Capital gains: India
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Bitcoin sale
Profit is taxable
Need To Declare Earned Income & Pay Tax, Say Experts
India is not isolated from the rising popularity of bitcoins, which got a boost post-demonetisation. According to industry sources, nearly 300-plus enthusiasts of the cryptocurrency trade daily on Indian bitcoin exchange platforms. Most of these platforms boast of user registrations of more than a lakh.Thus, many taxpayers in India need to understand the I-T nuances of their bitcoin transactions.
Curiosity prompted Rakesh M, a Bengaluru-based techie (identity changed), to make his first investment in bitcoins. He sold his investment during the financial year 2016-17 (year ending March 31, 2017) and earned a profit.The perplexing issue for him is: How should he treat the income on sale of the bitcoin for I-T purposes? As a salaried employee, he has to file his I-T return by July 31. The Central Board of Direct Taxes (CBDT) has not yet issued any guidance. Tax authorities in many countries, such as the US, treat bitcoins a capital asset in hands of investors, with the sale resulting in a capital gain.
The I-T department can catch up if you try to evade tax on sale of bitcoins. Benson Samuel, co-founder, Coinsecure, a trading platform for bitcoins in India, points out, “When you sell your bitcoins over an exchange such as Coinsecure, the money flows directly into your bank account.The transaction is completely transparent. Even though not obliged to do so, most bitcoin exchanges also adopt KYC norms for their customers.“
Bitcoins in India are unregulated but are not yet illegal. However, the RBI has on occasion cautioned investors of inherent risks. An inter-disciplinary committee set up by the government is examining the framework of virtual currencies. “That said, even if bitcoins were illegal, income earned needs to be declared and tax paid,“ says an I-T official.
Harshal Kamdar, tax partner, PwC India, says, “Taxability of bitcoins is a nuanced is sue and will depend on facts of each case. In the absence of CBDT guidelines, the logical conclusion is to treat profits on sale of bitcoins as `capital gains', unless the person is in the business of trading bitcoins, in which case it would likely be `business income'. However, we have seen instances, where to be on the safe side, individuals have preferred to treat it as `income from other sources' where the relevant slab rate of I-T applies, as opposed to a 20% tax with indexation (if applicable), on long-term capital gains“.
Capital gains for a bitcoin investor
Nishith Desai, founder of an international law firm which is working closely with the bitcoin industry , says, “Given the wide nature of definition of capital assets under Section 2(14) of the I-T Act, the purchase of bitcoins, if it has been made for the purpose of investment, should be treated as a capital asset. Thus, any gains arising on transfer (ie: sale) should be characterised as capi tal gains.“ (See illustration of I-T computation.) Caution point: Short-term capital gains are taxed at the applicable I-T slab rate, which for those with a taxable income of more than Rs 10 lakh is 30% plus applicable surcharge and cess. On the other hand, long-term capital gains (LTCGs) attract a tax rate of only 20%. The time period for which an asset is held before its sale determines whether it is a longterm asset that is eligible for a lower rate of tax on sale. For equity , the holding period prescribed is just 12 months.“The period of holding of bitcoins should be like any other property . If they are held for three years or more, it should be considered longterm and if less than shortterm,“ says Desai.Hot tip: Indexation benefit (which is an adjustment to account for inflation for the period between purchase and sale of a capital asset) can be availed of. This would reduce the total tax outgo on capital gains. A cost inflation index (CII) figure is issued by the CBDT each year and the prescribed formula is to be followed.
Business income for a bitcoin trader
It may be a bit perplexing to understand whether one would be regarded as an investor or trader. Desai points out, “The CBDT has in the past issued a circular (4 2007) which, after taking into consideration various judicial precedents, has set out various tests to determine whether shares are held as investment or stock in trade.The same parameters can also be applied to bitcoins.“
For instance, if the transactions in bitcoins are substantial and frequent, it could be said that the individual is trading in bitcoins. In this case, income on sale of bitcoins would be a business income, to which the applicable slab rate of income tax would apply . Thus, for those having a taxable income of more than Rs 10 lakh (including on bitcoin sales) the applicable tax slab rate of 30% plus surcharge and cess is higher than the tax rate of 20% on LTCGs.
There is also an additional catch. If you haven't paid any advance tax on income from your bitcoin transactions, it's likely that penal interest will be levied.
House sale
Tax implications
The Times of India, Jun 20 2016
Also, if a house is sold within 5 years of the end of the financial year in which it was purchased, tax benefits claimed go out of the window. The tax deduction claimed for the principal repayment, stamp duty and registration under Section 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched.
This is why it is advisable to hold a property for at least three years. If you sell after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the inflation during the holding period and adjusts the purchase price accordingly, thereby slashing the tax burden for the seller (see graphic). There are other benefits too.The owner can claim exemptions in the case of long-term capital gains, but no such benefit is provided for short-term gains. “Expenses incurred on repairs and renovation can be added to the cost of acquisition while computing longterm capital gains. The interest paid during the pre-construction period can also be added to the cost, if not already claimed as a deduction earlier,“ says Vaibhav Sankla, Director, H&R Block India.
How to avoid tax
There are several ways to avoid paying tax when you sell a house. There is no tax to be paid if you use the entire gain from the transaction to buy another house within two years or construct one within three years. The twoand three year period applies even if you bought another house a year before selling the first one. But the property should have been bought in the name of the seller.In case the entire capital gains are not invested, the balance amount is charged to long-term capital gains tax. However, the entire tax exemption will be reversed if the new property is sold within three years of purchase or construc tion. In such a case, the entire capital gains from the sale of the previous house will be considered as short-term gains and taxed at the normal slab rates.
If you are not keen to lock-in your gains from the sale of a house in another property , there is another way out.You can claim exemption under Section 54 (EC) by investing the long-term capital gains for 3 years in bonds of NHAI and Rural Electrification Corporation Limited within six months of selling the house. However, one can invest only up to `50 lakh in these bonds in a fiscal.From the current financial year, sellers also have the option of investing the entire long-term capital gain in a technology driven start-up (certified by the Inter-Ministerial Board of Certification) to get relief from tax. The investment in computers and software for your startup will be eligible for exemption from tax on the sale of house held for at least three years. Apart from this, sellers also have the option set off long-term capital gains from sale of the house against any long-term loss from sale of other assets.These can be losses carried forward over the past 8 years or even those incurred in the same year. However, the only way to avoid tax on short-term capital gains is to set it off against any short-term loss from the sale of other assets.
Dealing with TDS
To plug tax leaks, the government has now made it mandatory for buyers to deduct TDS when they buy a house worth over `50 lakh. TDS of 1% of the value of the property has to be deducted before making the payment to the seller.Till last month, this amount was required to be deposited within seven days from the end of the month in which the sale transaction was carried out, but from 1 June, the period has been extended to 30 days. Since this payment is made on behalf of the seller and linked to his PAN, it is reflected on the seller's Form 26AS. The seller must also obtain a TDS certificate in Form 16B from the buyer. The seller can claim a refund of TDS if he is incurring a loss on the sale of the house or if he is claiming exemption from long-term capital gains. To claim the refund, he should provide details of investment of the capital gains in his tax return. Alternatively, he can obtain a certificate from the assessing officer specifying that no TDS must be deducted on payments made to him, and present this certificate to the buyer.
