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"Is gratuity taxable?"

The Rediff Money Channel presents everything you wanted to know about tax issues, but didn't know whom to ask.

My friend was in a partnership business. He expired in January and is liable to pay tax for 10 months. Can his company invest in PPF and infrastructure bonds to claim tax exemption for Rs 14,000. And what is the procedure to close the PPF account.

— Paresh Mehta

From your query it is not very clear whether the tax liability of Rs 14,000 is liable to be paid by the partnership firm or by your friend's legal representatives. We have assumed that you are referring to the tax liability of your deceased friend and have accordingly based our answers.

As the partner died during the accounting year, there would be two separate and distinct assessments for that year, the first part of income would be taxed in the hands of the legal representative of the deceased partner and the second part of income would be taxed in the hands of executors of the deceased partner. This may even lower the incidence of tax for the year. Also, the same is applicable even if the representative and the executor are one and the same.

In such case of separate assessments, the income for the said accounting year would be apportioned between the two periods, viz., income accrued and/or received upto the date of death and the income arising after the death upto the end of the accounting year.

As the rebate u/s 88 of the I.T Act, 1961, is available to any individual for investments made out of income earned during the year, the legal representative/s of the deceased partner can invest in PPF for availing of rebate on tax arising income for the 10 months ending January 2000.

I have deposited sale proceeds of my residential property in a bank. I would like to reinvest this money on construction of a residential building on a site belonging to my wife. Please let me know if this is possible as per IT rules.

— Rasna

I have deposited capital gains (the proceeds of sale of my residential propery) in a bank. Can I reinvest this money on construction of a residential building on a site belonging to my wife.

— Chandra

You may reinvest the sale consideration on construction of a residential building on a site belonging to your wife. You would be eligible for exemption of capital gains under section 54 of the IT Act, 1961 up to the whole of capital gains if the cost of the new house property is equal or greater than the capital gains on sale of the earlier residential house property.
Further, the cost of new house property includes the cost of land. In your case the cost of land may be nil as the ownership of such land vests with your wife. You may pay some consideration either in the form of monthly rent or a lump-sum amount so that the usage of land is for a reasonable consideration.

I was retrenched from service last year. I withdrew my PF amount and I also got money in the form of gratuity, leave salary and other benefits. The previous organisation has held that all this benefits (except PF) are taxable and applied TDS accordingly? Is this in line with IT rules?
Also, I now understand that any annual interest above Rs 15,000 obtained from my PF (and other money like gratuity, superannuition) is added to my salary and tax is payable. Please note that currently I am unemployed. Is my understanding correct. Is there any instrument where such PF money can be deposit and exempt from tax.

— Shanbag

Any gratuity received by an employee covered by the Payment of Gratuity Act, 1972 is exempt from tax to the extent of least of the following: 15 day's salary based on the salary last drawn for every completed year of service or part thereof in

• excess of 6 months
• Rs 350,000
• Gratuity actually received

15 day's salary is computed thus: Last drawn monthly salary X (15 ÷ 26)
Half month's salary is computed thus: Average monthly salary for last 10 months ÷ 2
However for working out the gratuity exemption of any later year, you would need to reduce the exemption of gratuity claimed by you now from Rs 350,000.

Leave encashment at the time of leaving the job or retirement is exempt from tax u/s 10(10AA) of the I.T. Act, 1961 to the least of the following:

• 10 months 'Average salary'; or
• Rs 2,40,000 (amount specified by the Government); or
• Leave encashment actually received; or
• Cash equivalent of the leave salary in respect of the period of earned leave standing to the employee's credit (this cannot exceed 30 days for every year of actual service rendered for the employer).

Regarding the taxability of interest on bank deposits, the following is relevant:
Section 80L of the IT Act, 1961, provides for general and special deduction of the interest earned by an assessee. The deduction limits for the current year are as follows:
General Deduction : Rs. 12,000
Special Deduction for interest on any security of central or state government: Rs 3,000
You could deposit these sums in a PPF account with any nationalised bank so that the interest earned on such deposits become interest free and also you could avail of the rebate u/s 88 of the IT Act, 1961.

What is the current status on interest subsidy as far as income tax is concerned? Is it exempt in the hands of the employee? If so, to what extent?

— Vivek

We would be in a better position to explain your query if you could elaborate your requirements. However, we believe you are referring to loans given by employer to an employee at cheaper interest rates. Such loans granted free of interest or at lower interest rates are not taxable as perquisites in the hands of the employee.

I am a physically handicapped person running a school. The total taxable income after the computation of all expenses is around Rs 90,000. I would like to know whether there are any deductions for handicapped persons who are self employed other than the standard deductions allowed. What will be my tax liability? I am an assessee since 1999 and will be filing my returns shortly.

— Mohammed Umar

Physically handicapped resident persons are entitled to a deduction of Rs 40,000 u/s 80U of the IT Act, 1961 in computing his taxable income. This deduction is available subject to satisfaction of the conditions mentioned in the section. If this were your first year of filing return, you would be required to obtain a certificate from a physical surgeon working in a government hospital and produce it before the assessing officer.
It would be difficult to compute your tax liability without details of income and nature of such income, however going just by the data provided by you, it seems that you would not be liable to any tax as your net income comes down to the maximum amount exempted from tax (90,000 - 40,000 = 50,000).

I need a Form16 as I have to file income tax for this year. The normal procedure to get Form 16 will take 15 days. Is it any other way by which I can get Form 16 within a day or two? I am working with Wipro Enterprise Solutions and currently in the US on a project.

— Sonal Laharia

The time limit for issue of Form 16 by the employer is within one month from the close of financial year. Hence as we are now in the month of May, your employer would necessarily have to issue you the certificate of TDS in Form 16 without any delay.

There was a suitable and apt response to the question I always wanted to ask on "Are allowances for business travel taxable?". Kindly extend the same thought and can you give at what percent I might be taxed and is there any levels in tax as in income tax Rs 50,000 to Rs 60,000 and Rs 60,000 to Rs120,000

— Mohan Hiremath

As the allowances are in the nature of salary they are clubbed along with the salary for the purpose of computing income tax and hence the same rates as are applicable to your total income is relevant.

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