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March 16, 2000

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"Are allowances for business travel taxable?"

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.

Your replies to the questions on the tax liability state that allowances paid will be taxable. Assume that I am on a domestic company tour and am paid Rs 50 as food and other incidental expenses without bills. This is not taxable as this is not an income. Similarly, how can an allowance given abroad for travelling on business be taxed? If I am paid $100 per day subject to tax, that leaves me with just $66.

According to my understanding, the allowance is identical to business travel and is not taxed. If you say that only the savings are to be taxed, then the government is encouraging people to spend money and not save foreign exchange. I am positive that the allowances are not taxed.

Also, many of them have mentioned that they are getting an allowance for expenses abroad, the salary being paid only in India.

Satish Natarajan

Allowance as understood in Income Tax Act and defined in case Mutual Acceptance Co. Vs FCT (1944) 69 CLR 389 is as under: -

"Allowance is generally defined as fixed quantity of money or other substance given regularly in addition to the salary for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual condition of that service"

Evindently, the allowance received abroad is also covered under the above definition. The allowance is generally given by the company to take care of expenses that the employee has to bear while being employed away from home. Ideally the company should have paid for the living expenses there instead of giving allowance to employees in which case it would be treated as reimbursement of expenses by the company for the cost incurred. Reimbursements are not taxable and all allowances except the ones which are specifically exempted are taxable.

But, in your case, since the allowance is given in your hands, the full amount will be treated as 'allowance taxable in your hands'. Rebate is provided under Section 80 RRA upto 75 per cent of the amount so earned in foreign currency and brought back in India (incentive for savings). We respect your sentiments, but as the law stands today, you will be taxed for the amount received as allowance for being posted abroad.

I purchased a Maruti Omni and made a full cash payment by withdrawing money from my provident fund account as well as taking loans from relatives and friends. Am I eligible for any tax exemption?

K S Manjunath

We presume that you are an individual assessee earning a salary as income. The vehicle purchased by you will not qualify for any tax exemption. In case, you have a business and you have purchased the car in that venture, then such an investment will qualify for a depreciation benefit.

My brother in the US gifted $10,000 to my son and daughter last March. The money was directly transferred to their savings account. I invested this money in software companies in their names. Can you please enlighten me on the liability that would arise when I sell these shares?

P Ajay

Since this money has now been invested by you in shares, any income arising on sale of such shares will be taxable as capital gains. Presuming that your children are minors, the income from sale of shares will be clubbed with the income of the parent whose income is higher and would be taxable as part of income earned by such a parent. In case the shares are held for 12 months or more, the gain on sale will be charged at the rate of 20 per cent , which is the long-term capital gain tax or it will be chargeable based on the marginal rate of tax. On the other hand, if the children are majors, then the capital gains would be chargeable to tax in their respective hands.

I constructed my house with the help of loans from two sources. One loan of Rs 5,00,000 was taken from the Government of India in March 1999 and the other, worth Rs 2,44,000, from LIC in July 1999. The construction was completed in October 1999. I have been informed that the limit for claiming rebate on accrued interest is only Rs 30,000. Since I have raised the second loan after March 1999 and also completed the construction in October 1999, should I not be eligible to claim a rebate of Rs 75, 000?

Sushil K Jalali

The Finance Act, 1999 has amended Section 24 (2) of the Income Tax Act, 1961 thereby raising the amount of deduction in respect of interest paid on capital borrowed for acquisition/ construction of house property. As a result of the amendment, where the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2001, the deduction on account of interest will be Rs 75,000 instead of Rs 30,000. So in your case you can avail of a deduction on account of the interest amount paid by you to LIC up to a maximum of Rs 75,000 in the Assessment Year 2000-01.

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