I want to borrow some shares from my wife's demat account and return them after a few months through an off-market transaction. The shares will not be sold but used only to get margin funding for other transactions. What are the tax implications for such an arrangement?
If shares are transferred from your wife's demat account to your account, it will be treated as a sale and she will be taxed for the capital gain. If shares have been held for more than 12 months, the capital gain will be tax-free, otherwise she will have to pay 15 per cent tax. However, there will be no tax if your wife gifts you the shares. You will need to fill out a form explaining the reasons for the off-market transaction. Remember, that a gift from a spouse attracts clubbing provisions. So, any income from the gifted asset will be clubbed with the income of the giver. Since you intend to use the shares only as collateral and will not be selling them, there will be no tax liability. However, you should prepare a gift deed for the shares.
Two years ago, I gave my mother-in-law Rs 2 lakh. She invested this amount in fixed deposits and is now earning an interest on it. As her annual income is less than Rs 1.5 lakh, she does not file her income-tax (IT) returns. Will I have to include this income in my IT return? Now, she intends to gift Rs 2.5 lakh to me. Will I be required to pay any tax on the additional Rs 50,000?
—V. Verma, Bengaluru
If you gave Rs 2 lakh as a gift to your mother-inlaw, you don't have to pay any tax on the interest that is earned on it. The income from fixed deposits is hers and she will be taxed on it. The money that your mother-in-law intends to return to you will also be a gift. Gifts from specified relatives, including wife's parents, are tax-free. However, it is advisable to prepare a gift deed to substantiate your claim.
What is the tax rate for nonresident Indians (NRIs)? What is the criterion for classifying one as an NRI? If I have already paid tax on income abroad, am I eligible for any tax credit in India? What do I have to submit as proof?
—A.K. Goel, Mumbai
The tax rates (slabs) are the same for nonresidents and residents. For NRIs, special rates apply for interest earned on foreign currency deposits. To qualify as an NRI, you should not have spent more than 181 days in a year in India. If you are a resident and have paid tax on the income abroad, you are eligible for tax relief as per the double tax avoidance agreement with that country. If you are a non-resident, only the income received or accrued in India is liable to be taxed and, hence, the question of relief on the taxes paid abroad does not arise.
The income-tax return forms in India are now free of annexures. You do not need to attach any documents with the tax return. However, you should retain a copy or receipt of your foreign tax return for future reference.
I am a pensioner and earn Rs 2.5 lakh a year. I bought some shares in 1986 for Rs 14,000 and sold them this year for Rs 78,000. As the investment was made before 2002, does this mean the profit will not be tax-free? How much will be my tax liability?
—D.K. Arora, Chandigarh
If you sold the shares through a recognised stock exchange and paid the securities transaction tax, your long-term capital gains will be tax-free. The long-term capital gain will be Rs 14,800 (sale amount of Rs 78,000 minus the indexed purchase cost of Rs 63,200).
Your gross total income will be the sum of Rs 2.5 lakh from pension and Rs 14,800, which is Rs 2,64,800. The long-term capital gain is tax-free, and as you are a senior citizen, your income between Rs 2.4 lakh and Rs 3 lakh will be taxable at the rate of 10 per cent. Hence, you will have to pay a tax of Rs 1,000.
I am a partner in a firm. Recently, my car was involved in an accident. How will the money received from the insurance company reflect in my company's balance sheet? Do I have to pay tax on the amount? Is there a tax implication due to the accident?
—Shital Patil, Kolhapur
Yes, the money received from the insurance company by the partnership firm will be treated as income from other sources. However, the expenses incurred on repairing the car and the insurance premium will be allowed as deductible expenses.
I received my income-tax refund cheque this year after four years. It was issued to the bank account number mentioned in my return form. However, I had closed this account two years ago. How can I get a fresh refund cheque?
—Rajesh Mahale, Bengaluru
You need to contact your income-tax officer with an application to issue a fresh refund cheque along with the new bank account details. Don't forget to mention the MICR code of your bank. Also, attach the last statement from the closed bank account or the account closing certificate that you would have received from the bank. If you do not have such a certificate, try and get one from the bank. Otherwise, you may have to submit an indemnity bond and an affidavit stating that the account is closed.
I want to invest in a debt mutual fund to earn a monthly income. Does the dividend paid by monthly income plans (MIPs) attract any tax? Writing out a redemption slip every month is too cumbersome. Do I have any other option?
—Pritam Chatterjee, Kolhapur
Though the dividend from mutual funds is tax-free, the fund house has to pay a steep 14-28 per cent dividend distribution tax (DDT) on it in case of debt and debt-oriented mutual funds. The DDT is compulsorily deducted by the mutual fund regardless of the person's tax status. To avoid this and the problem of redeeming every month, you can opt for a systematic withdrawal plan (SWP). A fixed amount is redeemed on a predetermined day of the month and paid to the investor. Such SWPs are especially useful for retirees who need a steady stream of income.
Another benefit of SWPs is that they allow investors to customise the cash flow. You can fix the redemption amount according to your needs. However, keep in mind that every time you redeem, you earn capital gains, which are taxable. In the first year of investment, the profits are taxed at normal rates, but after a year, the profit is treated as long-term capital gain and taxed at a lower rate.
Should an investor take into account the size of the fund before investing? What should be the deciding factor?
—H.L. Shammi, Allahabad
The size of the fund does not have a significant bearing on its performance. True, managing a large corpus is difficult, especially in the Indian context, because of the relatively limited spread of stock universe available for investment. However, there is no empirical evidence for such a correlation. So the next time a fund salesperson tries to impress you with the size of a fund scheme, don't be taken in by the hype. Instead, look at the long-term performance of the fund. A fund that has done consistently well in the past will continue to do so in the future.