Q.I have a house in my name and am planning to buy a second house.The plan is to co-own the second house with my wife in the ratio of 40:60. Please clarify the individual tax implications.
A.You have not mentioned whether your wife has an individual source of income or not and whether she files her return of income. When the husband and wife are living together, only one house can be treated as self-occupied. Even if the second house is not rented out, it shall be treated as let out. In case your wife has an independent source of income, the notional rent from the second house shall be included in both yours and your wife’s gross total income in the ratio of ownership.
If your wife does not have any income in her own right, the amount of rent—or notional rent as the case may be—will be clubbed with your income. Under Section 27(i), if an individual transfers any house or property to his spouse for any reason other than for an adequate consideration, the transferor in that case shall be deemed to be the owner of the property and the annual value of the property is taxed in the hands of the transferor. The main point of consideration, therefore, is the source of funds that is used to buy the house.
Q.I have booked a flat and am saving money for some time for its interior designing. However, the handover of the flat is getting delayed for some reasons and now I have Rs 14 lakh in a bank fixed deposit which I may need once the handover is complete. I am in the 30% tax bracket. Is there any other option for me to park my money to have this kind of liquidity as well as capital protection?
A.Since the liquidity of your investment is very important, the best option would be to park your Rs 14 lakh in a liquid fund. This would allow you to get the money in your credit on one day’s notice. But liquid funds have a lock in period of 15 days or a month and premature withdrawal, though allowed, could lead to a marginal loss of interest. In the present scenario, one can expect a tax-free return of around 7.30% on an annualised basis from these funds. Since these liquid mutual fund schemes invest in money market instruments, there is no risk of the capital invested. But the return may fluctuate on a day-to-day basis.
Q.If I sell some of my personal belongings, will the proceeds of the sale be subject to capital gains tax? If yes what will be the rate of tax?
A.The capital gains tax is applicable on the sale or transfer of only capital asset. Up till the assessment year 2007-8, except for jewellery, no other personal effect was considered a capital asset. Therefore, there was no tax on the sale or transfer of any personal effects except for jewellery.
However, from the assessment year 2008-9, Section 2(14) has been amended to further exclude from the definition of the term “personal effects” any archaeological collection, drawing, painting, sculpture or any other work of art. Therefore, from 1 April 2007 onwards, if someone sells any of these, it will attract a capital gains tax. The rate of tax depends on the period of holding. A short-term gain will be added to your income for the year and taxed at normal rates whereas any long-term gain will be taxed at a flat 20% after applying indexation.
Q.I have returned to India after 14 years. At present I do not have any income and have invested my earnings in deposits, mutual funds and shares. Please advise me about tax payment.
A.Your basic capital which you have brought to India as such does not attract any income tax. However, the income from your investments in India will be taxable. The first step for paying income tax will be to apply for a permanent account number (PAN). Out of your total income, some incomes such as dividend on equity shares and mutual funds may be exempt from tax. Other incomes like interest on deposits will be taxable subject to the provisions of the Income Tax Act.
Q.Is the tax on the interest earned on fixed deposits deducted at source?
A.According to the Income Tax Act, no tax is to be deducted on interests earned from a time deposit if the deposit was made after 1 July 1995 with a bank and if the total amount of interest income earned does not exceed Rs 5,000 a year. This means if your fixed deposits earn interest of more than Rs 5,000 with any bank branch during the financial year, then tax at the rate of 10% plus surcharge and education cess shall be deducted by the bank.
But TDS does not mean that your tax liability ends with this deduction. Whether or not TDS is deducted, you are required to include the interest earned from the fixed deposit in your income for the year and compute your tax liability according to the applicable rate of income tax. In case the bank deducts the TDS, it will issue you a certificate to that effect. The amount stated in the TDS certificate will be credited to your account as tax paid.
Q.I recently sold a house for Rs 35 lakh. I bought it in 1992 for Rs 3.50 lakh. Out of the proceeds, Rs 15 lakh were utilised for buying a residential flat and the balance Rs 20 lakh has been invested in a shop.Will I get any tax exemption for investing the full amount of sale proceeds?
A.Since you held your house property for more than three years, the profit on sale will be classified as long-term capital gains. The taxable amount of capital gains is calculated by reducing the adjusted cost of purchase of house (by applying the cost inflation index) from the sale proceeds. If you have sold your house in the financial year 2006-7, the adjusted cost in your case will be Rs 9.13 lakh (3.50 X 519/199). The net gain, therefore, will be Rs 25.87 lakh.
If you had invested the full amount of capital gain in the purchase of a residential flat, the entire amount of gain would have been exempt from tax. However, since in your case, you actually invested only Rs 15 lakh in the residential flat, the balance amount of gain, which is Rs 10.87 lakh, will be taxable in your hands. The rate of tax will, however, be at 20% flat. Subject to the exact calculations, your tax liability will be in the region of Rs 2.17 lakh.
Q.My father wants to give me Rs 1 lakh out of his income. He is a senior citizen and regularly files return with the income tax department.What documentary evidence is required to prove that the money he gives is a gift?
A.First of all, it would be best if your father gives you the money by writing out a cheque in your name. Since your father is a regular income tax assessee, he should also reflect the transaction in his statement while filing his return of income. Your father can also draw up a gift deed in your favour. In addition, you should include the amount received in your capital account and enclose the copy of the gift deed along with your return of income.
