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Taxing tax

The  interest on loan raised to build a house qualifies for deduction under Section 24 of the Income Tax Act, 1961, for a maximum of Rs 1.5 lakh.

Question: My accounts department says that I can’t claim a tax deduction on the home loan interest and on HRA together. Can you explain the income tax laws regarding this? —A Ramaswamy

Answer: The deduction for HRA is available only if the assessee is paying rent for the accommodation which is occupied by him. At the same time the interest on the loan raised to build a house qualifies for deduction under Section 24 of the Income Tax Act, 1961, for a maximum of Rs 1.5 lakh, only if the house is self-occupied. Since these two situations are mutually exclusive (if a person is paying rent he cannot be the owner of that property and vice versa), both these deductions cannot be granted at the same time.

However, if the house for which the loan has been taken is in another city and it is not possible to commute from there to the place of work on a daily basis, an individual is eligible for both benefits—HRA as well as deduction of home loan interest. If the home loan has been taken to buy a second house, you can deduct the interest paid on the home loan from any rental income earned from the second house for calculating tax.

Tax after TDS

If your total tax liability exceeds the TDS amount deducted by your employer, you need to calculate the balance tax payable and deposit the same as selfassessment tax.

Question: I get a monthly rent of Rs 60,000 from a commercial property on which a tax of Rs 9,000 is deducted at source. This rental income will now fall under service tax from the financial year 2007-8. How much service tax will I have to pay? —Hriday Acharya

Answer: With effect from 1 June 2007, service tax on rental income from commercial property is 12.36%. However, service tax is not applicable if the gross rent received from a commercial property does not exceed Rs 8 lakh after deducting municipal taxes in a financial year. Service tax will not be applicable in your case since your annual income from rent is Rs 7.20 lakh. Once your rental income from commercial properties starts falling within the purview of service tax, you will be required to collect service tax from your tenants and deposit it in the service tax department. If the rent includes all the taxes and levies, you will have to deposit service tax out of the total amount of rent received.

Question: After the calculations for tax, I found that I need to pay more because of shortterm capital gains. My company has deducted tax according to my salary. How do I pay the additional tax? —Rishabh

Answer: As your total tax liability exceeds the TDS amount deducted by your employer on your salary income, you need to calculate the balance tax payable and deposit the same as self-assessment tax with any bank that accepts income tax. For the payment of this amount you can obtain Form No. 280 or download it from the site http://www.taxmann.com/dittaxmann/incometaxrules/pdf/challanitns-280.pdf. According to the new rules there is no need to attach any challans or Form 16 with the tax return. You will have to fill in the tax deposit particulars in the ITR form.

Question: I migrated to Australia in 2002 but have bank accounts in India and also get rental income from my house.Do I need to file my tax return in India? —Shivashish Paul

Answer: Although your status as per the Indian tax laws is that of a non-resident you still need to file your income tax return in respect of income earned and received in India. Therefore, after accounting for the rents and interests earned on your bank deposits, if your income in India exceeds the minimum taxable limit, you will have to file your return.

Education Loan

The repayment of interest on education loan qualifies for deduction under Section 80E, only in case the individual has taken a loan from any financial or charitable institution.

Question: I redeemed some mutual fund units within a year of purchase. What will be the tax treatment? —Anand B

Answer: As you have redeemed the units before a year, the capital gains from the sale will be shortterm capital gain and taxed at a flat rate of 10% if it was an equity mutual fund and securities transaction tax has been paid. Equity funds are those which have at least 65% of their corpus invested in equities.

If it was a debt fund or debt-oriented fund, the income shall be clubbed with your income and taxed at the applicable rate. It is advisable to hold mutual funds for more than one year to minimise tax. If held for over a year, income from equity funds is exempt from tax while in case of debt funds it is taxed at 10% flat or at 20% after indexation.

Question: In 2006, I bought a shop for Rs 5.25 lakh. I sold it for Rs 10 lakh to buy an office space worth Rs 8.5 lakh. What will be my tax liability? —Anil Sharma

Answer: Firstly, any profit on sale or transfer of a capital asset is taxed as capital gains. Depending on the period of holding of the asset, the capital gains earned is classified as short term or long term. If an immovable property is held for more than three years, the gain on its sale or transfer is termed as long term. Since you held the shop for less than three years, the capital gain in the transaction will be termed as short term. This short-term capital gains will be added to your income for the financial year 2006-7.

If the sale and purchase price of the shop quoted by you is net, your short-term capital gains is Rs 4.75 lakh. Your total income will comprise this amount and other incomes which you may have. Out of this amount, you will get deductions under Section 80 of the Income Tax Act. After the deductions, your net income will be taxed at the normal rates. You will not get any advantage for investing Rs 8.5 lakh in an office space.

Question:  I am buying a land to build a house. At what stage of the building am I eligible for tax rebates? —Velu

Answer: For individuals if they build a house by deploying their own resources, there is no tax benefit as such. However, in case you are planning to take a housing loan for the construction, the repayment of principal amount of loan and the interest paid on the borrowed capital up to Rs 1.5 lakh for self-occupied property qualifies for deductions. The proviso being the housing loan has to be from a recognised lender.

As far as the payment of interest on the housing loan is concerned, you will not get any deduction on the borrowed capital until the construction of the house is complete. The accumulated balance of interest paid during the construction period can be divided into five equal parts and claimed as deduction in the five years starting with the year of completion of construction. After completion the interest amount on loan that can be claimed as a deduction in a year is restricted to Rs 1.5 lakh in case of a self-occupied house.

Question: Instead of taking an education loan from a bank, my son has taken a loan from me. Can I get tax benefits stating this as education fee? Will he get tax benefits whenever he repays the loan to me? —Ram Prasad

Answer: No, you cannot get tax benefit for the loan given by you to your son for pursuing his studies nor can your son get tax benefits for the repayment of this loan as loans taken for further education from a parent is not eligible for deduction.

The repayment of interest on loan taken for higher education qualifies for deduction under Section 80E, only in case the individual has taken a loan from any financial institution or approved charitable institution. However, you can get deduction for the tuition fees paid to the institute for your son’s degree under Section 80C.

Are matters of tax taxing your brain?

Sood, Sharma and Associates, a Gurgaon-based accounting firm, will answer your queries on taxation. Log on to www.moneytoday.in and click on Tax Quer ies to submit your questions.