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April 18, 2000

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"Is leave encashment at time of resignation taxable?"

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

Is leave encashment at time of resignation taxable?

Subbarao

The Officers of the Income Tax Department are known to have taken a stand that leave encashment is exempt only if it is received at the time of retirement. However, as per the decisions given by the Madras High Court in the case of CIT Vs. R. J. Shahney reported in 159 ITR 160 and by the Mumbai High Court in CIT Vs. D.P. Malhotra reported in 229 ITR 394, leave encashed at the time of resignation is also exempted from tax under section 10(10AA).

Please send me details of what is covered under section 89 of the Income Tax Act.

Thomas Pinto

The basic aim of Section 89 is to give tax relief to a person who receives arrears of salary in a particular year. When any individual receives any salary in arrears or in advance or receives profit in lieu of salary, he can claim relief for payment of tax on such salary under section 89(1) as under:

  • Calculate the tax payable on the total income of the relevant previous year in which the same is received including the additional salary;
  • Calculate the tax payable on the total income of the relevant previous year in which the additional salary is received excluding the additional salary;
  • Find the difference between the tax at 1 and 2;
  • Compute the tax on the total income after including the additional salary in the year to which such salary relates.
  • Compute the tax on the total income after excluding the additional salary in the year to which such salary relates.
  • Find the difference between tax at 4 and 5
  • The excess of tax at 3 over tax computed at 6 is the amount of relief admissible under section 89(1). No relief is, however, admissible if tax computed at 3 is less than 6. In such a case, the assessee-employee need not apply for relief.
My landlord gives me a rent receipt showing a part of the rent paid as house rent and the rest as rent on furniture and fixtures. Can I claim a tax rebate on the total amount or only the part shown as house rent? This division is done on a single receipt and the payment is also accepted on a single cheque for the whole amount.

Basab Ghosh

No, you cannot take into account the whole amount of the receipt for the purpose of claiming exemption under section 10(13A) for House Rent Allowance. You can only consider the rent component pertaining to the house for the purposes mentioned above. The rent for furniture does not qualify for the exemption.

I retired in February 2000 and am getting a monthly pension of Rs 7,500. My terminal benefits work out to about Rs 1.4 million. Out of this sum, I intend giving Rs 2,50,000 as a gift, invest about Rs 1 million and keep the balance for other expenditure.
I intent availing of the rebate under section 88 (Rs 14,000) and also the special rebate for women (Rs 5,000).
I have a house property and the income on it would be (-) Rs 5,000. The bank will deduct TDS on Rs 6,00,000 which would work to about Rs 6,500. Is my planning in order? What should I do to make the gift acceptable to the Income tax authorities or rather how should it be made. How much am I eligible for deduction under 80 L for bank deposits - I suppose it is Rs 15,000 as per the budget proposals.

Mohana Moorthy

First of all, you have not given any details of the terminal benefits received by you. So, I am presuming that the entire amount is exempt from tax in your hands.
The pension that you will receive will be fully taxable under the head SALARIES.
You can avail of rebate under section 88 upto Rs 14,000 and under the new section which is proposed in the Finance Bill 2000 (section 88C) upto Rs 5,000.
The loss of Rs 5,000 from house property can be adjusted against your salary income and whatever other income that you have only if the loss arises on account of interest paid on loan taken for purchase / construction of such property. In such a case you can also claim rebate for the principle amount repaid during the year under section 88.
You can claim deduction under section 80L for a maximum amount of Rs 12,000 in respect of interest on bank deposits. The amount of Rs 15,000 mentioned by you in your query is incorrect.

What does the income tax rule say about medical allowance and medical reimbursement? How much is taxable? What is the limit? What is the rule applicable for leave travel allowance? What is the treatment for Leave encashment? How do I compute all these things in returns?

Ravi

Fixed Medical Allowance is fully taxable irrespective of any amount. However reimbursement of Medical Expenses actually incurred (to be supported by bills/vouchers) is exempt upto Rs 15,000 per annum.
Exemption in respect of Leave Travel Allowance can be claimed for yourself and for your family members viz. spouse, children, parents, brothers, sisters who are dependent on you. However the exemption can be claimed twice in a block of four years and the blocks are specified in the Act. The relevant block at present is from January 1, 1998 to December 31, 2001. The amount of exemption cannot exceed the value of economy class airfare, where travel is by air or rail fare for air-conditioned first class when the journey is undertaken by rail.

As regards leave encashment, it is necessary to know whether you are an employee of a private sector organisation or a public sector organisation. In the absence of information, I am assuming that you are a private sector employee. In such a case, if encashment is during the course of service, then it is fully taxable. However, if it is at the time of retirement or at the time of leaving the job, exemption is allowed under section 10(10AA) upto a maximum limit of Rs 2,40,000 subject to conditions laid down in the Income Tax Act.

I had taken a housing loan in April 1999 for a flat which is due for completion by April 2000. I have the following queries regarding the tax benefits for the FY 1999-2000.

  • Am I eligible for the tax rebate on principal repaid on this loan? If so, upto what amount?
  • Am I eligible for the tax rebate on interest paid on this loan? If so, upto what amount?
  • Can these rebates be calculated by the employer and adjusted while computing the tax to be deducted at source? Or do I have to pay the tax, and then claim the refund from the IT authorities?

Jacob Koshy

Since the property does not come into habitable existence during the FY 1999-2000, you will not be entitled to any tax rebate in respect of the repayment of any portion of the principal amount borrowed by you or in respect of the interest on such loan for the FY 1999-2000.

My grandmother is a tax payer and has a regular source of income, which we disclose in her regular tax returns. She had an irregular source of income that come as religious contributions whenever she is organizing a 'satsang'.
Lately, she is increasingly getting popular through her 'satsangs' and so is the amount in shapes of religious contributions. I want to know the status of such income and the tax liability if she is earning around Rs 1,20,000 per annum.

Vinay Gupta

This income shall be included in income under the head "Income from Other Sources" and charged to tax at normal rates alongwith her other regular income. Please note that the officer may take a stand that this income is arising out of a systematically organised activity and is therefore to be treated as a Business Income. As long as your grandmother is not planning to claim any expenses against this income, such a stand on the part of the department would not make any difference to the taxation.

I am in a private job and earning roughly Rs 2,10,000 per annum. Though my tax is deducted every month upto 500 but, at the end of the year inspite of LIC and ULIP, I had to pay Rs 8,000 as tax. I have bought a house from a private builder and have taken a housing loan of Rs 5,80,000 from GIC. I took this cheque on August 21, 1999. Since the said house has not been registered till now, I am still paying a pre-emi to GIC of Rs 7,200 per month.
I want to know if I can get some tax rebate on this pre-emi amount as I have already paid around 50K since Aug 1999 to March 2000. Secondly, what is the tax exemption I would get once I start paying the EMI of Rs 8,200 per month to GIC.

P R Dhariwal

As far as the financial year 1999-2000 is concerned, you cannot claim rebate in respect of the pre-EMI paid by you to GIC. The rebates are available only after the house is completed and occupied by you. Once the house is completed and occupied by you, the rebates and deductions available to you would be as under:

  • Interest paid by you upto the financial year prior to the year in which the property is qcuqired/constructed will be treated as pre construction period interest and shall be allowed as a deduction from income from house property in five equal installments commencing from the year in which construction is completed subject to a maximum of Rs 75,000/- per annum.
  • This one-fifth amount will be clubbed with the interest actually paid for that relevant year as part of the EMI for that year.
  • The ceiling of Rs 75,000 applies to the total amount of interest.
  • If the property is let out then the entire amount of interest can be claimed as a deduction from the rental income without any upper limit. The loss arising on account of such a deduction can be set off against income under any other head of income.
  • The amount of loan repaid after the property is acquired/constructed will be eligible for rebate under section 88 alongwith other eligible investments like PPF, Life Insurance Premium etc. However, the maximum limit for this purpose is Rs 10,000 (loan repayment upto Rs 10,000 per annum will be eligible for the rebate).

My father and I have different source of income. I have got demat account. My father is illiterate, hence is it possible for my father (tax point of view) to trade in shares by using my demat account? Will the IT authority treat it as loan taken by me from my father and club the gains in my income?

Ram Patil

It would be advisable for you to open the demat account in the name of your father jointly with you. Then, you can operate the account by obtaining a Power of Attorney from your father. The first name must be that of your father.

Send in your questions to perfin@rediff.co.in

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