will be subject to taxation, thereby enabling the government to capture potential tax revenue from this emerging sector.

III. Taxation of Virtual Digital Assets/Cryptocurrencies in India.

Classifying Cryptocurrencies as Capital Assets.

Cryptocurrencies, such as Bitcoin or Ethereum, can be considered capital assets if they are acquired for investment purposes. According to section 2(14) of the tax code, a capital asset refers to any property owned by an individual, irrespective of its connection to their business or not. Therefore, if an individual purchases cryptocurrency as an investment, any profit made from their sale would be taxed under the “Capital gains” head.

a. Taxation of Capital Gains on VDA.

When a person sells their cryptocurrencies and realizes a profit, it is important to understand the tax implications. Capital gains tax is applicable on the profit earned from the sale of capital assets. The gain is calculated by deducting the cost of acquisition from the selling price.

2. Treating Cryptocurrencies income as Business Income.

In certain scenarios, cryptocurrency transactions may be deemed substantial, or the assets may be held for trading purposes. In such cases, the income generated from the sale or purchase of virtual digital assets can be classified as business income. It is crucial to note that the intention and frequency of the transactions play a significant role in determining the nature of income.

a. Taxation of Business Income.

If the income from cryptocurrency transactions is considered business income, it is subject to taxation as per the applicable income tax rates. The profits earned are added to the individual’s overall income and taxed accordingly. Additionally, individuals engaged in cryptocurrency trading as a business may also be required to comply with other tax obligations, such as maintaining proper books of accounts and filing regular returns.

Section 115BBH of the Income-tax Act 1961, which deals with the taxation of income from cryptocurrencies or virtual digital assets, does not explicitly state whether it should be treated as business income, capital gains, or income from other sources. This lack of clarity often creates confusion among taxpayers and tax authorities alike.

3. Tax rate.

Under section 115BBH of the act, income from the transfer of virtual digital assets will be taxable at the rate of 30 percent (+ SC + HEC). The tax rate is the same whether it is business income, short-term or long-term capital gains.

IV. Manner of Computation of Income from Virtual Digital Assets.

When it comes to computing income from the transfer of virtual digital assets, Section 115BBH(2)(a) lays out specific provisions that need to be understood. In this article, we will explore the key rules and deductions about income computation for virtual digital assets, shedding light on the nuances involved.

a. Deduction of Cost of Acquisition.

As per Section 115BBH(2)(a), the cost of acquisition, if any, must be deducted from the full value of the consideration received. However, it’s important to note that if the income falls under the category of “Capital gains,” indexation benefits will not be available. This deduction allows for a more accurate determination of the net income from the transfer of virtual digital assets.

b. No Deduction for the Cost of Improvement and Transfer Expenditure.

It is essential to understand that no deductions will be permitted for the cost of improvement or any expenditure related to the transfer of virtual digital assets. Unlike other forms of income computation, where expenses can be offset against the total income, the provisions under Section 115BBH restrict such allowances. Therefore, any costs incurred in improving or facilitating the transfer of virtual digital assets cannot be claimed as deductions.

c. Application of “Transfer” Definition.

For computing tax under Section 115BBH, the definition of “transfer” as stated in Section 2(47) will be applicable. This definition determines what transactions constitute a transfer, and whether the virtual digital asset is considered a capital asset or not. It is crucial to have a clear understanding of this definition to ensure accurate tax calculation on income derived from the transfer of virtual digital assets.

d. Inability to Adjust Losses.

When it comes to losses arising from the transfer of virtual digital assets, they cannot be adjusted against any other form of income. This provision prevents the offsetting of losses from such transactions against gains in other areas. Losses incurred specifically from the transfer of virtual digital assets must be treated independently and cannot be utilized to offset taxable income from other sources.

e. Inability to Offset Losses from Other Transactions

Additionally, any losses incurred by an assessee from transactions other than the transfer of virtual digital assets cannot be adjusted against income derived from the transfer. This means that losses from other heads of income cannot be used to reduce the tax liability associated explicitly with income from the transfer of virtual digital assets. It is important to consider the individual nature of losses and ensure they are appropriately accounted for in tax calculations.

For Instance

A purchased 60,000 BTC (cryptocurrency) at Rs. 67 each on the 10th of Jan. of 2018. He transferred 20,000 BTC in the previous year 2021-22, and the remaining 40,000 in 2022-23. The capital gains from the transfer of BTC shall be computed as under Brokerage on 01-03-2022 Rs.3,245, 01-04-2022 Rs. 2,660 and on 31-03-2023 Rs. 4,150

Solution: Accounting Net profit of sales of 20,000 BTC took place on 01-03-2022 of Rs. 4,63,245 and taxable profit of Rs. 2,35,064* is taxable at the rate of 20% plus 4% HEC.

*The benefit of indexation shall be allowed because Section 115BBH shall be applicable from the assessment year 2023-24.

Mr. A suffer a loss on sales of 20,000 BTC on 01-04-2022 after the effect of the Brokerage of Rs. 2,660 is 5,42,660 but Taxable losses are only of Rs. 5,40,000.

Mr. A earned a profit on sales of the rest of 20,000 BTC on 31-03-2023 Rs. 16,60,000 without the effect of a brokerage shall be taxable at the rate of 30% plus HEC 4% because the loss on sales of BTC shall not be eligible to set-off and carry forward as per the provision of a section of 115BBH of Income-tax Act 1961.

Disclaimer: The content/information published on the website is only for the general information of the user and shall not be construed as legal advice. While the writer has exercised reasonable efforts to ensure the veracity of information/content published, the writer shall be under no liability in any manner whatsoever for incorrect information, if any.

Posted By: Salman Khan

www.linkedin.com/in/ksalman873

22Jan, 2023

The Public Provident Fund (PPF)

Overview:

The Public Provident Fund (PPF) is a long-term savings instrument established by the Central Government. It offers tax benefits on contributions as well as withdrawals after the lock-in period. This scheme came into force on July 1, 1968, and is backed by the government with the objective of providing old-age income security to the self-employed and those working in the unorganized sector. Though the scheme is voluntary, assured returns and income-tax benefits have fuelled its popularity. The primary objective of saving in the PPF account is to avail tax deductions on deposits, guaranteed returns on investment, and tax-free withdrawal on maturity. Savings in this product are completely risk-free because of government backing.

Key Features of a PPF Account:

Capital Protection & Inflation Protection

The capital in a PPF account is completely protected as the scheme is backed by the Government of India, making it fully risk-free with guaranteed returns. The PPF account is however not inflation protected, which means whenever inflation is above the latest guaranteed interest rate, the deposit earns no real returns. However, when the inflation rate is below the guaranteed rate, it does manage a positive real rate of return. For Example; If the Inflation rate is 7% and the PPF Interest rate is also 7%, then our Investment earns no real returns.

Interest Rate

Interest rates are aligned with G-sec rates of similar maturity, with a spread of 0.25 percent. The government has decided to review the PPF rates quarterly. Interest on the PPF balance is calculated every month and the amount is credited to the PPF account at the end of every financial year. Each month, the interest amount is calculated on the lowest PPF balance in the account after the 5th of every month to the last day of the month. Hence, PPF investors are advised to make contributions to their PPF account before the 5th of each month. For the fourth quarter of FY 2020-21, the rate has been set at 7.1 percent compounded annually.

Liquidity (Loan against investment)

The PPF is liquid, despite the 15-year lock-in stipulated with this account. Liquidity is offered in the form of loans against the PPF. However, the loan will only be granted if it is taken at any time from the beginning of 3rd year till the end of the 6th year from the date of activation of the account. The maximum loan amount is limited to 25% of the PPF balance at the end of the 2nd year or the year preceding the year in which the loan is being applied. You will have to repay the loan in 36 months.

Investment tenure

A PPF account has a lock-in period of 15 years on investment, before which funds cannot be withdrawn completely. This tenure can be extended by 5 years at the end of the actual lock-in period. Premature withdrawals are allowed but only in case of emergencies subject to the condition that “after the sixth year, you can withdraw up to 50% of the balance at the end of the fourth year, or the immediately preceding year, whichever is lower”.

Minimum and maximum investment

You must contribute at least Rs 500 and at most Rs 1.5 lakh in your PPF account in a year. The minimum investment of Rs 500 has to be maintained even for accounts extended beyond 15 years. If you don’t put in a minimum of Rs 500 a year, the account becomes dormant and Rs 50 penalty will be charged for reactivating a dormant account. If you put in more than Rs 1.5 lakh in a year, the excess amount, even if credited by mistake, will not earn any interest. The maximum limit of Rs 1.5 lakh per year includes the contribution in PPF accounts in the names of minor children.

Tax Implications

The scheme has exempt-exempt-exempt (EEE) status, where the deposits, the interest earned as well as the maturity amount are tax-free. The sum invested in the PPF account is eligible for tax deduction under Section 80C subject to a maximum of Rs 1.5 lakh in a financial year. On maturity, the entire amount including the interest is tax-free.

Additional tax benefits of PPF

Open a PPF account in the name of your spouse or child to gain additional tax benefits. As per tax laws, if money gifted to a spouse is invested, income from the investment is clubbed with that of the giver. Since PPF income is tax-free, it does not push up the tax liability of the giver. So one can invest up to Rs 1.5 lakh a year in this tax-free haven.

22Jan, 2023

Deductions under Chapter-VI of the Income Tax Act

Deductions under chapter 6 of the Income Tax Act in India refer to the various deductions that taxpayers can claim from their taxable income. These deductions are available under various sections of the Income Tax Act and are meant to encourage certain types of investments and expenditures that are considered to be beneficial for the economy or society. Here are some of the common key deductions available under chapter 6 of the Income Tax Act:

Section 80C: This section provides for a deduction of up to INR 1.5 Lakhs for investments and expenditures such as Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance Premium, Equity-linked savings scheme (ELSS), Sukanya Samriddhi Scheme, etc.
Section 80CCC: This section provides for a deduction of contributions made to pension funds.
Section 80CCD: This section provides for a deduction for contributions made to the National Pension Scheme. (NPS)
Section 80D: This section provides for a deduction of up to INR 25,000 for health insurance premium payments made for self, spouse, and dependent children and INR 25,000 for health insurance premium payments made for parents.
Section 80DD: This section provides for a deduction of expenditure incurred for the maintenance of a disabled dependent.
Section 80DDB: This section provides for a deduction for medical treatment of specified diseases for self, spouse, children, and dependent parents.
Section 80E: This section provides for a deduction of interest paid on education loans for higher education.
Section 80G: This section provides for a deduction of donations made to specified charitable organizations and trusts.
Section 80GG: This section provides for a deduction of rental expenses paid by an individual who does not receive a house rent allowance (HRA) from the employer.
Section 80GGC: This section provides for a deduction of donations made to political parties.
Section 80TTA: This section provides for a deduction of up to INR 10,000 for interest earned on the savings account.
Section 80U: This section provides for a deduction of expenditure incurred for the maintenance of a disabled person.

It’s worth noting that the above-mentioned deductions are subject to certain conditions and restrictions, and the specific deductions and the amount of deductions available may vary depending on the specific section and the taxpayer’s personal circumstances. The deductions under chapter 6 of the Income Tax Act are meant to provide relief to taxpayers and to encourage certain types of investments and expenditures that are deemed to be beneficial for the economy or society.

7Jan, 2023

Sukanya Samridhi Scheme

Sukanya Samriddhi Scheme is a government-backed savings scheme in India that is specifically targeted towards the girl child. The scheme was launched by the Indian government in 2015 as part of the “Beti Bachao, Beti Padhao” campaign, which aims to address the issue of the declining child sex ratio in the country. The scheme is aimed at providing a secure future for the girl child and encouraging parents to invest in their daughter’s education and marriage expenses.

The scheme is open to any individual who has a girl child aged below 10 years. The account can be opened in any post office or authorized banks across India. The minimum deposit required to open the account is INR 500 and the maximum deposit is INR 1.5 Lakhs per year. The account can be opened in the name of the girl child, and it will remain operational for 21 years from the date of opening. The account can be transferred from one bank or post office to another.

The interest rate for the scheme is determined by the government and is subject to change from time to time. The interest is compounded annually. The deposit made in the account is eligible for tax benefit under Section 80C of the Income Tax Act, 1961. The maturity proceeds of the scheme are also tax-free.

The scheme also offers a partial withdrawal facility after the completion of 5 years from the date of opening of the account. The withdrawal can be made only for the girl child’s higher education or marriage.

Sukanya Samriddhi Scheme is a long-term investment option that can provide a secure future for the girl child. It is a great way for parents to start saving for their daughter’s education and marriage expenses at an early age. The scheme also has a number of tax benefits, which makes it an attractive investment option. It is also a good option for those who are looking for a low-risk, fixed-return investment.

However, it is important to note that the scheme is only for the girl child and the account can only be opened before the girl child turns 10 years old. The scheme also has a lock-in period of 21 years and there are certain restrictions on withdrawals. It is also important to keep in mind that the interest rate for the scheme is determined by the government and is subject to change from time to time.

Overall, Sukanya Samriddhi Scheme can be a great investment option for parents who want to save for their daughter’s education and marriage expenses. The scheme offers a number of benefits and can provide a secure future for the girl child. It is important to understand the terms and conditions of the scheme and the restrictions on withdrawals before investing in the scheme. Consulting with financial experts can help understand the scheme better and make an informed decision.

Monthly Archives: January 2023

Tax on Virtual Digital Assets

The Public Provident Fund (PPF)

Deductions under Chapter-VI of the Income Tax Act

Sukanya Samridhi Scheme