Tax question: Which ITR form for insurance agents?

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I am 51 years old and have investments in an NPS Tier-1 account and equity mutual funds. Please clarify the tax aspects regarding the following: 1. I want to activate the NPS Tier-2 account for savings and allocate a higher percentage of this equity investment. What are the tax implications if I withdraw these investments within one year/three years? If I retire after turning 60, what are the tax implications? 2. I have invested emergency funds in liquid mutual funds. What are the tax implications when I withdraw these funds?

S.Subramanian

There are no specific provisions on the taxation of withdrawal from an NPS Tier-II account under the Income Tax Act 1961 (“the Act”). If certain income is not specifically exempt, then it is considered taxable. Since the contribution to the Level II account is allocated to different categories of funds – equities, corporate bonds and government securities at their net asset value (NAV), it makes sense to treat this contribution as investments and to treat any profit thereon as capital gains under section 45 of the Act. Also, depending on how long it is held, it can be considered either Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG). The taxation would not change if the units were redeemed by you after reaching age 60.

If the equity-oriented mutual funds are redeemed within 12 months, they would be considered STCG and would be taxable at 15% (plus education tax and applicable surtax) under Section 111A of the law. On the contrary, if mutual funds are redeemed after 12 months, it would be treated as LTCG. According to Section 112A of the Act, LTCG in excess of ₹1 lakh would be taxable at a rate of 10% (plus education tax and applicable surcharge) without the benefit of cost indexation.

I am retired and live off interest from bank deposits, insurance agent commission. I also buy and sell stocks (short-term and long-term earnings) sometimes. I would like to know which ITR form I should use to file tax returns.

PK Divakaran

Understand that you work as an insurance agent and earn commission or brokerage income from the sale of insurance policies. Consequently, income from commissions is taxable under the heading “Business or professional income”. In accordance with the instructions issued by the Central Commission for Direct Taxation (CBDT), you will need to file the ITR-3 and declare commission income under the heading “Business or professional income”; income from bank deposits under ‘Income from other sources’, while capital gains (on the sale of shares) under ‘Capital gains’ on your tax return.

The author is Partner, Deloitte India.

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Published on

April 23, 2022

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