'Do gifts offer tax deductions?'

An employer is required by the law to deduct tax on the payment he makes to compensate a previous employer for not serving the notice period.

Print Edition: May 17, 2007

When I left my previous job, I had to pay my employer Rs 15,000 for not serving the notice period.When I joined my new company, I got this reimbursed. However, my current employer has deducted tax on this reimbursement. Is this correct? This is not my income but only a reimbursement.

Congratulations on the new job. Your services must be valuable enough for your employers to have paid up for your notice period. But unfortunately, he can’t save you from taxes. According to Section 17(2) of the Income Tax Act any amount of money paid by the employer for any obligation which would have been payable by the employee is treated as perquisite and is taxed as salary income. Therefore, your employer is required by the law to deduct tax on the payment he made to compensate your previous employer for not serving the notice period. You will also not get any tax deduction on account of this payment as it was made to meet your contractual obligation with the former employer.

Can I can claim tax benefits for principal repayment as well as interest payment on my home loan for the financial year 2006-7? The construction of my home is not complete, and I live in rented premises. Can I claim HRA benefit as well for the entire 12 months from April 2006 to March 2007?

You can claim tax benefit on repayment of principal amount of the housing loan for the financial year 2006-7 but you cannot claim tax deduction on interest payment until the house is completed. Total interest payment during the construction period can, however, be claimed in five equal instalments in five years starting with the year of completion of the house. As long as you are living in a rented accommodation, you can claim the benefit for HRA according to the provisions of Section 10(13A) of the Income Tax Act.

I booked an overseas air ticket to travel before March-end and paid the travel agent before 31 March. However, I had to cancel the booking and postpone the travel till April 2007. Am I liable to claim the expenses before 31 March?

As an individual, you can follow either of the two recognised accounting systems— cash system of accounting or mercantile system of accounting. If you are following cash basis of accounting, you can book the expenditure before 31 March. However, if you are following mercantile system of accounting, you will be able to book the expenditure in the financial year 2007-8. In case of mercantile system, since you paid for the ticket in March 2006, in your accounts for the financial year 2006-7, you will have to show the value of ticket as current asset in your balance sheet. Whichever system you chose to follow, you have to follow it consistently.

I am a businessman and my income for 2006-7 was Rs 2.6 lakh. Can I gift Rs 1.35 lakh to my mother? She is a homemaker and does not have any independent income.What will then be my taxable income: the remaining Rs 1.25 lakh or Rs 2.6 lakh?

The Income Tax Act does not provide for any deduction on account of gifts made by an assessee. Therefore, the gift of Rs 1.35 lakh to your mother does not change your taxable income. You will have to pay your tax according to your income of Rs 2.60 lakh subject to the tax deductions you are entitled to.

My father wishes to transfer a few lakhs to me as gift. He is a senior citizen and does not file income tax returns. Please advise if this would create any tax issues for him.

Your father can gift you any amount of money. The receipt of money from your father will not be taxable in your hands. If your father does not have a taxable income, he may not be filing his income tax return but the source of funds out of which he intends to gift the money should be explainable in case there is any enquiry from the income tax department.

I am a salaried employee. I own a home and am in the process of buying another. I believe that I will have to pay taxes on the notional rental income on the home that I am not living in. Having two homes means that I may have to pay wealth tax also. If I have one of the homes in the name of Hindu Undivided Family (HUF), can I decrease the taxes?

It is true, that in case the second house remains in your possession, you will have to pay tax on the notional rental value of the second house. For wealth tax purpose, one house is exempt from tax. If the value of second house together with other taxable assets exceed the minimum taxable limit which is Rs 15 lakh at present, you will be required to pay wealth tax. HUF is a different entity as far as the application of income tax is concerned. If your HUF owns any one of the houses, you will not be required to pay taxes for that property.

Can I claim as deductions expenses like demat charges, service tax paid to broker, etc from income from capital gain?

You will get a deduction for the service tax paid to the broker. In fact it will be automatically added at the time of purchase and deducted from the sales income. The gain will be computed by deducting the total cost of purchase from the net sale income. However, as an individual investor, you will not get any tax deduction for the demat charges.

This year my total income is approximately Rs 1,60,000. I pay a premium of Rs 25,824 for an LIC policy. I paid Rs 4,300 as tax at source. But I am also paying house rent of Rs 3,500 per month for the past five months.The company does not pay the rent nor is it a company house. Can I get the rent deducted from my taxable income?

You can get a deduction for payment of house rent only if you get a house rent allowance from your employers. You can always get a break-up of your salary from your employers. As per Section 10(13A) of the IT Act, you can get a deduction equal to the least of the following amounts: a) amount of HRA actually received during the relevant financial year, b) amount of actual rent paid in excess of 10% of salary or c) in case the assessee is a resident of any of the metropolitan cities (Delhi, Mumbai, Kolkata or Chennai) 50% of the salary or 40% of the salary in case the assessee is a resident of any other city in India. In case you satisfy the above eligibility criterion, you will be required to submit the proof of payment of rent to your employers.

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