Will I have to pay tax on insurance reimbursement?

I recently sold my house for Rs 9 lakh. Do I have to show this income as capital gain? If yes, at what rate will it be taxed? Where can I invest this amount to save on tax?

— Jatin Paul

The profit from the sale of a house is taxable under the head of capital gains. If you sold your house within three years of its purchase, the gain made on its sale will be termed as short-term capital gain and taxed at normal rates applicable to your income. Also, no deduction will be allowed for reinvestment of sale proceeds or profit in a new residential house.

In case you had owned the house for more than three years, the profit will be long-term capital gain. For calculating the longterm capital gain, the cost of the property is indexed as per the cost inflation indices declared by the government. Long-term capital gain is taxed at a flat rate of 20%.

In this case, you also have the option of investing the amount of gain in another residential property or in tax-saving bonds to avoid paying capital gains tax. The amount of tax will depend on the classification of gain, purchase cost and your income slab.

I got a bonus of Rs 1.5 lakh in January 2008. But this bonus relates to the year 2006.Which year will be applicable for calculating tax?

—Ratnesh Kumar

The bonus received by an employee is treated as part of the salary income. It is chargeable under the head “salaries”, when it becomes due from an employer or is paid to him in the year though not due to him in that year.

Therefore, if you did not include bonus in your salary income for 2006, the bonus paid by your employer in January 2008 will be taxed in the financial year 2007-8 at the normal rates of income tax. However, you can claim relief under Section 89(1) if your tax liability for the year is higher than it would have been in the year 2006, had you received the bonus during that year.

My wife and I jointly took a home loan to renovate our house. I have already received the completion certificate and the tax exemption certificate from the bank. Can I claim any tax deduction?

—Diwakar Shetty

The loan taken for renovation or alteration to an existing house, that is, after the issue of completion certificate or after the house has been occupied or let out, is not eligible under Section 80C for claiming exemption for the principal component of loan.

However, its interest component is still eligible for deduction under Section 24(b) under the head “income from house property”. In case you live in the house, the maximum amount of interest allowed is restricted to Rs 30,000, but if the house is rented out, full amount of interest on loan will be allowed as deduction.

I am retiring next month. How much of my pension can I receive as a lump sum? What will be my tax liability?

—Devendra Pratap

Pension received by an employee from his employer after his retirement or voluntary resignation, is taxable under the head of salaries as per the rates applicable to an individual. According to pension rules, you can commute some amount of the pension in lump sum at the time of retirement, but you cannot commute or withdraw the full amount.

Commuted value of pension is exempt under Section 10(10A) of the Income Tax Act and the quantum of exemption depends on whether you receive gratuity at the time of retirement. In case you get gratuity, commuted value of one-third of the pension is exempt from tax. In case of non-receipt of gratuity, commuted value of half the pension is exempt from tax and the rest of the commuted pension is then liable for tax.

I turned 64 in March this year. Can I avail of the benefits given to senior citizens during 2007-8?

—Amrit Mathur

Under the Income Tax Act, a person is considered a senior citizen only after he or she completes 65 years of age. As you are 64 years old, you cannot avail of the benefits extended to senior citizens. You will be eligible for these benefits next year.

After six years with a company, I am changing my job. Do I have to pay tax on provident fund (PF) withdrawal from my account? What will be the tax liability if I transfer the amount to my new employer’s account?

—Kamlesh Garg

If you were a member of a recognised PF, the withdrawal of gross amount from the PF account on voluntary resignation from a job after rendering continuous service of six years will not be taxable. If the employment period is less than five years, the amount will be taxable.

Also, at the time of switching jobs, the employer gives the option of withdrawal or transfer of the balance in your PF account to your new employer. In such a case, the accumulated balance due and payable (gross amount) shall be exempt from income tax if it is transferred to your account in the recognised PF maintained by your new employer (irrespective of employment period).

My son, who gets house rent allowance (HRA) from his employer, stays in my house and pays rent to me. Can he do this? Will the rent be included in my income?

—Preet Arora

Yes, your son can pay you rent for staying in a house owned by you and claim exemption for it from the HRA paid to him by his employer. He can claim this exemption only if he is actually paying the rent to you. The rent he pays will be included in your income under the head “income from house property” and taxed according to the applicable rates.

My gross annual income is Rs 5 lakh. Please tell me how I can save income tax.

— Tarun Kumar

There are several tax-saving options under Section 80C of the Income Tax Act. Life insurance premium, investment in specified tax-saving mutual funds, National Savings Certificates, 5-year bank deposits and contributions to pension plans, provident fund and Public Provident Fund are eligible for deduction.

Certain other payments, such as tuition fees of children and repayment of principal amount of housing loan, also qualify for deduction under the Section within the overall limit of Rs 1 lakh. Under Section 80D, you can claim a deduction of up to Rs 15,000 for a health insurance policy taken for yourself and your family.

My employer gives me medical cover under a group insurance scheme. The insurer reimbursed a claim for an expense of Rs 40,000 incurred by me for my mother’s surgery. Will I have to pay tax on the money received?

— Joginder Kumar

Money received through a claim under a medical policy is only a reimbursement of expenditure already incurred by the policyholder. As this does not amount to profit or income for the insured person, this money is not taxable. Therefore, the medical expense reimbursement credited in your salary account will not be included in your total income for tax purposes.