Jan 17, 2011

Idiotic Tax Advice: A Few Examples



Beware of false knowledge; it is more dangerous than ignorance.

_George Bernard Shaw

Sometime back, I came across a regular ‘Expert View Column’ in the print media (special supplement to a well reputed National Publication read and relied upon by millions of readers) where experts chosen from different fields answer the questions raised by readers. Here are two tax questions—tax exemption of LTA and tax benefits on home loans— taken from two different editions of the publication:


Query: My Company contends that I must take privilege leave to claim LTA. Is it necessary to take privilege leave for claiming LTA?

Tax Expert view: The tax law has not prescribed the minimum number of days’ leave that should be availed for claiming LTA exemption. Therefore, in my view, even one day’s leave will suffice for claiming LTA exemption.


So what’s wrong with the advice? It is
yet
another height of financial stupidity! The querist would like to know how to claim LTA/LTC without undertaking the journey. The company official advised him that he just needs to take a few days off just to show he went on the journey and file a false declaration that he indeed undertook the journey …the tax expert goes a step ahead and advises the querist that even one day leave will suffice for the purpose. It implies that just by taking one day off without undertaking the journey, one becomes entitled for LTA/LTC tax exemption. Is it lack of common sense??... making mockery of tax laws?? Or, what?? Is this tax planning or tax evasion??

Why should there be a specific mention of availing leave? Is it possible to undertake journey while sitting in an office? …virtual travel is yet to become a reality!

Query: My wife and I jointly took a housing loan of Rs. 28.5 lakh in March 2010. Possession is expected by March 2011. I fall in the 30% tax bracket and my wife in the 20% bracket. Can I take rebate in 2010-11 on interest being paid in a ratio other than 50:50?

Tax Expert view: You can claim tax deduction on interest payable and principal amounts repaid for your housing loan only from the year of possession. Hence, if you do not receive possession by 31 March 2011 you will not be eligible to claim either of the deduction. If you wish to claim tax deductions on interest payable and principal repayments in equal proportion, you should bear the EMI in equal proportion.


Again, do you sense anything wrong with the advice? There are two errors: First, tax deduction on principal repayment and tax deduction on interest are governed by separate provisions; unlike allowability of interest on housing loan after acquisition or completion of the house, deduction under section 80C is available as soon as one starts repaying the loan [See: Home Loan Tax Deduction: Section 80C vs. 24(b)]. Second, in case of joint home loans, for availing tax deduction on interest under section 24 it is a necessary that co-borrowers are also co-owners. Therefore, in this particular case, just paying the EMI in equal proportion is not enough to claim interest in the ratio of 50:50.

In a hurry to answer the query, the tax expert forget to answer –or, is it a tactful dodge?—the real question asked by the querist. So let me answer the question of querist where he would like to know whether it is possible to claim interest deduction in the ratio other than 50:50 (as he falls in 30% tax bracket and wife in 20% bracket).

Yes, it is certainly possible to claim tax benefits in the ratio other than 50:50, say 60:40; but for that the querist needs to ensure the following:

a. the sale deed also makes a specific mention of the ratio of co-ownership to be 60:40.
b. the down payment made towards purchase is also in the 60:40 ratio
c. the repayment of loan should also be in the ratio of 60:40
d. the 40 contribution of wife towards down payment and repayment of installments is also from her own funds / sources of income (this condition seems to be already satisfied as wife has her own source of income and is an income tax assessee).


Note: While writing the review of online SIP Calculators— later deleted—I promised to mind my own business…I resist a lot, but sometimes I can’t help it…this is just one example of misleading advice…my due apologies to the publication and the tax expert and hope that tax expert will take this in the right spirit and will be careful next time...will refurbish his tax basics before advising people …one can ignore a techie trying to fool people on financial matters but such kind of misguidance from an individual proclaiming to be a tax expert and too printed in a national publication is not acceptable …the intention is not to hurt anyone’s feeling.


Lesson for you: There is no shortage of bullshit advice floating in the print and electronic media including internet. Therefore, before relying on any kind of advice from any publication be it print or electronic media including The Money Quest, it is always better to cross-check or else it might cost you a fortune…though in my case, I try to make sure that the information is 99.99% correct before publishing it but 0.01% chance of error still remains…so, why take a chance?

What do you say?


Also Read:

1. Top 10 Tax Myths
2. Tax Queries: Housing Loans
3.
8 tax considerations to know before buying a house
4. Legal Implications of buying a Benaami Property

3 comments:

  1. I am little surprised to find the details of co-ownership that you have mentioned as a pre-requisite to avail the tax benefits for home loan.

    a. the sale deed also makes a specific mention of the ratio of co-ownership to be 60:40.
    A- I never found any such provision of mentioning the %tage of ownership in sale deed.
    b. the down payment made towards purchase is also in the 60:40 ratio
    c. the repayment of loan should also be in the ratio of 60:40
    d. the 40 contribution of wife towards down payment and repayment of installments is also from her own funds / sources of income (this condition seems to be already satisfied as wife has her own source of income and is an income tax assessee).

    A - Also the the source of fund is never verified by anyone in the chain and even the employers always just accept a declaration from the employee regarding this.

    Regarding the co-ownership and co-borrower relationship. Of course that is in a way ensured by the bank as they will insist on co-ownership in case of co-borrowers. However i have not seen even PSU's like SBI also insisting on the %tage of owenership being mentioned.

    You are dead right about one thing. There are lot of fakes writing on leading newspapers claiming to be experts.

    Regards
    Raja

    ReplyDelete
  2. Why One Day leave is relevant ?... Suppose Wedenessday / Thursday is a holiday . SO by taking one day leave ( Friday ) one actually gets a 5 day leave ( Which was relevant to the first question ). Also their are different type of Leaves such as PL ( PRiviledge Leave ) CL ( Casual Leave ) RL ( Restricted Leave ) SL ( Sick leave ) . I presume the reader wanted to ask if he could be entitled for LTA on Casual Leave ( CL - 10-12 days in a year )

    ReplyDelete
  3. Getting deduction of principal component before completion/possession is still a matter of debate.

    ReplyDelete

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