I have deposited Rs 50,000 in my wife’s account. She is a housewife who trades in shares. Her short-term capital gains (STCG) are Rs 5,000. How much tax does she need to pay? Will I have to pay gift tax?
No tax is applicable if you gift money to your wife. Though there is no limit on the amount that can be gifted, the income from investments from the gifted money will be clubbed with the husband’s income and he will have to pay tax on it. The income is taxable in the hands of the person who earns it, irrespective of who manages it. So, even if your wife manages your investments, you shall be liable to pay the tax on the income. The STCG on income from equities is 15%, so your tax is Rs 750 plus a 3% education cess on the tax. However, you won’t have to pay any STCG tax if you suffer a shortterm loss of an equivalent amount from equities. A short-term loss can be set off against both long-term and short-term gains, but long-term loss can be set off only against long-term gains. Also, capital loss cannot be set off against any other form of income. Capital losses can also be carried forward to be set off against future gains for up to eight assessment years.
What tax deductions can I get for repayment of home loan?
You are entitled to two types of deductions for a home loan. One, on repayment of the principal amount of the loan, and the other on the interest paid on the loan. Whether you live in your own house or give it out on rent, the repayment of principal amount will qualify for deduction under Section 80C. The maximum amount of deduction available for repayment is Rs 1 lakh.
In case of the interest paid on the loan, under Section 24(b), up to Rs 1.5 lakh can be claimed as deduction under the head ‘Income from House Property’ for a self-occupied house. However, the full amount of interest can be claimed as deduction in case the house is given on rent.
I live with my parents in their house. I get a house rent allowance (HRA) from my employer. If I pay rent to my parents, can I claim tax exemption? How much of the rent paid is eligible for exemption?
Yes, you can pay rent to your parents and claim tax exemption on the HRA that you receive from your employer. You will need to submit rent receipts to your employer to claim the exemption. However, the rent that you pay to your parents becomes their income and is taxable in their hands after a 30% standard deduction. If your parents have no other source of income, then the arrangement will not impose a huge tax burden on them. But if the rent received is more than the tax-free limit, they will have to pay tax on their income.
The exemption on HRA is subject to certain limits. The least of the following amounts is exempt from tax under Section 10(13A) of the Income Tax Act:
a. Actual HRA received
b. Actual house rent paid minus 10% of basic salary
c. 50% of basic salary (for nonmetros, it is 40%)
I am retired and my only source of income is the interest paid by my bank. How much tax will I have to pay if I earn a profit from stock market investments?
The amount of tax you pay will depend on your total income and age. If you are more than 65 years old, you will be considered a senior citizen and will have to pay income tax only if your net income from all sources exceeds Rs 2.25 lakh. Your income from bank interest will be chargeable under the head ‘Income from Other Sources’. And, incidentally, the income from your bank fixed deposits is taxable.
The income from sale and purchase of shares will be taxed under the head ‘Capital Gains’. If shares or equity-oriented mutual funds are sold within a year of their purchase, the gains are considered short-term capital gains and are taxed at 15% (plus 3% education cess on the tax) with effect from financial year 2008-9. However, long-term capital gains— from sale of shares or equity-oriented mutual funds more than one year after their purchase—are exempt from tax. To claim this exemption, the sale should have been done through a recognised stock exchange in India and you should have paid the securities transaction tax.
I want to gift some shares to my wife and transfer them to her demat account. I bought these shares two years ago for Rs 5,000. If my wife were to sell these shares after six months for Rs 8,000, will the gain be treated as long- or short-term? Will the profit from the sale be assessed as my income or hers?
The gain from the sale of shares gifted by you will be taxable in your hands. According to Section 64(1), if you transfer an asset to a spouse, the income from the asset is clubbed with the income of the person making the transfer. Also, under Section 2(42A), when the asset transferred is a gift, the period of holding of the asset by the previous owner is taken into account while determining whether the gain from the sale of the asset is short-term or long-term. In your case, the gain will be treated as long-term since the shares were held for more than 12 months. Therefore, the income will be tax-free.
Can a proprietorship or a partnership firm buy a keyman insurance policy? Can the premium paid on the policy be treated as a business expense?
—Ram Swarup Mishra
Keyman insurance covers the life of people who are crucial for a business. The main objective of the plan is to protect the business interest by reducing financial consequences due to the death of the key man. It is a clever way of reducing tax liability while enjoying the benefits of life insurance. A proprietorship firm cannot buy a keyman insurance policy. However, a partnership firm can take a keyman insurance policy and treat the premium as a business expense.
My annual salary is Rs 1.7 lakh. What will be my tax liability?
From the financial year 2008-9, the basic exemption limit for paying tax is Rs 1.5 lakh in case of males. So your income up to Rs 1.5 lakh is exempt from tax. The income between Rs 1.5 lakh and Rs 3 lakh is taxable at the rate of 10%. Hence, your tax liability is Rs 2,000. In addition to this, there is an education cess of 3% on the payable tax, which works out to Rs 60. Therefore, your total tax liability is Rs 2,060.
Certain tax concessions are also available on the gross income earned by a person. Under Section 80C, you can invest up to Rs 1 lakh in specified tax-saving avenues. These include your contribution to the Employees’ Provident Fund, investments in Public Provident Fund, National Savings Certificates, premium for a life insurance policy or a pension plan, investments in equity-linked savings schemes of mutual funds and fixed deposits of over five years. So, if you invest Rs 20,000 under Section 80C, your tax liability will be reduced to nil.
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