Does non-payment of EMIs effect on tax exemption?

Yes, Section 24(b) of the Income Tax Act allows deduction of interest due on home loan from the head 'Income from house property'.

Print Edition: September 4, 2008

Occasionally, I fail to pay the equated monthly instalment (EMI) of my home loan on time. Will this have any effect on the income-tax exemption that I claim for paying EMIs?

—Raj Kumar Sharma

Yes, non-payment of EMIs will affect your income-tax exemption. Section 24(b) of the Income Tax Act allows deduction of interest due on home loan from the head ‘Income from house property’ even if it is not paid during the previous year. But, on the other hand, under Section 80C, deduction of the principal amount of home loan is allowed only if it is actually paid during the previous year. Since you have delayed paying your EMI at times, this will affect your income-tax exemption.

My parents gifted me shares that they had bought over 20 years ago. I sold some of them less than a year after I received them.Will I have to pay capital gains tax? How will it be calculated?

—Praveen Ojha

As per the Income Tax Act, gifting of shares is not regarded as a transfer. So there is no question of a capital gain at the time these shares were transferred to you. But the profit made by you from the sale of these gifted shares shall be treated as a long-term capital gain because the shares were bought 20 years ago.

For the calculation of capital gain, the price your parents paid to buy the shares will be taken as the cost of their acquisition and the period for which they held them shall be taken into account along with the period for which they were with you. In case the shares are not sold through a recognised stock exchange, long-term capital gain is taxed at 10% along with an education cess. But this gain is exempt from tax if shares are sold through a recognised stock exchange where share transactions are subject to a securities transaction tax.

I have invested Rs 1.5 lakh in a postoffice monthly income scheme (POMIS) in my wife’s name.The income from this scheme is Rs 1,000 a month. This amount is put in a post-office recurring deposit, also in my wife’s name. My wife does not have any other source of income.Will her income from the POMIS and the interest she earns from the recurring deposit be clubbed with my income? If yes, under which head will this income be?

—Raju Vesagna

If the amount invested in the POMIS is sourced from your income, it will be treated as your income, and both the monthly return from the POMIS and the recurring deposit interest will be clubbed with your income. The main point is to determine the original source of funds (income from any fund is to be taxed to the real owner). The income from the POMIS and the interest on the recurring deposit will have to be shown under the column ‘Income of other persons’.

However, if your wife can prove that her investments in the POMIS were made from Pin money— money given by a husband to his wife for personal expenses—then both the income from the POMIS and the interest on recurring deposit will be treated as her income and clubbing provisions will not apply. In that case, since the sum of the two incomes is below the basic exemption limit, she will not have to pay any tax.

I am a partner in my family business. I also earn income from other sources.Will my share in profit from the firm be exempt from tax? In case of a loss, can I set it off against my other income?

—Ravi Gupta

No, you will not have to pay tax on your share of profit from the business. This is because any partnership firm that earns profits is supposed to pay tax. As this income has already been taxed, a partner in a firm is not required to pay tax on his share of profit. This is done to avoid double taxation. This also implies that you cannot set off the loss from the firm against your personal income because this loss is from a source whose income is exempt from tax. Since you are not liable to pay any tax on the profit, you also cannot set off the loss against any taxable income that accrues from other sources.

I have recently joined a private-sector bank after having worked in a public-sector bank for 10 years. I received Rs 2 lakh as provident fund dues.Will this amount be taxable?

—Savita Bhandari

If you were a member of a recognised provident fund (PF), you will not have to pay tax on the withdrawal of the gross amount since you have resigned voluntarily after rendering a continuous service of 10 years (which is double the stipulated minimum period of five years).

Also, at the time of switching jobs, an employee can choose between withdrawing the balance in his PF account or transferring it to the PF account that will be opened for him in the new organisation. If he transfers the balance in the PF account to the new account, then he will not incur any tax liability.

My 18-year-old son gets a scholarship for his engineering course.Will the entire scholarship be tax-free? Or will the tax break depend on the cost of his education?

—Ramakrishna Rajah

The scholarship received from any approved institute to meet the cost of education is exempt from tax. Since the purpose of granting a scholarship is to help a student complete his education, the question of whether the amount received is adequate or in excess of his requirements does not arise.

I filed my income-tax returns for the first time this year.What do the terms financial year, previous year and assessment year imply with regard to income-tax filing?

—Vinay Bhat

A financial year is a period of 12 months commencing from 1 April of a given year and ending on 31 March of the next year. For income tax purposes, a financial year is the period during which the income has been earned. An assessment year is the year immediately following the financial year. The income earned in a financial year is assessed in the following year, that is, the assessment year. The year before the financial year is referred to as the previous year.

For example, the income you earned between 1 April 2007 and 31 March 2008 (this will be termed as financial year 2007-8) will be assessed for tax in the year 2008-9 (this is the assessment year 2008-9 and will also be mentioned in your ITR form). In this instance, the previous year will be 2006-7.

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