Author : Vivek Kaul/DNA
Content :
Content :
To file I-T returns, the choice for salaried individuals will be between the Indian Income Tax Return - 1 (ITR-1) and ITR-2 forms. If your earnings for the year are through salary income and interest earned on bank deposits, then ITR-1 is the form you should fill up. If you are a salaried individual and have made some money selling shares, or if you own a house, then ITR-2 is the form to be filled up. Vivek Kaul explains through the hypothetical example of Vijay Kelkar how you can fill up ITR-2. Even if you are filling up ITR-1, this is a helpful guide. The main portion of ITR-2 has two pages, which are reprinted below. Other than these, there are four pages occupied by 15 schedules, most of which have been reprinted on the sides. The user has to first fill up the schedules and then get around to filling up the two main pages.
General information
Part A-Gen needs to be filled up for general information. This part is the easiest to fill up and most entries are self- explanatory.
n Name and address are the first entries you should fill up.
n Then come to filling up the permanent account number, popularly known as PAN. If you want to file a tax return, you must necessarily have a PAN. You cannot file a return otherwise.
n To know the designation of your assessing officer, pull out a copy of your last year's return. If you are filing a return for the first time, find out about it when you go to the income tax office.
n To know the section under which returns are being filed, look at instruction number 9 in the list of instructions. For individuals filing returns before the due date, the right section is 11.
n Indians living outside the country need to specify whether the returns are being filed by a representative assessee. Salaried Indian nationals can ignore this entry.
Salary income
For this entry, schedule S needs to be filled up first.
n The information to fill up this schedule comes largely from Form 16 and your salary structure.
n Salary includes your basic salary and the bonus earned during the course of the year. In the case of Kelkar, the basic and bonus amount to Rs 3,24,000.
n Allowances like leave travel allowance, medical reimbursement, house rent allowance (if an individual lives in a rented accommodation) and transportation allowance, etc are exempt from taxes. Nevertheless, these need to be mentioned in the form. You don't need to calculate this entry separately -- your form 16 will have the numbers.
n Allowances not exempt include allowances like special allowance. It also includes the house rent allowance (HRA) if the individual owns a house and lives in it. Kelkar has bought a house for Rs 30 lakh this year and lives in it. He has taken a loan of Rs 25 lakh and paid the remaining amount from his own savings. Since he lives in the house, his HRA is taxable. The total of his special allowance (Rs 96,720) and HRA (Rs 72,000) works out to Rs 1,68,720.
n The income chargeable to tax under this head works out to Rs 4,92,720. This is the sum of 1 and 3 in the table below.
Income from house
For this entry, you need to fill up schedule HP first
n If you don't own a house, this section is not for you.
n If you have a house and you live in it, the entry that matters to you is the interest paid on borrowed capital. Kelkar has a 20-year housing loan of Rs 25 lakh at a fixed interest rate of 12%. His equated monthly instalment (EMI) for this works out to Rs 27,527. The interest component for the year works out to Rs 2,98,275.
n In case of a self-occupied house, interest of up to
Rs 1,50,000 can be shown in a given year. So, even though Kelkar has paid an interest of Rs 2,98,275 during the year, he can show an interest of only Rs 1,50,000. To make this entry, take a look at the certificate issued by the bank, whose housing loan you have.
n Given that Kelkar lives in the house he bought, and he pays an interest on the home loan he has taken, his income from house property is negative. That entry has been made in the table below.
n For those who rent out their house, the entire interest part of the EMI can be set off against the rent earned during the course of the year.
"Since long-term capital gains from equity and equity mutual funds are tax exempt, any long-term losses from these instruments cannot be adjusted against any other income. Basically this principle flows from Section 14A of the Income Tax Act that provides that no deduction shall be allowed in respect of expenditure incurred in relation to exempted income i.e if the income is tax-free, expenditure / loss related to such income is also not deductible."
—Sandeep Shanbhag, Director, Wonderland Consultants, Tax & Investment Advisory
Income from short-term capital gains
n Full value of consideration indicates the total value of sale of the assets. In his case, Kelkar sold shares for Rs 64,000 and liquid funds for Rs 50,000. So, the total value comes to Rs 1,14,000, which is the entry to be made here.
n Cost of acquisition is the price at which the assets are bought. Kelkar bought the shares for Rs 84,000 and liquid fund units for Rs 48,000, putting the total cost of acquisition at Rs 1,32,000. The difference between sale value (Rs 1,14,00) and cost of acquisition (Rs 1,32,00) is the short-term capital gain or loss. This, in Kelkar's case, works out to a loss of Rs 18,000.
n Short-term capital gain under section 111 A is the capital gain made by selling shares. In Kelkar's case, there is a loss of Rs 20,000 (Rs 64,000 — Rs 84,000).
n Short-term capital gain other than section 111 A is the remaining
capital gain. In Kelkar's case, this is Rs 2,000 ( Rs 50,000 — Rs 48,000).
Income from capital gains
Part A-Gen needs to be filled up for general information. This part is the easiest to fill up and most entries are self- explanatory.
n Name and address are the first entries you should fill up.
n Then come to filling up the permanent account number, popularly known as PAN. If you want to file a tax return, you must necessarily have a PAN. You cannot file a return otherwise.
n To know the designation of your assessing officer, pull out a copy of your last year's return. If you are filing a return for the first time, find out about it when you go to the income tax office.
n To know the section under which returns are being filed, look at instruction number 9 in the list of instructions. For individuals filing returns before the due date, the right section is 11.
n Indians living outside the country need to specify whether the returns are being filed by a representative assessee. Salaried Indian nationals can ignore this entry.
Salary income
For this entry, schedule S needs to be filled up first.
n The information to fill up this schedule comes largely from Form 16 and your salary structure.
n Salary includes your basic salary and the bonus earned during the course of the year. In the case of Kelkar, the basic and bonus amount to Rs 3,24,000.
n Allowances like leave travel allowance, medical reimbursement, house rent allowance (if an individual lives in a rented accommodation) and transportation allowance, etc are exempt from taxes. Nevertheless, these need to be mentioned in the form. You don't need to calculate this entry separately -- your form 16 will have the numbers.
n Allowances not exempt include allowances like special allowance. It also includes the house rent allowance (HRA) if the individual owns a house and lives in it. Kelkar has bought a house for Rs 30 lakh this year and lives in it. He has taken a loan of Rs 25 lakh and paid the remaining amount from his own savings. Since he lives in the house, his HRA is taxable. The total of his special allowance (Rs 96,720) and HRA (Rs 72,000) works out to Rs 1,68,720.
n The income chargeable to tax under this head works out to Rs 4,92,720. This is the sum of 1 and 3 in the table below.
Income from house
For this entry, you need to fill up schedule HP first
n If you don't own a house, this section is not for you.
n If you have a house and you live in it, the entry that matters to you is the interest paid on borrowed capital. Kelkar has a 20-year housing loan of Rs 25 lakh at a fixed interest rate of 12%. His equated monthly instalment (EMI) for this works out to Rs 27,527. The interest component for the year works out to Rs 2,98,275.
n In case of a self-occupied house, interest of up to
Rs 1,50,000 can be shown in a given year. So, even though Kelkar has paid an interest of Rs 2,98,275 during the year, he can show an interest of only Rs 1,50,000. To make this entry, take a look at the certificate issued by the bank, whose housing loan you have.
n Given that Kelkar lives in the house he bought, and he pays an interest on the home loan he has taken, his income from house property is negative. That entry has been made in the table below.
n For those who rent out their house, the entire interest part of the EMI can be set off against the rent earned during the course of the year.
"Since long-term capital gains from equity and equity mutual funds are tax exempt, any long-term losses from these instruments cannot be adjusted against any other income. Basically this principle flows from Section 14A of the Income Tax Act that provides that no deduction shall be allowed in respect of expenditure incurred in relation to exempted income i.e if the income is tax-free, expenditure / loss related to such income is also not deductible."
—Sandeep Shanbhag, Director, Wonderland Consultants, Tax & Investment Advisory
Income from short-term capital gains
n Full value of consideration indicates the total value of sale of the assets. In his case, Kelkar sold shares for Rs 64,000 and liquid funds for Rs 50,000. So, the total value comes to Rs 1,14,000, which is the entry to be made here.
n Cost of acquisition is the price at which the assets are bought. Kelkar bought the shares for Rs 84,000 and liquid fund units for Rs 48,000, putting the total cost of acquisition at Rs 1,32,000. The difference between sale value (Rs 1,14,00) and cost of acquisition (Rs 1,32,00) is the short-term capital gain or loss. This, in Kelkar's case, works out to a loss of Rs 18,000.
n Short-term capital gain under section 111 A is the capital gain made by selling shares. In Kelkar's case, there is a loss of Rs 20,000 (Rs 64,000 — Rs 84,000).
n Short-term capital gain other than section 111 A is the remaining
capital gain. In Kelkar's case, this is Rs 2,000 ( Rs 50,000 — Rs 48,000).
Income from capital gains
To fill up this entry, schedule CG needs to be filled up first. This can be the most complicated schedule among all the schedules
All capital gains are not taxed at normal tax rates. Hence the need for a separate entry. Short-term capital gains from equity are taxed at the rate of 10% for the financial year 2007-08. Other short-term capital gains are lumped with income and taxed according to the tax bracket you fall in.
A short-term capital loss can be set off against any short-term capital gain you have made on selling shares or any other taxable short-term capital gain. But this loss cannot be set off against long-term capital gain on selling shares, because long-term capital gain made on selling shares is not taxable. Nevertheless, you can set off the short-term capital loss against any other taxable long-term capital gain like sale of gold or property or debt mutual funds.
Long-term capital gains made through stocks sold through a stock exchange, which are not taxed, are not to be mentioned in this section. There is a separate schedule EI (exempt income, which is not shown here) for that.
Other long-term capital gains are taxed at the rate of 10% without indexation and 20% with indexation. Indexation is essentially a process that takes inflation into account while deciding the cost of acquisition of a particular asset. For this, index numbers are available in the instructions that come with ITR-2.
What about long-term capital loss on selling shares? Long-term capital gain on selling shares or units of equity mutual funds is tax-free. As a result, long-term capital loss on selling shares is also tax-free. Put simply, any long-term capital loss incurred on selling shares or units of equity mutual funds cannot be set off against any long-term capital gain, even taxable long-term capital gain made on selling units of debt mutual funds or for that matter property.
To fill up this entry, schedule CG needs to be filled up first. This can be the most complicated schedule among all the schedules
Income from long-term capital gains
n Kelkar has sold units of a liquid fund he had bought in the year 2005-06 for Rs 60,000 at Rs 70,000. Capital gain is taxed at the rate of 10% without indexation and 20% with indexation, whichever is less. Hence we need to find out which calculation leads to a lesser tax and then fill up the form.
n With indexation, the cost of acquisition goes up to Rs 66,519. For the year 2005-06, the index number is 497. For 2007-08, the index number is 551. Dividing 551 by 497, we get 1.1086. Multiplying this by Rs 60,000, we get the cost of acquisition after indexation, which is Rs 66,519. The capital gain in this case is Rs 3,481 of which 20% would be Rs 697. Hence, the tax to be paid through this method is Rs 697.
n Without indexation, the capital gain is Rs 10,000 and the tax works out to be Rs 1,000 (10% of Rs 10,000). This is greater than Rs 1,025 and so Rs 697 is the tax that Kelkar should be paying. Hence, he needs to fill up the portion shown above.
n Kelkar has also suffered from a long-term capital loss of Rs 50,000 on selling shares. This loss cannot be set off.
n The total capital gain finally entered in entry 3c in computation of total income in the main form is zero, because overall, Kelkar has faced a capital loss of Rs 14,519 ( - Rs 18,000 short-term capital loss + Rs 3,481 long-term capital gain).
Total tax to be paid
Income taxable at normal rates needs to be found out
n As can be seen in entry 13 in computation of total income, the total taxable income is Rs 2,29,200. The entire amount will be taxed at normal taxes rates. This is primarily because Kelkar has no capital gain. As we have seen, he has suffered from capital loss. Since he has faced a loss, no special rates come into play.
n The tax calculations are shown in the table below. This table is not a part of ITR 2 and has been used here for the understanding of readers.
n The company has already deducted a tax of Rs 24,000, as can be seen in entry 9b of computation of tax liability on total income. This means Kelkar will get a refund of Rs 3,560. In case of refunds, it is mandatory to quote the MICR code.
Losses of current year
For this entry, schedule CYLA (not shown) needs to be filled up
n If an individual has made a loss under any of the sources of income, he can adjust these losses against other sources of income to reduce his tax liability. For Kelkar, the loss from house property is Rs 1,50,000.
n Capital losses can be adjusted only against capital gains and not against any other source of income.
n Kelkar has also suffered a short-term capital loss of
Rs 20,000 on selling shares. He has been able to adjust Rs 2,000 against short-term capital gain and Rs 3,481 against long-term capital gain. This still leaves Rs 14,519. This remaining loss cannot be set off this year as there are not enough capital gains available to do so. It will therefore have to be carried forward and entered in schedule CFL (carried forward loss) and also as entry 14 in computation of total income. The schedule CFL is not shown here.
n Losses can be carried forward for a maximum of 8 years
Tax deductions
For this entry, schedule VIA needs to be filled up first
n There are 13 sections (only 7 are shown below) under the schedule VIA of the Income Tax Act, which allow you to get tax deductions.
n Section 80 C allows a maximum of Rs 1 lakh for investments into life insurance, Employees Provident Fund, tax saving mutual funds, Public Provident Fund, repayment of home loan principal etc. Kelkar has utilised this limit.
n Section 80 D allows a deduction for payment of health insurance premium. The maximum limit is Rs 15,000 or Rs 20,000 for senior citizens. On his part, Kelkar pays a premium of Rs 7,500.
n Section 80 E allows a deduction for repayment of education loan. The deduction is allowed only for the interest portion of the EMI up to a maximum of Rs 40,000. In case of Kelkar, the total interest on the education loan works out to Rs 10,000.
"People scramble to make their tax saving investments at the last moment. This leads to a cash flow crunch. Also, there may not be much time to evaluate options. So it is mportant to start investing from the beginning of the year." — Suresh Sadagopan,
Ladder 7 Financial Advisories
Other income
n Dividend income from stocks and mutual funds is tax-free. Hence, dividend entry should include only dividend from foreign stocks. In Kelkar's case, this remains blank. Interest income includes interest received on fixed deposits (FDs) and money in the savings accounts. Kelkar receives an interest of Rs 4,000 on FDs.
All capital gains are not taxed at normal tax rates. Hence the need for a separate entry. Short-term capital gains from equity are taxed at the rate of 10% for the financial year 2007-08. Other short-term capital gains are lumped with income and taxed according to the tax bracket you fall in.
A short-term capital loss can be set off against any short-term capital gain you have made on selling shares or any other taxable short-term capital gain. But this loss cannot be set off against long-term capital gain on selling shares, because long-term capital gain made on selling shares is not taxable. Nevertheless, you can set off the short-term capital loss against any other taxable long-term capital gain like sale of gold or property or debt mutual funds.
Long-term capital gains made through stocks sold through a stock exchange, which are not taxed, are not to be mentioned in this section. There is a separate schedule EI (exempt income, which is not shown here) for that.
Other long-term capital gains are taxed at the rate of 10% without indexation and 20% with indexation. Indexation is essentially a process that takes inflation into account while deciding the cost of acquisition of a particular asset. For this, index numbers are available in the instructions that come with ITR-2.
What about long-term capital loss on selling shares? Long-term capital gain on selling shares or units of equity mutual funds is tax-free. As a result, long-term capital loss on selling shares is also tax-free. Put simply, any long-term capital loss incurred on selling shares or units of equity mutual funds cannot be set off against any long-term capital gain, even taxable long-term capital gain made on selling units of debt mutual funds or for that matter property.
To fill up this entry, schedule CG needs to be filled up first. This can be the most complicated schedule among all the schedules
Income from long-term capital gains
n Kelkar has sold units of a liquid fund he had bought in the year 2005-06 for Rs 60,000 at Rs 70,000. Capital gain is taxed at the rate of 10% without indexation and 20% with indexation, whichever is less. Hence we need to find out which calculation leads to a lesser tax and then fill up the form.
n With indexation, the cost of acquisition goes up to Rs 66,519. For the year 2005-06, the index number is 497. For 2007-08, the index number is 551. Dividing 551 by 497, we get 1.1086. Multiplying this by Rs 60,000, we get the cost of acquisition after indexation, which is Rs 66,519. The capital gain in this case is Rs 3,481 of which 20% would be Rs 697. Hence, the tax to be paid through this method is Rs 697.
n Without indexation, the capital gain is Rs 10,000 and the tax works out to be Rs 1,000 (10% of Rs 10,000). This is greater than Rs 1,025 and so Rs 697 is the tax that Kelkar should be paying. Hence, he needs to fill up the portion shown above.
n Kelkar has also suffered from a long-term capital loss of Rs 50,000 on selling shares. This loss cannot be set off.
n The total capital gain finally entered in entry 3c in computation of total income in the main form is zero, because overall, Kelkar has faced a capital loss of Rs 14,519 ( - Rs 18,000 short-term capital loss + Rs 3,481 long-term capital gain).
Total tax to be paid
Income taxable at normal rates needs to be found out
n As can be seen in entry 13 in computation of total income, the total taxable income is Rs 2,29,200. The entire amount will be taxed at normal taxes rates. This is primarily because Kelkar has no capital gain. As we have seen, he has suffered from capital loss. Since he has faced a loss, no special rates come into play.
n The tax calculations are shown in the table below. This table is not a part of ITR 2 and has been used here for the understanding of readers.
n The company has already deducted a tax of Rs 24,000, as can be seen in entry 9b of computation of tax liability on total income. This means Kelkar will get a refund of Rs 3,560. In case of refunds, it is mandatory to quote the MICR code.
Losses of current year
For this entry, schedule CYLA (not shown) needs to be filled up
n If an individual has made a loss under any of the sources of income, he can adjust these losses against other sources of income to reduce his tax liability. For Kelkar, the loss from house property is Rs 1,50,000.
n Capital losses can be adjusted only against capital gains and not against any other source of income.
n Kelkar has also suffered a short-term capital loss of
Rs 20,000 on selling shares. He has been able to adjust Rs 2,000 against short-term capital gain and Rs 3,481 against long-term capital gain. This still leaves Rs 14,519. This remaining loss cannot be set off this year as there are not enough capital gains available to do so. It will therefore have to be carried forward and entered in schedule CFL (carried forward loss) and also as entry 14 in computation of total income. The schedule CFL is not shown here.
n Losses can be carried forward for a maximum of 8 years
Tax deductions
For this entry, schedule VIA needs to be filled up first
n There are 13 sections (only 7 are shown below) under the schedule VIA of the Income Tax Act, which allow you to get tax deductions.
n Section 80 C allows a maximum of Rs 1 lakh for investments into life insurance, Employees Provident Fund, tax saving mutual funds, Public Provident Fund, repayment of home loan principal etc. Kelkar has utilised this limit.
n Section 80 D allows a deduction for payment of health insurance premium. The maximum limit is Rs 15,000 or Rs 20,000 for senior citizens. On his part, Kelkar pays a premium of Rs 7,500.
n Section 80 E allows a deduction for repayment of education loan. The deduction is allowed only for the interest portion of the EMI up to a maximum of Rs 40,000. In case of Kelkar, the total interest on the education loan works out to Rs 10,000.
"People scramble to make their tax saving investments at the last moment. This leads to a cash flow crunch. Also, there may not be much time to evaluate options. So it is mportant to start investing from the beginning of the year." — Suresh Sadagopan,
Ladder 7 Financial Advisories
Other income
n Dividend income from stocks and mutual funds is tax-free. Hence, dividend entry should include only dividend from foreign stocks. In Kelkar's case, this remains blank. Interest income includes interest received on fixed deposits (FDs) and money in the savings accounts. Kelkar receives an interest of Rs 4,000 on FDs.
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