Income earned from registered patents is taxed at a concessional rate
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I am a resident Indian and a practising surgeon. I have invented a new operation technique, which I have not patented and its name is not registered. Now, my partnership firm has permitted a US surgeon to use this brand name. I also gave him technical advice whenever needed. Against this, he pays my firm some amount in dollars, which is converted and deposited in my firm’s account in India. Through these, and other activities, my firm receives about $5,000 every month. There is no legal agreement.
Under what section of the income tax act will this income be taxed, and at what rate? Please suggest legal tax-planning ways to reduce my tax outgo.
—Name withheld on request
More information/facts will be required on the nature of the transaction and income, etc., to comment on the exact tax implication. However, the general principle is, as the income is being earned by the partnership firm, the same would qualify as income of the partnership firm and taxed accordingly in the hands of the partnership firm as business/ profession income. In case the patent is registered under the Patents Act, 1971, a concessional tax rate could be claimed under section 115BBF of the Income Tax Act, 1961, in respect of royalty earned by a patentee after satisfying all conditions laid therein.
My uncle is a farmer and his main occupation is farming. He wants to sell his farm because of crop failures over the last 5 years and buy a farm at another place. His current farm comes in a designated rural area. Does he need to pay tax on the gains from the sale? Most importantly, is it true that if the sale of farming land yields more than a certain amount, it will be taxed? What is that amount?
The gain arising from the transfer of an agricultural land would not be liable to income taxes if it is situated within a designated area. The key factors to determine if the land is situated within the designated area are distance from a municipality or cantonment board and population of such municipality/cantonment board as per the latest population census. If your uncle’s land is situated within the designated area, it would not be taxable irrespective of the quantum of such a gain.
I have given my property for a joint development project, where I will be receiving 50% of the flats. This property was transferred from my parents to me 1.5 years ago, and completion of the project may take 2 years. If I sell all the flats soon after completion, what type of tax would I have to pay? If I reinvest that entire amount, can I avoid short-term capital gains tax as well?
—Name withheld on request
The sale of an immovable property held for more than 24 months is taxable as long-term capital gains (LTCG) and assuming this property was inherited by you from your father or gifted by him to you, the period your father held this property will also be considered when calculating the total period you hold this property.
As per recent changes made through the Finance Bill, 2017, the capital gains arising to an individual, from the transfer of land or building or both, under a registered agreement permitting the development of a real estate project is taxable in the fiscal in which the competent authority that approved the building plan issues a certificate of completion for either the whole or part of the project.
Any sale proceeds you receive in cash (that is, not in kind) plus the stamp duty value of the flats you receive as on the date of issue of the completion certificate, is treated as the full value of the sale proceeds that is taxable. The difference between the sale proceeds value (determined as above) net of any expenses incurred by you for the transfer (such as brokerage) and the indexed cost of acquisition of the property is taxed as LTCG. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the Income tax department for Financial Year (FY) of purchase and FY of transfer. In your case, the FY of purchase by your father would be taken into consideration. The LTCG that is calculated as above is subject to tax at 20.60% (plus applicable surcharge). There are certain specified exemptions from LTCG taxation for re-investing such long term gains into specified investments.If you sell the flats allotted to you by the builder within 2 years from the date of acquisition, the resultant gain (indexation is not permitted) is taxable as short-term capital gain (STCG), at the slab rates applicable to you in that year. The re-investment of STCG does not qualify for tax exemptions.
Parizad Sirwalla is partner (tax), KPMG.
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