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April 4, 2000

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"Can I withdraw PF money and deposit it in PPF?"

The Rediff Money Channel presents everything you wanted to know about tax issues, but didn't know whom to ask. Chartered Accountants from Ganesh Jagadeesh & Co are here to remove all your doubts.

I live in Hyderabad and work for a foreign bank. I have a flat on my name which earns me a monthly rent of Rs 1,650. This is declared in my tax return.
Now, I wish to purchase two flats at Rajahmundry costing around Rs 9,00,000 for which I would need to take a housing loan. Once the builder offers possession, I plan to rent out the two apartments. My monthly income tax amounts to Rs 10,000 on an average after I avail of rebates under section 88.
Can I avail of the benefit of interest concession on loans up to Rs 75,000?

Jagannath

Section 24 (1) (vi) of the Income Tax Act 1961 allows a deduction for the interest on borrowed capital where such amount is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. The amount that is allowed as deduction under this section is Rs 30,000.
However, for the financial year 1999-2000 interest on borrowed capital is deductible up to Rs 75,000 where the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition / construction is completed before April 1, 2001.
However, the capital has to be borrowed on or after April 1, 1999 and purchase or completion of construction before April 1, 2001.

Is earned leave surrendered and encashed during service taxable or not?

Leave encashment during continuity of employment is chargeable to tax. The employee can however, claim relief under section 89(1) of the Income Tax Act 1961 read along with rule 21A of the same act.

Can a partnership firm engage in agricultural activities? How would the profits be taxed under Income Tax Act? How would the share of profits of the partners be assessed in their individual capacity?

Jay Patel

A partnership firm can engage itself in agricultural activities. Section 10(1) of the Income Tax Act 1961 exempts agricultural income from tax. The reason of exemption of agricultural income from central taxation is that the constitution gives exclusive power to make laws with respect to taxes on agricultural income to the state legislature. However, in some cases agricultural income is taken into consideration to determine tax on non-agricultural income.
Section 10(2A) of the Income Tax Act 1961 provides that in the case of a partner (including a minor admitted for the benefit of the firm) of Partnership Firm Assessed As Such, his share in the total income of the firm shall be exempt from tax.

I recently offered 1,000 units of UTI's MEP-92 for repurchase. While making the payment to me, UTI has deducted Rs 2,200 as TDS.
(1) Can UTI deduct tax at source even after June 1, 1999?
(2) If so, am I entitled to claim a refund of income tax by applying the appropriate index to calculate the capital gains tax payable?
Would the tax rate be 15 or 20 per cent?

V Ramani

Under section 194F of the Income Tax Act, 1961, UTI is liable to deduct tax at source on repurchase of units issued by them if the amount is the one referred to in sub-section (2) of section 80CCB of the Act.
Since you are referring to MEP 92, we presume that you must have made the investment to avail of the benefit u/s 80CCB.

The face value of the investment made by you would be deemed to be the income of the previous year in which you receive the same and taxed accordingly. The difference between the face value of the units and the repurchase price will be treated as the capital gains. The amount of capital gains on this would be calculated as the lower of the following:

  1. Difference between the face value of investment and the repurchase price (the rate of tax applicable is 10 per cent).
  2. Difference between the indexed cost of acquisition and the repurchase price (the rate of tax applicable is 20 per cent).

My mother is a pensioner. At the time of retirement, she owned a flat at Bombay. That was purchased with the help of her savings, inheritance and a loan from LIC.
She now wants to sell that house and put the money in a bank and is no lo nger interested in buying any more property.
Can you suggest such investments where the capital gains tax will be at a minimum?

Ravichandran C R

A house being a capital asset, will attract Capital Gains Tax on the Sale, if the Sale Consideration is more than the Cost of Acquisition (in case of a Short Term Capital Asset) or the Indexed cost of acquisition (in case of a Long Term Capital Asset.)

There are no exemptions from Capital Gain tax by investing money in the bank. However there are certain other exemption granted by Act. From the Assessement Year 2001-2000, under Section 54EC, the capital gains, upto an amount (out of Sale consideration received on the sale of Long term Capital Asset) invested in the bonds issued by the NABARD or National Highway Authority of India will be exempt for Capital Gains Tax. Such Investments carry a lock-in period of five years.

I am 60 years old and retired from service. My monthly pension is Rs 6,400 and LIC deducts Rs 99 towards TDS. Am I supposed to pay income tax on the entire pension amount?

Unnikrishnan

Under Section 16(i) of the Income Tax Act, 1961 Standard Deduction is granted also in respect of Pension. If your income is Rs 1,00,000 or less, the amount of standard deduction is a third of your gross salary or Rs 25,000, whichever is less. If your income is more than Rs 1,00,000 but less than Rs 5,00,000, then the amount of standard deduction is Rs 20,000.

What is the taxability of interest of section 88 bonds? Is interest earned on these bonds exempt under section 80L?

Amar Arun Harolikar

Interest on bonds issued by notified institutions (including a public sector company) are entitled to deductions under section 80L. Hence interest on infrastructural bonds of ICICI would generally be eligible for deduction under section 80L.

I am paying around Rs 10,000 -12,000 per annum as income tax and I have not opted for any saving schemes like LIC or NSC. Please suggest a way to plan my tax saving. I am not interested in mutual funds or investments in private companies.

Ravi Marigoudar

It is inferred, that your income falls under the head "Salaries" for the purpose of income tax. The reference of investments made by you to avoid tax also seems to hint that the investments referred to are investments covered by Section 88 of the Income Tax Act, 1961.
Section 88 provides that an assessee shall be entitled to a deduction from the amount of tax payable of an amount equal to 20 per cent of the aggregate of sums invested.

The investments which qualify for this section include life insurance premia paid for the assessee & family, contribution to statutory and/or recognised provident funds, contribution to Public Provident Fund, contribution towards approved superannuation funds, any sum deposited under the Post Office Savings Bank (CTD) Rules, 1951, subscription to National Savings Scheme, any sum paid to subscription to National Savings Certificates (NSC) (VI & VII issues), contribution in Unit Linked Insurance Plan (ULIP) of UTI or LIC Mutual Fund, contribution to notified Equity Linked Savings Scheme (ELSS) of a mutual fund or UTI and payment made towards installment for repayment of principal amount of loan taken for purchase/construction of a new residential house property.

The maximum aggregate amount of investment permitted is Rs 60,000. An additional sum of Rs.10,000 can qualify as investment under this section if used to purchase debentures or equity shares of a public company engaged in infrastructure or units of mutual funds referred to in S.10 (23D).

The various modes of investments mentioned above involve locking up of the principal amount for periods ranging from 3 to 15 years yielding periodical or cumulative returns. If the assessee disposes the investments before the minimum lock-in period, then the sum thus received will attract tax in the year of receipt. Hence, if liquidity is most important, then you may choose that mode of investment wherein the lock-in period of the principal is the least e.g. contribution to ELSS of a mutual fund or UTI with a minimum lock-in period of three years. Investment in PPF and NSC are the more popular investments for the purpose of claiming Rebate under Section 88.

After serving for six years, two years ago I changed my job and joined different company. Still, my PF money is with my previous company's trust. In my new I do have a PF account belonging to government. Can I withdraw PF money deposited with my previous employer and deposit it in my PPF account (certainly I would not claim tax benefit since this income doesn't belong to my earning)?
I am not interested in transferring my PF money to my new employer's account because many of times in private sector employees have to leave the company in unusual circumstances and the PF money gets locked at the mercy of employer.

Sandeep Agrawal

The accumulated balance due and becoming payable to an employee participating in a recognised provident fund will be excluded from his total income and would not be taxable if he has rendered continuous service with his employer for a period of five years or more.
If accumulated balance includes any amount transferred from his individual account in any other recognised provident fund maintained by his former employer, then in computing the period of five years, the period for which the employee rendered continuous service to his former employer is also to be included. In your case, since you have completed six years of continuous service, the amount if withdrawn will not be taxable. You may invest the same in PPF.

I would like to take money from my brother-in-law and invest it in mutual funds and shares in my name. All the returns will be his. Will be I able to say that the money involved is not mine and thus not to be taxed in my account?

M P Ramanathan

Under section 60 of the Income Tax Act, 1961, if a person transfers income without transferring the ownership of asset, such income will be taxable in the hands of the transferor.
If you invest the money received from your brother in your name (the same would be considered as gift from your brother to you), and transfer the income to him, it will amount to transfer of income without transferring the ownership of the asset and hence clubbed with your income. You may instead invest the money in your brother-in-law's name.

If a person has sold two scrips, on one he has long-term gains of Rs 50,000, and on the other a long-term loss of Rs 20,000. The net consideration in the first scrip is Rs 1,00,000. How much should he invest to claim exemption under section 54EA and 54EB?

B Chandra Mohan

The answer is given assuming that no Long Term Capital Loss is to be carried forward and the investments in Section 54EA & 54EB is to be made only to claim exemption of Rs. 30,000 and hence the make the Tax Payable NIL.

  • Section 54 EA
You would be required to invest the whole or any part of net consideration (full value of consideration minus expenses on transfer) in specified bonds or debentures or share of public company or units of a mutual fund as may be notified from time to time.
If the amount invested in the specified asset is equal to or more than the net consideration received, then the entire capital gains is exempt. If, however, amount invested in the specified asset is less than the net consideration, then the amount of exemption is equal to the following:
Amount invested in specified assets X Capital gains/ Net sale consideration
Thus the amount to be invested to claim an exemption of Rs. 30,000 will be Rs 60,000.
  • Section 54 EB
You would be required to invest the whole or any part of capital gain in long term specified assets as may be notified from time to time.
If the amount invested in the specified asset is equal to or more than the capital gain, the whole of capital gains will be exempt from tax. If, however, amount invested in the specified asset is less than the capital gains, then the amount of exemption will be equal to the amount invested in the specified asset.
Thus the amount to be invested to claim an exemption from Long Term Capital Gains of Rs. 30,000 will be Rs. 30,000.

It has to be noted that the minimum lock in period of the investments in 54 EA & 54 EB differ and are three and seven years respectively.
The 6 months time for investment is from the date of transfer of the original asset and does not depend on the registration of the sale deed.
It may also be noted that both sections 54 EA & 54 EB have been deleted by the recent Budget and replaced by a new Section 54 EC which will come to force from April 1, 2000).

I plan to subscribe to the Tax Saving bonds issued by ICICI to claim the tax benefit under section 88 by investing the additional Rs 10,000. If I opt for the Deep Discount option and hold it till maturity, will the difference between the issue price (Rs 5,000) and the face value (Rs 7,025) be treated as Capital Gains or Income. If Capital Gains will I be able to claim indexation benefits.

Sreejib Sinha

As per notification issued by the Central Board of Direct Taxes (CBDT), where deep discount bonds are concerned, if the investment is held till maturity, then the difference is treated as interest income.
If the investment is sold before maturity, then the difference is treated as capital gains. In case such investment is held for at least 12 months, indexation benefits would be available for the purpose of computing capital gains.

I understand that there are three clauses for HRA exemption. I would like a clarification on the clause that deals with 10 per cent of the basic. Does the HRA include:
Monthly house rent + electricity bills + water bills
Monthly house rent
Monthly house rent + electricity and water bills not exceeding 10 per cent of monthly house rent?

Atul Aggarwal

Firstly HRA means house rent allowance, which is the allowance the employer gives to the employee, it may or may not have any relation with the actual rent paid for the house.
Now coming to the provision mentioned under sec 10(13A), the house rent allowance received is exempt from tax subject to the least of the following:

  1. 40% of salary, or 50% of salary if the assessee resides in any of the 4 major cities.
  2. HRA actually received
  3. Rent paid in excess of 10% of salary
Salary: Salary for the above purpose means basic salary and includes dearness allowance if terms of employment so provide but excludes all other allowances and perquisites. (Commission paid as fixed percentage of turnover achieved is included in the salary for above purpose).

Rent Paid: Rent paid for the purposes of computation of exemption u/s 10(13A) includes only the net rent paid and does not include any other expenses such as electricity and water bills.

Exemption is denied if rent paid does not exceed 10 per cent of salary. The following example should help. Assume an individual earning a monthly salary of Rs 28,000 in Mumbai. His basic is Rs 8,000; DA is Rs 6,000; HRA is Rs 6,000 and the balance is other perquisites. The actual rent that he pays is Rs 5,000.

Per month

 

 

 

Per month

Per annum

SALARY

 

 

 

Basic

 

Rs 8,000

Rs 96,000

DA

 

Rs 6,000 

Rs 72,000

Total salary

 

Rs 14,000 

Rs 1,68,000

HRA COMPUTATION

 

 

 

50% of salary if residing in metros,

otherwise 40%

Rs 7,000

 

Rs 84,000

HRA received by employee

Rs 6,000

 

Rs 72,000

Excess of rent paid over 10% of salary

10% of salary = Rs 1,400

Excess of rent over 10% =

Rs 5,000 Rs 1,400 =

Rs 3,600

 

Rs 43,200

HRA EXEMPTION

 

Rs 3,600 

Rs 43,200

TAXABLE HRA

 

Rs 2,400

Rs 28,800

 

 

EARLIER Q&As:

'Can one adjust capital loss against capital gains?'

'Are allowances for business travel taxable?'

'How do I calculate the tax rebate on my house loan?'

'Can I gift shares to my daughter on her wedding without any tax liability?'

'How can I prevent tax deduction at source on company and bank fixed deposits?'

'How do I file tax returns if the original Form 16 is lost in transit?'

'Is income from moonlighting for a foreign firm taxable?'

'What is the tax concession available to an artist or a writer and under which section of the Income Tax Act?'

'Some mutual funds are deducting tax at source from tax savings schemes such as Magnum Gifts, while some are not. What is the real status?'

'How much deductions can I claim out of the House Rent Allowance that I receive from my company?'

Is PAN a must even if I am not paying income tax?

What are the possible ways of planning my tax payments using the Hindu Undivided Family status?

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