Personal Finance

Systematic Investment Plans (SIPs) have become one of the most popular ways for individuals to invest in mutual funds. One of the common questions new and even experienced investors ask is, “Is SIP tax free?” The answer isn’t a simple yes or no. Taxation on SIPs depends on multiple factors, such as the type of mutual fund, investment duration, and the amount of capital gains.

Understanding whether SIP is tax-free or not is crucial for proper financial planning. Investors need to know what tax benefits SIP offers and how they can optimize their investments. 

At the same time, it’s essential to clarify common confusions, such as what SIFs are, since many beginners confuse SIFs with SIPs. While SIPs refer to a disciplined investment method, SIFs (Structured Investment Funds) are entirely different instruments, often used by institutional investors for structured and diversified exposure.

Understanding How SIPs Are Taxed in India

SIP itself is not a tax-free investment. The tax treatment depends on the type of mutual fund (equity, debt, or ELSS) you invest in and the duration you hold the units.

The important point to remember is that it’s not the invested amount (principal) that gets taxed, but the gains you earn on that investment. Let’s explore this in detail.

What is SIP and How It Relates to Taxation

Before understanding taxation, let’s clarify what an SIP is. An SIP (Systematic Investment Plan) is a method of regularly, monthly, or quarterly investing a fixed amount in a mutual fund. This approach helps investors benefit from rupee cost averaging and compound growth.

SIPs are not a different product; they are just a way of investing in mutual funds over time.

Mutual Fund Type Determines Tax Treatment

The tax implications of SIP depend on the type of mutual fund:

• Equity Mutual Funds
  
• Debt Mutual Funds
  
• ELSS Funds (Equity Linked Saving Schemes)
  

Each category has rules for capital gains tax, lock-in periods, and exemptions.

Is SIP Tax-Free?

If you’re wondering if SIP investment tax free, the short answer is: No, SIP returns are not entirely tax-free. While SIPs offer certain tax advantages, you may still have to pay capital gains tax on the profits earned.

What Gets Taxed: Gains from SIP Investments, Not the Principal

Your invested principal is not taxed. What gets taxed is the profit (capital gain) you make when you redeem your units. This is true for all mutual funds. The question “Is investing in SIP tax-free?” should be looked at in terms of how gains are taxed, not your actual investment amount.

Tax Rules for Different Mutual Fund Categories

1. Equity Mutual Funds

• If you redeem within 1 year, the gains are called Short-Term Capital Gains (STCG) and taxed at 15%.
  
• If held for more than 1 year, the gains are called Long-Term Capital Gains (LTCG).
  
• LTCG over ₹1 lakh in a financial year is taxed at 10% without indexation.
  

2. Debt Mutual Funds

• Gains from debt funds are added to your income and taxed as per your income tax slab.
  
• This applies regardless of whether you hold the investment for short or long term (as per rules effective from April 1, 2023).

3. ELSS Funds (Tax Saving SIPs)

• ELSS funds qualify for tax deductions under Section 80C.
  
• Investments up to ₹1.5 lakh per year in ELSS funds are eligible for tax deduction.
  
• ELSS has a lock-in period of 3 years and is considered one of the best ways to make SIP tax-free under 80C.
  

SIP Taxation Rules Explained

1. Capital Gains Tax on SIP

Each SIP installment is treated as a fresh investment. So the gains from each SIP follow their own taxation rules.

Short-Term Capital Gains (STCG)

• For equity mutual funds, if units are redeemed within 12 months, the gains are taxed at 15%.
  
• STCG is added to your total income for debt funds and taxed at applicable slab rates.
  

Long-Term Capital Gains (LTCG)

• In equity funds, gains held for over 12 months are long-term and taxed at 10% if gains exceed ₹1 lakh.
  
• As per recent rules, no LTCG benefit is available for debt funds. Gains are taxed like regular income.
  

2. How Tax is Calculated on Each SIP Installment

Every SIP installment has its date of purchase. Therefore, each installment has its holding period. If you’re redeeming your mutual funds, the FIFO (First In, First Out) method is applied for taxation.

For example:

• You invest ₹5,000 every month.
  
• If you withdraw ₹20,000 after 14 months, the first four SIPs are considered long-term, and the others short-term.
  

This makes taxation slightly complex, but important to plan redemptions wisely.

3. Lock-In Periods and Their Tax Implications

Only ELSS mutual funds have a mandatory lock-in of 3 years. For SIP in ELSS:

• Each SIP has its 3-year lock-in.
  
• So, if you started in January 2022 and invested monthly, only the January 2022 SIP becomes redeemable in January 2025.
  

This ensures long-term savings and helps with tax deductions.

Is SIP Investment Tax-Free Under Section 80C?

Only ELSS (Equity-Linked Saving Scheme) Qualifies

Most SIPs are not eligible for deductions under Section 80C, except for ELSS funds. If you’re asking, “which type of SIP is tax-free under 80C?” ELSS is the answer.

It’s important to note:

• ELSS can reduce your taxable income by up to ₹1.5 lakh per year.
  
• You must stay invested for at least 3 years.
  

How to Claim Tax Deductions via SIP in ELSS

You can claim your Income Tax Return (ITR) deduction under Section 80C. Ensure:

• You have proper proof of investment.
  
• You invest before March 31 of the financial year.
  

You can use an online SIP calculator to plan how much to invest in ELSS to claim the full deduction.

Tax Benefits of SIP in India

Systematic Investment Plans (SIPs) offer significant tax benefits in India, especially when invested in Equity-Linked Savings Schemes (ELSS). 

• Tax Benefits via ELSS: SIPs in Equity-Linked Savings Schemes (ELSS) offer attractive tax benefits under Section 80C of the Income Tax Act.
  
• Tax Deduction Limit: You can claim up to ₹1.5 lakh deductions per financial year by investing in ELSS through SIPs.
  
• Disciplined Investing: SIPs promote regular and systematic investing, making them a smart and tax-efficient method.
  
• Shortest Lock-in Period: ELSS has a lock-in period of just three years, shorter than most other tax-saving options.
  

Tax-Free Dividends? Only if Reinvested or Below Threshold

Earlier, dividends from mutual funds were tax-free for investors. But now:

• Dividends are added to your income and taxed as per your slab.
  
• Choose the growth option or reinvest dividends to delay taxation.
  

How to Make SIP More Tax-Efficient

Here are a few tips from stock market advisors:

1. Invest in ELSS if you’re looking for tax-saving options.
   
2. Hold equity mutual funds for over 1 year to benefit from the LTCG exemption.
   
3. Track each SIP’s investment date and plan redemptions accordingly.
   
4. Use an SIP calculator to plan your investments effectively.
   

Conclusion

To sum it up, SIPs are not completely tax-free, but they can be highly tax-efficient. While your principal investment remains untaxed, any capital gains are subject to taxation. However, by investing in ELSS SIPs under Section 80C, you can avail of tax benefits. A reliable stock investment advisor can help you select the right SIPs aligned with your tax-saving and wealth-building goals. 

Whether you’re a beginner or an experienced investor, choosing your SIPs is essential based on your financial objectives. If your focus is on saving taxes, ELSS funds are ideal. Consider equity SIPs held for more than a year for long-term capital growth.

FAQs 

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

An Income Tax Assessee is any individual or entity obligated to pay taxes or any other sum under the Income Tax Act, 1961. This includes those who have earned income, incurred losses, or are liable to pay taxes on behalf of others. The term includes many taxpayers, from salaried individuals to companies and trusts.

Income Tax Assessees must also choose between the new and old tax regimes, each offering different tax slabs, exemptions, and deductions that impact how much tax they ultimately pay.

Meaning of Assessee Under the Income Tax Act

As per Section 2(7) of the Income Tax Act, an assessee is a person by whom any tax or other sum of money is payable. This includes:

• Individuals or entities liable to pay taxes.
  
• Persons against whom proceedings under the Act have been initiated.
  
• Persons deemed to be assesses under specific provisions.
  

Categories of Income Tax Assessee

Normal Assessee

A Normal Assessee is an individual or entity liable to pay tax on their income or losses incurred during a financial year. This includes those required to pay interest, penalties, or entitled to refunds under the Act.

Unlike indirect taxes, which are levied on consumption and passed on to others, direct taxes, like income tax, are the direct responsibility of the assessee.

Representative Assessee

An Income Tax Representative Assessee is someone responsible for paying taxes on behalf of another person. This situation arises when the person liable to pay tax is a minor, non-resident, or otherwise incapable of managing their tax affairs. For example, a guardian filing taxes on behalf of a minor child, or an agent handling tax matters for a non-resident Indian (NRI).

Deemed Assessee

A Deemed Assessee is a person who is considered responsible for paying taxes on behalf of another, typically in situations where the original taxpayer has passed away or is otherwise unable to fulfill their tax obligations. For instance, the legal heir of a deceased individual becomes a deemed assessee for the income earned by the deceased.

Professional guidance becomes crucial in such cases, especially if the deceased had multiple income sources, such as capital gains, business income, or investments. Consulting a share market advisor can be particularly helpful when dealing with complex assets such as equity shares or mutual funds, ensuring accurate reporting and compliance under the Income Tax Act.

Assessee in Default

An Assessee in Default fails to fulfill their statutory obligations under the Income Tax Act, such as not paying taxes deducted at source (TDS) to the government within the prescribed time. For example, an employer who deducts TDS from an employee’s salary but does not deposit it with the government becomes an assessee in default.

Types of Income Tax Assessees Based on Legal Status

Individual Assessee

This category includes single human beings liable to pay taxes on their personal income. This encompasses salaried individuals, professionals, freelancers, and investors.

Hindu Undivided Family (HUF)

An HUF is a family unit recognized under Hindu law, comprising all persons lineally descended from a common ancestor. The head of the family, known as the ‘Karta,’ manages the affairs of the HUF, and the family is assessed as a separate entity for tax purposes.

Company

Whether domestic or foreign, a company is considered a separate legal entity and is taxed on its profits. Companies must file income tax returns and comply with various provisions under the Income Tax Act.

Firm

A firm, including a partnership firm or a limited liability partnership (LLP), is assessed separately. The firm is liable to pay tax on its income, and the partners are taxed on the income received from the firm.

Association of Persons (AOP) or Body of Individuals (BOI)

An AOP or BOI is a group of individuals who come together for a common purpose and earn income collectively. They are assessed as a single entity for tax purposes, and the income is taxed either at the entity level or in the hands of the members, depending on the specific circumstances.

Local Authority and Artificial Juridical Persons

Local authorities, such as municipal corporations, and artificial juridical persons, like trusts or societies, are also considered Income Tax assesses under the Income Tax Act. They are taxed based on their income and are required to comply with the relevant tax provisions.

Deemed Assessee: Meaning and Examples

When a Legal Heir Becomes a Deemed Assessee

In cases where an individual passes away without settling their tax liabilities, the legal heir becomes responsible for filing the income tax return and paying any due taxes on behalf of the deceased. The legal heir is thus considered a deemed assessee.

Examples of Deemed Assessees in Practical Scenarios

• If a person dies during a financial year without filing their income tax return, their legal heir must file the return and pay any taxes due.
  
• If a person is declared insolvent, the official receiver managing their estate becomes the assessee responsible for handling tax matters.
  

Assessee in Default: Meaning and Implications

When an Assessee Becomes a Defaulting Party

An assessee becomes a defaulting party when they fail to comply with certain provisions of the Income Tax Act, such as not depositing TDS, not filing returns on time, or not paying the due taxes. This non-compliance can lead to penalties and legal consequences.

Consequences of Being an Assessee in Default

• Imposition of interest and penalties on the unpaid tax amount.
  
• Initiation of legal proceedings, including prosecution in severe cases.
  
• Disallowance of certain expenses and deductions, leading to higher tax liability.
  

Responsibilities and Duties of an Income Tax Assessee

Timely Filing of Income Tax Return

Every assessee is required to file their income tax return (ITR) within the prescribed due dates. Timely filing ensures compliance and helps avoid penalties. It also facilitates the processing of refunds, if any.

Payment of Due Taxes and Compliance

Assessees must accurately calculate their tax liability and pay the due taxes within the stipulated time. This includes advance tax payments, self-assessment tax, and TDS. Proper compliance helps in avoiding interest and penalties.

Responding to Income Tax Notices

If the Income Tax Department issues any notices, such as for scrutiny or assessment, the assessee must respond promptly and provide the required information or documents. Non-response can lead to adverse consequences, including reassessment and penalties.

Penalties for Non-Compliance by an Assessee

Failure to File Returns or Pay Taxes

Non-filing income tax returns or non-payment of taxes can attract penalties under various sections of the Income Tax Act. For instance, under Section 271F, a penalty of ₹5,000 may be levied for failure to file the return within the due date.

Consequences of Misreporting Income

Misreporting or underreporting income can lead to penalties ranging from 50% to 200% of the tax amount under-reported. In cases of willful evasion, prosecution may also be initiated.

Conclusion

Understanding one’s status as an Income tax assessee is crucial for ensuring compliance with tax laws. It helps fulfill tax obligations promptly and accurately, thereby avoiding penalties and legal issues. Being aware of your responsibilities under the Income Tax Act is essential for smooth financial management, whether you are an individual, a business entity, or a representative.

Additionally, staying informed about special levies like the windfall tax is equally important. This tax is imposed on unexpected or unusually high profits, often affecting industries like oil and gas. Assessors operating in such sectors must factor in these liabilities while planning their taxes to avoid surprises and ensure full compliance.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Introduction

What is Form 10BD?

Earlier, the exact number of donations made to a charitable institution could not be known, and thus, there was no standard way of verifying the recorded figure. Form 10BD was introduced through a CBDT notification to ensure that the donors correctly record and easily claim every donation.

Form 10BD of the Income Tax Act is a statement of donations received by charitable organizations or institutions eligible to offer tax deductions under Section 80G of the Income Tax Act. Organizations must file it annually to report donor details and the amount of donations received.

Importance of Form 10BD Under the Income Tax Act

• Ensures transparency in charitable contributions.
• Helps the Income Tax Department verify donor claims for deductions under Section 80G.
• Enables organizations to issue Form 10BE of the Income Tax Act, a certificate donors can use to claim tax deductions.

Who Needs to File Form 10BD?

Eligibility Criteria for Filing Form 10BD

Organizations and institutions registered under:

• Section 80G: Entities receiving charitable contributions are eligible for tax deductions under this section.
• Section 35: Institutions involved in scientific research or rural development that receive funds for these purposes.
• Section 10(23C): Specified funds, trusts, and educational institutions recognized under the Income Tax Act.

The funds received by the institutions should be aligned with the following sections:

• Section 35 (1A) (i): Deductions for donations to approved scientific research institutions, exclusively for scientific research.
• Section 80G (5) (viii): Tax deductions for donations to charitable institutions for education, poverty relief, or medical aid.

Entities Required to Furnish Form 10BD

• Non-profit organizations.
• NGOs receiving tax-deductible donations.
• Trusts and institutions covered under Section 80G of the Income Tax Act.
• Research institutions and universities receiving funds for scientific research under Section 35.

Purpose of Form 10BD

Tracking Donations and Issuing Certificates to Donors

Form 10BD enables charitable institutions to report donations received and issue certificates to donors, ensuring accurate record-keeping and facilitating tax deductions under Section 80G. It provides a systematic way to reconcile donations with claimed deductions, similar to the method for TDS in India through the TDS Reconciliation System (TRACES) that prevents discrepancies in tax on mutual funds. The form also enables the organization to issue Form 10BE, which helps donors claim tax deductions.

Ensuring Transparency in Charitable Contributions

Form 10BD promotes transparency by requiring registered NGOs and charitable institutions to file a comprehensive statement of donations. Introduced by the CBDT in 2021, this mechanism helps verify donor claims and prevents misuse of tax-exempt funds, reinforcing accountability in the tax system.

Details Required in Form 10BD

Donor Information (Name, PAN/Aadhaar, Address)

• Donor ID: A unique identifier such as PAN, Aadhaar, Passport, or Driving License. 
• Donor Name: The donor’s name as it appears on the provided ID. 
• Donor Address: The complete residential or registered address of the donor.

Additionally, Form 10BD also requires the statement number and receipt number, which are unique identifiers for tracking donation reports and verifying donor transactions. 

Donation Details (Amount, Mode of Payment, Purpose)

• Donation Amount: The exact amount donated during the financial year, matching the receipts issued to the donor.
• Mode of Payment: Specifies how the donation was received: cash, cheque/draft, in kind, or other electronic methods. Donations above ₹2,000 in cash are not eligible for tax deductions, aligning with the exemption vs deduction rules.
• Donation Type: Categorized as specific, corpus, restricted grant, or other to prevent misallocation.
• Section Code: Identifies the applicable section under the Income Tax Act:
  1. Section 35(1)(iii): Donations to scientific research institutions.
  2. Section 35(1)(ii): Donations to research-focused universities.
  3. Section 35(1)(iia): Donations to research associations in social sciences or statistics.

Step-by-Step Guide to Filing Form 10BD

Filing Timeline and Due Dates

The due date for filing Form 10BD for the financial year 2024-25 is 31st May 2025. Eligible trusts, institutions, and organizations must submit the donation statement within this timeframe to avoid penalties.

Online Filing Procedure Through Income Tax Portal

1. Log in to the Income Tax Portal at https://www.incometax.gov.in/iec/foportal/ using valid credentials.
2. Look for the “e-file” tab, select “Income Tax Forms,” and proceed to Form 10BD.
3. Choose the relevant financial year and click “Continue” to proceed.
4. Enter the required information across the three sections – Basic Information, Donation and Donor Details, and Verification.
5. Download the Excel template, fill in the mandatory fields, and upload the CSV file to the portal.
6. Review all details, click “Proceed to verify,” and confirm the submission.
7. After successful submission, download the acknowledgement and the filed Form 10BD.
8. To download the filed Form 10BD, go to the e-file tab > Income Tax Forms > View Filed Forms, select “Statement of Particulars to be filed”, click “View All,” and then “Download Form.”
9. After filing Form 10BD, download Form 10BE and provide it to the donors

Form 10BE: Certificate of Donation

What is Form 10BE?

Form 10BE is the certificate issued to donors after filing Form 10BD, allowing them to claim deductions under Section 80G of the Income Tax Act. It serves as proof of donation and must be provided to the donor by 31st May of the relevant financial year.

Issuing Form 10BE After Filing 10BD

Once Form 10BD is filed, the organization can generate Form 10BE through the income tax portal. The certificate specifies donor details, donation amount, and a unique acknowledgment number.

Donors can download the certificate 24 hours after filing Form 10BD. To download, donors need to:

• Log in to the e-Filing portal.
• Go to the Dashboard, click e-File > View Filed Forms, and select Download 10BE PDFs.
• Once downloaded, review the PDF and issue it to donors as the official Certificate of Donation.

Consequences of Non-Filing or Incorrect Filing

Penalties for Delay or Errors

Non-filing or delayed filing of Form 10BD incurs a penalty of ₹200 per day, which is capped at the total donation amount for which the filing was delayed. Additionally, under Section 271K, further penalties ranging from ₹10,000 to ₹1,00,000 may be imposed for failure to file or inaccurate filing of Form 10BD.

Impact on Donors’ 80G Claims

If the organization fails to file Form 10BD, donors may have difficulty claiming deductions under Section 80G. Accurate filing ensures that donors receive Form 10BE, which serves as valid proof for their tax deduction claims.

Common Mistakes to Avoid While Filing Form 10BD

Incorrect Donor PAN Details

Ensure the donor’s PAN is entered accurately to prevent mismatches during verification. If incorrect details are submitted, revise the form by filing a corrected Form 10BD before the due date.

Missing Information or Incorrect Donation Amounts

Verify donation amounts and payment modes to avoid discrepancies in the submitted form. If errors are detected after submission, the Income Tax Portal allows for corrections by filing a revised Form 10BD within the specified timeframe.

Recent Updates Related to Form 10BD

Changes Introduced by CBDT Notifications

• Digital Verification Measures: The filing of Form 10BD now requires electronic verification through Digital Signature Certificate (DSC) or Electronic Verification Code (EVC), ensuring the authenticity of the reported information.
• Introduction of Pre-Acknowledgement Numbers (Pre-ARNs): Entities can generate up to 1,000 Pre-ARNs for manually issued donation certificates (Form 10BE) before filing Form 10BD. These Pre-ARNs must be quoted on the certificates and reported in Form 10BD.
• Stricter Penalties: Recent CBDT notifications have emphasized stricter penalties for incorrect filing and have updated the format of Form 10BD and Form 10BE to include additional donor details.

Conclusion

Accurate filing of Form 10BD under the Income Tax Act is crucial for charitable organizations to maintain compliance, ensure donor transparency, and facilitate tax deduction claims under Section 80G. Just as in stock market advisory, where precise reporting and documentation are vital for informed decision-making, timely submission of Form 10BD helps organizations avoid penalties and effectively support donors in their tax-saving efforts.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

When earning foreign income, Indian taxpayers often face a challenge: double taxation. Fortunately, the Income Tax Act includes provisions such as Section 90, Section 90A, and Section 91, which provide relief from being taxed twice. Understanding these sections is crucial for international income earners, professionals, and business owners with overseas operations.

Additionally, professionals working abroad or earning income from foreign sources must consider other statutory deductions like professional tax tax while computing their overall tax liability. Although state governments in India levy professional tax, it plays a role in the broader picture of income reporting and tax compliance. 

Understanding Double Taxation and Relief

What is Double Taxation?

Double taxation means the same income is taxed in two countries. This commonly happens when a person resides in India but earns income from another country. Both India and the foreign country may try to tax that income, leading to a financial burden.

The Impact of Double Taxation on Individuals with Foreign Income

Double taxation reduces net income and creates confusion. For example, if you’re a salaried employee working in Dubai for part of the year and also earning rental income in India, both countries may tax your earnings. This affects your income tax calculation on salary and other global income.

Double Taxation Avoidance Agreements (DTAAs)

To address this, India has signed Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. These agreements provide a framework to decide which country gets the right to tax which income and offer relief through exemptions or tax credits.

Section 90 of the Income Tax Act: A Detailed Explanation

Overview of Section 90

Section 90 of Income Tax Act provides relief from double taxation for Indian residents earning income from countries with which India has a DTAA. The relief can be in the form of a tax exemption or a credit for foreign taxes paid.

This section is relevant for:

• Salaried professionals working abroad.
  
• Investors in global mutual funds or stocks.
  
• NRIs earning income in India and abroad.
  
• Freelancers and consultants with foreign clients.
  

Eligibility Criteria for Relief under Section 90

To claim benefits under Section 90 Income Tax Act, the taxpayer must:

• Be a resident in India during the financial year.
  
• Have earned income that is taxed in both India and the foreign country.
  
• Pay taxes in the foreign country.
  
• Ensure the foreign country has a DTAA with India.
  

Types of Relief Available under Section 90 Income Tax Act

Exemption Method

This method excludes the foreign income from taxation in India if it’s already taxed in the foreign country. For example, if your salary is taxed in the UK, India may exempt it.

Credit Method

India taxes global income, but under the credit method, tax paid in a foreign country is allowed as a deduction from the Indian tax liability. So, you do not pay tax twice.

Documentation Required for Claiming Relief under Section 90 Income Tax Act

You must provide:

• Tax residency certificate (TRC) from the foreign country.
  
• Proof of foreign income, such as payslips, invoices, or dividend statements.
  
• Tax paid certificates from the foreign jurisdiction.
  
• Form 67, which is essential to claim the foreign tax credit.
  

Computation of Relief under Section 90

Step-by-step Calculation Example

Let’s say:

• You earned ₹10 lakhs in the UK and paid ₹2 lakhs tax there.
  
• Your Indian tax on this income is ₹2.5 lakhs.
  

Under Section 90, you can claim ₹2 lakhs as credit, and only pay the balance ₹50,000 in India.

Steps:

1. Compute total income (Indian + foreign).
   
2. Calculate total Indian tax liability.
   
3. Deduct foreign tax paid (limited to the Indian tax on that foreign income).
   

Illustrative Case Studies of Section 90 Application

Case Study 1: Freelance IT consultant

Let’s say person A is an Indian resident offering freelance IT services to US clients. He pays 15% tax in the US. At year-end, he includes this foreign income in his Indian return and claims credit using Form 67, reducing his Indian tax burden under Section 90 Income Tax Act.

Case Study 2: NRI with dual income

Person B, a resident returning from Singapore, earns rental income from her flat in Mumbai and residual income from her old job in Singapore. She claims tax credit on the salary taxed in Singapore under the DTAA with India.

Section 90A of the Income Tax Act

What is Section 90A?

Section 90A is a newer provision introduced to deal with countries or specified territories with which India has signed bilateral agreements, not DTAAs. These agreements are often more limited in scope and typically apply to economic cooperation or trade agreements.

This section allows Indian residents to claim tax relief from such countries.

Key Differences between Section 90 and 90A

Aspect	Section 90	Section 90A
Applies to	DTAA Countries	Specified Territory Agreements
Relief	Comprehensive	Limited or Specific
Focus	Double Taxation	Economic & Tax Cooperation

Conditions for Claiming Relief under Section 90A

• The taxpayer must be a resident in India.
  
• The agreement must be between India and a notified territory (like Hong Kong or Macau).
  
• Relief should be claimed only if the territory has notified of cooperation.
  

Computation of Relief under Section 90A

The tax relief computation method (exemption or credit) remains similar to Section 90. However, it’s limited to the terms of the agreement. Always refer to the official treaty document.

Section 91 of the Income Tax Act

Overview of Section 91

Section 91 of Income Tax Act provides unilateral relief for Indian residents earning income in countries without a DTAA. This is important when no agreement exists, but double taxation occurs.

Relief Provided Under Section 91

This section grants a deduction on the foreign tax paid, calculated as:

Lower of:

• Indian tax payable on that income, or
  
• Foreign tax paid
  

Determining the Method of Relief under Section 91 (considering DTAAs)

Relief under Section 91 is applicable only when no DTAA exists between India and the foreign country. If a DTAA is in place, Section 90 or 90A should be used first. Section 91 is a fallback mechanism, providing unilateral tax relief to avoid double taxation.

Computation of Relief under Section 91

Let’s say:

• You earn ₹5 lakhs in a country with no DTAA.
  
• You pay ₹60,000 tax there.
  
• Indian tax on the same income is ₹50,000.
  

You can claim ₹50,000 as relief (lower of the two).

Illustrative Case Studies of Section 91 Application

Case Study: Indian photographer in Africa

Person A, an Indian photographer, earned ₹4 lakhs in a non-DTAA African country and paid ₹40,000 in taxes. Indian tax on this is ₹35,000. Amit can claim ₹35,000 relief under Section 91 of Income Tax Act.

Form 67 and Claiming Foreign Tax Credit

What is Form 67?

Form 67 is a mandatory form introduced by the Income Tax Department for claiming foreign tax credit under Section 90, 90A, or 91. It must be submitted online through the Income Tax e-filing portal.

How to Fill Form 67

• Log in to the Income Tax portal.
  
• Go to “e-File” > “Income Tax Forms” > “File Income Tax Forms.”
  
• Select Form 67.
  
• Provide details of foreign income, tax paid, country, and DTAA clause (if any).
  
• Attach supporting documents.
  

When to File Form 67

Form 67 must be filed on or before the due date of filing your Income Tax Return (typically July 31st). Filing it late can result in the denial of your claim for foreign tax credit.

Penalties for Non-Compliance

Penalties for Non-Disclosure of Foreign Income

Under the Black Money Act, failing to disclose foreign income or assets can attract a penalty of ₹10 lakhs per default and prosecution.

Penalties for Incorrect Reporting of Foreign Income

Incorrectly claiming foreign tax relief or misreporting income may attract:

• Interest under Sections 234A/B/C
  
• Penalty under Section 270A (up to 200% of tax under-reported)
  

Penalties related to Documentation and Record-Keeping

If you fail to maintain documentation (like TRC or Form 67), the relief may be denied, and penalties under Section 271J may apply for inaccurate reporting.

Conclusion

Navigating foreign income taxation can be tricky, but Sections 90, 90A, and 91 of the Income Tax Act help simplify this process. Whether you’re a salaried NRI, a freelancer with international clients, or a businessperson investing overseas, claiming appropriate relief ensures you avoid unnecessary tax payments.

Understanding and using tools like Form 67, knowing about DTAAs, and keeping proper documentation are essential. If you’re ever in doubt, consult a share market advisor or a direct tax expert to stay compliant and maximize your earnings.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Understanding Depreciation in the Income Tax Act

Definition and Purpose of Depreciation

Depreciation allows businesses to account for the gradual wear and tear of assets. The Income Tax Act provides specific guidelines for calculating and claiming depreciation, making it one of the important income tax concepts. 

Depreciation, as defined under the Income Tax Act, refers to the deduction allowed to account for the reduction in the value of an asset due to wear and tear, obsolescence, or usage. It spreads the cost of an asset over its useful life, reducing taxable income in the process.

Tax Implications of Depreciation:

• Reduces taxable income by allowing deductions for asset wear and tear.
• Encourages businesses to invest in assets by offsetting purchase costs over time.
• Impacts overall tax liability, making it a crucial component in tax planning under income tax concepts.

Depreciation vs. Amortization

Depreciation (Income Tax Act) and amortization serve similar purposes but differ in scope and calculation methods.

Aspect	Depreciation (Income Tax Act)	Amortization
Definition	Spreads the cost of tangible assets over their useful life (e.g., machinery, vehicles).	Allocates the cost of intangible assets over time (e.g., patents, trademarks).
Formula	(Cost – Salvage Value) / Useful Life	Cost / Useful Life
Applicability	Tangible assets only	Intangible assets only
Residual Value	The estimated value of a tangible asset at the end of its useful life is considered in calculations.	Not applicable, as intangible assets typically have no salvage value.
Calculation Method	Straight-Line or Accelerated methods	Typically Straight-Line
Purpose	Manages tangible asset costs	Spreads cost of intangible assets over time.

Asset Classification for Depreciation

Tangible vs. Intangible Assets

• Tangible Assets: Physical assets like buildings, machinery, furniture, and appliances that depreciate due to wear, usage, and environmental exposure.
• Intangible Assets: Non-physical assets such as patents, trademarks, and licenses that depreciate due to limited legal life or market relevance. Only those acquired on or after April 1, 1998, are eligible for depreciation.

Different Categories of Assets and Their Classification

As per Income Tax basics, assets are grouped into Blocks of Assets for depreciation purposes. A Block of Assets refers to a group of assets of a similar nature and depreciation rate. Individual assets within a block lose their separate identity. Depreciation is calculated based on the written down value (WDV) of the entire block rather than on individual assets.

Asset blocks are classified based on:

• Nature: The physical or non-physical form and type of the asset.
• Lifespan: The useful life or duration over which they provide economic benefits.
• Usage/Application: Assets used in similar types of operations or business functions. 

Examples of each asset category:

Classification Criterion	Asset Type	Examples
Nature of the Asset	Machinery	Industrial equipment
	Buildings	Offices, factories, warehouses
	Patents	Legal rights for inventions
	Furniture	Desks, chairs, office fixtures
Lifespan of the Asset	Short lifespan	Computers (3–5 years)
	Medium lifespan	Vehicles, office equipment (5–8 years)
	Long lifespan	Buildings, industrial machinery (20+ years)
	Limited legal life	Trademarks, copyrights (10–20 years)
Usage / Application	Production	Manufacturing machinery
	Administrative	Office furniture
	Commercial	Retail outlets
	Legal Protection	Patents, trademarks, copyrights

Depreciation Rates and Methods

Prescribed Rates of Depreciation under the Income Tax Act

The Income Tax Act prescribes specific depreciation rates for various asset categories under Schedule XIV. These rates vary based on the nature and usage of the asset.

Schedule XIV of the Income Tax Act: 

Simplified depreciation rate table for commonly used assets:

Asset Class	Asset Type	Depreciation Rate
Building	Residential buildings (excluding hotels/boarding houses)	5%
	Hotels and boarding houses	10%
	Temporary wooden structures	40%
Furniture	Furniture and fittings (including electrical fittings)	10%
Plant & Machinery	General machinery, motor cars (non-commercial use)	15%
	Motor vehicles for hire or bought between 23 Aug 2019 and 1 Apr 2020	30% – 45%
	Computers and computer software	40%
	Books (annual publications or lending libraries)	60% – 100%
Intangible Assets	Franchises, trademarks, licenses, patents, copyrights, know-how, etc.	25%

 

Changes in Depreciation Rates Over Time: 

Depreciation rates have been revised periodically to reflect changes in industry needs, technology, and government policy.

• Accelerated Depreciation: Introduced temporarily for motor vehicles acquired between specific dates (e.g., 23 Aug 2019 to 1 Apr 2020) to boost investment.
• Higher Depreciation Rates: Certain assets, like pollution control equipment, renewable energy devices, and medical equipment, are eligible for rates as high as 40%.
• Technological Advancements: Computers and software have higher depreciation (40%) due to shorter useful life and rapid obsolescence.

Different Methods of Depreciation Calculation

Straight-Line Method (SLM):

The Straight-Line Method (SLM) allocates depreciation evenly across the useful life of an asset. It is simple, predictable, and is used when the asset generates equal value each year. The formula for computation is:

Depreciation per year = (Original Cost – Residual Value) / Useful Life

Where, 

• Original Cost: Price paid to acquire the asset
• Residual Value: Expected value at the end of useful life
• Useful Life: Operational tenure of the asset in years

This method is suitable for assets like buildings or furniture, where the asset’s benefit is consistent over time

Written Down Value (WDV) Method:

The WDV Method calculates depreciation on the asset’s book value at the beginning of each year. This results in higher depreciation in earlier years and lower depreciation in later years. The formula used for calculation is:

Depreciation Rate = {1 – (S/C)^(1/N)} × 100

Where:

• S = Residual Value
• C = Original Cost
• N = Useful life (in years)

This method is widely used under Indian Income Tax rules, especially for machinery or technological equipment where the asset’s utility declines quickly in the initial years. WDV is more prevalent under the Income Tax Act, making it relevant for share market advisory and other business operations where accelerated depreciation can offer earlier tax benefits.

Comparison of Methods:

Criteria	Straight-Line Method	Written Down Value Method
Depreciation Amount	Same every year	Higher in early years, lower in later years
Asset Value Reduction	Linear – decreases evenly	Exponential – faster reduction initially, tapering off over time
Ease of Calculation	Simple and predictable	Slightly complex due to reducing the balance
Usage	Financial reporting, steady-use assets like buildings	Tax reporting, especially for technology, machinery, share market advisory, and similar services
Examples	Buildings, office furniture	Vehicles, electronics, IT equipment, plant & machinery

Claiming Depreciation: Conditions and Procedures

Eligibility Criteria for Claiming Depreciation

To claim depreciation under the Income Tax Act, the following conditions must be met:

Ownership of the Asset: 

• The assessee must be the asset’s owner, either fully or partially.
• Ownership may be legal or beneficial in nature.
• Even if the legal title of the asset is held by another party, the assessee can still claim depreciation if they have constructed the asset or paid for it and use it for business or professional purposes.
• In the case of a finance lease, as governed by Accounting Standard AS-19, the lessee is considered the owner for the purpose of claiming depreciation, provided the asset is capitalised in their books..

Use of the Asset for Business or Profession: 

The asset must be used for the purpose of business or profession to be eligible. Full-year usage is not necessary; even partial or seasonal use qualifies. If used partly for non-business purposes, depreciation must be apportioned proportionally as per Section 38 of the Income Tax Act.

Documentation Requirements for Depreciation Claims

• Proof of ownership (purchase invoice, lease deed, loan agreement)
• Date of acquisition and use
• Asset classification and depreciation rate applied
• Fixed asset register or accounting records
• Usage evidence for business (e.g., logbooks for vehicles).

Impact of Lease vs. Ownership on Depreciation Claims

• Owned Assets: Eligible for depreciation. The asset must appear on the balance sheet.
• Finance Lease: Lessee may claim depreciation if the asset is capitalised (as per AS-19).
• Operating Lease or Hire Agreements: Lessee cannot claim depreciation; the lessor retains ownership and claims it.
• Constructed Assets on Leased Land: If the assessee builds a structure, even on someone else’s land, depreciation on the structure can be claimed.

Depreciation is only allowed on capital assets, not land or goodwill. Also, depreciation under the Income Tax Act takes precedence over the Companies Act for tax purposes.

Depreciation on Assets Sold During the Year

If an asset is sold, discarded, demolished, or destroyed in the same year it is acquired, no depreciation is allowed. Depreciation is only applicable for assets that are used during the year. This rule prevents immediate write-offs and ensures assets are actually utilized before claiming deductions.

Depreciation in Case of Co-Ownership

When an asset is co-owned, each co-owner can claim depreciation in proportion to their share of ownership, provided the asset is used in their respective businesses. Ownership and business use must both be established. This allows equitable tax benefits among co-owners of jointly held property or equipment.

Special Considerations for Depreciation

Depreciation under the Companies Act, 1956

• Depreciation was calculated based on asset cost and residual value.
• The method allowed higher initial deductions, impacting taxable income.

Depreciation under the Companies Act, 2013

• Focuses on useful life and residual value rather than specific rates.
• Aligns with the WDV method, reducing discrepancies in tax calculations.

Treatment of Losses on Sale of Depreciated Assets

• Losses on depreciated asset sales can be adjusted against other business income.
• If the asset was part of a block, the remaining block value is adjusted for the sale proceeds.

Impact of Inflation on Depreciation

• Inflation can impact asset values, affecting depreciation calculations.
• The Income Tax Act does not allow revaluation of assets based on inflation.

Conclusion

Understanding depreciation under the Income Tax Act is vital for effective tax planning and compliance. Accurate calculation and timely claims can significantly reduce taxable income, impacting overall tax liability. Whether you own a business or work as a share market advisory consultant, comprehending the nuances of depreciation can enhance financial planning and optimize tax outcomes. For those new to taxation, understanding what is income tax and how depreciation interacts with it is essential for making informed financial decisions.

FAQs on Depreciation under the Income Tax Act

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

What is a Section 142(1) Income Tax Notice?

Definition and Purpose of the Notice

A Section 142(1) notice under the Income Tax Act is a communication issued by the Income Tax Department to gather more information from the taxpayer. The notice is issued in two situations:

1. When the taxpayer has not filed their income tax return (ITR), the AO can ask the taxpayer to submit the ITR for the specified financial year.
2. When the taxpayer has filed the ITR, the AO may ask for additional documents, explanations, or clarifications regarding specific income or transactions.

A 142(1) notice is a tool for tax authorities to ensure accurate tax assessment. It helps the AO:

• Verify the income declared in the ITR.
• Cross-check financial transactions with third-party data
• Obtain additional information if the return is not filed or is incomplete.
• Confirm the accuracy of income disclosed from various sources, such as salary, investments, or business income.

Types of Information Requested in the Notice

Depending on the nature of the inquiry, the AO may request:

• Financial Records: 

Bank statements, salary slips, Form 16, tax audit reports, and balance sheets.

• Supporting Documents: 

Evidence of capital gains, stock trading reports, and tax-saving investments.

• Clarifications and Explanations: 

Justifications for high-value transactions, significant cash deposits, or discrepancies between reported and observed income.

Who Can Issue a Section 142(1) Notice?

Authority of the Assessing Officer (AO)

Only the Assessing Officer (AO) has the authority to issue a notice under Section 142(1) of Income Tax Act for the following:

• Verify the accuracy of income disclosed in the ITR, including income from salary, interest, mutual funds, or stock investments, ensuring accurate income tax calculation on salary and other income.
• Ensure all income sources, such as salary, interest, mutual fund gains, or stock income, are declared.
• Gather further evidence in cases of suspected tax evasion or underreporting.

Circumstances Leading to Notice Issuance

The AO may issue a 142(1) notice in the following scenarios:

• Discrepancies in Tax Returns: 

If your ITR shows income of ₹15 lakh, but the bank reports cash deposits of ₹25 lakh, the AO may seek clarification.

• Information Received from Other Sources: 

Data from a stock market advisory company may reveal capital gains not declared in the ITR.

• Suspected Tax Evasion:

If the AO suspects undeclared income or excessive deductions, a 142(1) notice may be issued.

When is a Section 142(1) Notice Issued?

Time Limits for Issuing Notices

A Section 142(1) notice can be issued anytime during the assessment year or ongoing proceedings. If the taxpayer hasn’t filed the ITR by the due date, the AO may issue a notice requiring its submission. If the ITR has already been filed, the notice can be issued anytime before the assessment is completed.

The AO can demand information for documents or financial records for up to 3 financial years before the notice date. However, there is no fixed time limit for issuing a notice if the ITR hasn’t been filed, but the assessment must be completed within 12 months from the end of the relevant assessment year.

Pre-Assessment Inquiry

During the assessment, the AO may issue a Section 142(1) notice to:

• Seek Clarifications: Request explanations for discrepancies or unusual transactions.
• Verify Claims: Request supporting documents for deductions claimed, such as interest certificates for home loans or proofs of investment.
• Request Additional Information: Demand specific documents, such as bank statements, Form 16, or tax audit reports, to verify the accuracy of the income declared.

During the Assessment Process

A 142(1) notice can be issued during the assessment to verify information, request additional documents, or seek explanations for specific transactions.

Objective of Issuing a Section 142(1) Notice

Gathering Information for Accurate Assessment

The Assessing Officer (AO) issues a Section 142(1) notice to collect additional information and ensure accurate tax assessment, including:

• Income from salary and the applicable income tax calculation on salary.
• Professional tax details and their implications on overall income.
• Earnings from investments and other savings instruments..

Verifying Information Provided by Taxpayers

The AO may verify the information submitted by the taxpayer against third-party data, such as:

• TDS certificates, Form 16, and salary slips.
• Bank statements and financial records.
• Employer records related to professional tax deductions.

In case of discrepancies, the taxpayer must provide clarifications and supporting documents to validate the information and ensure compliance with direct tax regulations.

Compliance with Section 142(1) Notice: A Mandatory Requirement

Legal Obligations of Taxpayers

Taxpayers are legally required to respond to a 142(1) notice by:

• Submitting the requested documents within the specified deadline.
• Providing accurate and complete information.
• Ensuring that income from all sources is accurately reported.

Penalties for Non-Compliance

Non-compliance with a Section 142(1) notice can result in severe penalties, including:

• Penalty Under Section 271(1)(b): If the taxpayer fails to respond as required, a fine of Rs 10,000 may be imposed.
• Best Judgment Assessment: Under Section 144, the case could be subject to a “Best Judgement Assessment,” where the AO assesses the tax liability based on available information rather than relying on the taxpayer’s return.
• Prosecution Under Section 276D: Non-compliance may lead to prosecution, which can result in imprisonment for up to one year, with or without a fine.

Issuance of a Warrant: In some instances, authorities may issue a warrant under Section 132 to search, complicating the matter further.

Safeguarding Your Rights as a Taxpayer

Understanding Your Rights

As a taxpayer, knowing your rights is essential when responding to any notice under the Income Tax Act. The Section 142(1) notice, for instance, grants you the right to:

• Request clarification on any part of the notice that is unclear.
• Access information on the necessary documents you need to submit.
• Seek an extension for the submission if you cannot meet the deadline.

Time Limits and Legal Recourse

You must respond to the Income Tax 142(1) notice within the specified time limit, usually 30 days. Failure to meet the deadline can lead to severe consequences, including a best judgment assessment under Section 144. If you believe the notice is unjust or incorrect, you have the legal right to:

• Request an extension of the submission time frame.
• If you feel your case has been unfairly assessed, under the prescribed legal provisions, file an appeal.

Seeking Professional Assistance

Like you consult a stock market advisory company for guidance in stock investments, you can seek a tax expert’s help to stay compliant with such notices.

• Consult a tax expert: Engaging a professional ensures that you respond correctly.
• Take proactive measures: A tax expert can help you file your taxes promptly, keep records, and ensure compliance with the Income Tax Act.

Steps to Respond to a Section 142(1) Notice

Gathering Required Documents

• Bank statements, tax-saving investment proofs, and salary slips.
• Tax audit reports and capital gains statements.
• Interest certificates from FDs, mutual funds, and other investments.

Preparing a Comprehensive Response

Once you have all the necessary documents, prepare your response:

• Review the notice carefully to understand the specific information requested by the AO.
• Choose Partial Response if you need more time to gather additional information, or Full Response to submit all requested details and documents based on your readiness.
• Before attaching your documents, organize them and ensure they are correctly formatted (PDF, Excel, or CSV).

Submitting the Response within the Deadline

The next step is to submit your response within the specified deadline. Follow these steps:

• Log in to the Income Tax Portal and access your e-filing account.
• Navigate to ‘Pending Actions’ and select ‘E-Proceedings’.
• Click ‘View Notices’ and select the Section 142(1) notice.
• Choose between ‘Partial Response’ or ‘Full Response’.
• Upload the required supporting documents (PDF, Excel, CSV).
• Review your response, check the declaration box, and click ‘Submit’.

You will receive a confirmation message indicating successful submission. Be sure to download the acknowledgment for your records. 

Following up on Your Response

After submitting your response, monitor the status:

• Check for any updates or further communication from the Assessing Officer.
• If additional information is requested, be prepared to provide it promptly.
• Keep track of all submissions and acknowledgments in case further follow-up is needed.
  

Sample Section 142(1) Notice

Suppose you submitted your tax return for the financial year [YYYY-YY]. Based on the review of your filed return, you may get the following notice:

Dear [Taxpayer’s Name],

Subject: Notice under Section 142(1) of the Income Tax Act, 1961

This is to inform you that your income tax return for the financial year [YYYY-YY] has been reviewed. To complete the assessment process, the following documents/information is required from you:

Required Information/Documents:

1. Please provide a brief note on the business activities carried out during the previous year relevant to A.Y. 2023-24.
2. Please provide the computation of total income head-wise.
3. Please provide details of all bank accounts maintained during FY 2022-23, including account number, MICR code, account type, branch address, etc.
4. During FY 2022-23, you made a significant property investment considerably higher than the income declared in the ITR. Please provide the sources of investment made for the property purchase along with documentary evidence.
5. Please provide the depreciation chart for the previous year relevant to A.Y. 2023-24, as well as for the two preceding years.
6. In the Schedule DOA of the ITR, a large addition in land & building has been shown where no addition was made. Please provide the details of additions made to fixed assets shown in the Schedule DOA of the ITR.
7. Please provide invoices/documentary evidence for assets added to fixed assets during the year under consideration.
8. You have made large contract payments to persons who have not filed their income tax returns for the relevant assessment year. Please provide the details of the persons to whom contract payments have been made in the following format:

S.No.	Name & Address of the Persons	PAN of the Persons	Gross Amount	TDS Deducted	Amount Paid After TDS	Nature of Work Done

9. Please provide copies of agreements/MOUs executed with the persons to whom contract payments were made.
10. It has been found that during the previous year relevant to A.Y. 2023-24, a large amount of cash (including bearer cheques) was deposited into the current account. Please provide the sources of these cash deposits along with documentary evidence.
11. Please provide a copy of GSTR-3B and GSTR-9C, and reconcile the turnover declared in GSTR and the ITR.

Assessing Officer:

[Officer’s Name]

[Designation]

[Contact Information]

Date of Issue: [DD/MM/YYYY]Note: To know the originator Unit of this Communication, kindly see the Digital Signature.

FAQs