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How do I reduce my tax liability?

Self-employed professionals have a very wide scope of reducing their tax liability.

Print Edition: November 16, 2006

Profits from trading in stocks are liable to short-term capital gains tax. How is income from derivatives trading to be treated? Is it to be treated as short-term capital gains, as business income or is it to be clubbed with your income for the year? Can the losses in derivatives trading be offset against the profits made in equity trading?

Capital gains for the purpose of income tax means income arising from the transfer of a capital asset. Income from derivatives trading is not an income arising from the transfer of a capital asset. On the contrary, derivatives trading is a business or adventure in the nature of trade. Accordingly, such income is to be considered as business income. As regards setting off of the losses in derivatives trading in view of the amendment made by the Finance Act, 2005, transactions in respect of trading in derivatives carried out in a recognised stock exchange are not to be considered as speculative transactions. Accordingly, effective January 25 this year, any loss suffered in derivatives trading after this date will not be considered to be speculative loss and shall be eligible for setting off against the profit made in equity trading and vice-versa.

My wife is taking a home loan to buy a flat. I intend to pay her monthly rent which would be used to repay the loan. Can I claim HRA rebate based on the rent that I will pay her? Will my wife’s rental income be clubbed with mine?

The rent you pay to your wife will be eligible for HRA exemption. There are three calculations for the HRA—actual HRA received, actual HRA received minus 10% of basic salary and 50% of basic salary. The lowest of the three is allowed as exemption. Regarding your wife’s rental income, she can offset it against the interest paid on the home loan. Her income will not be clubbed with your income.

I bought some equity shares in 1999. These shares were delisted from the market subsequently. After five years, these shares again got listed on the Bombay Stock Exchange. I recently sold these shares for Rs 3 lakh. Do I need to pay tax on the profit from the sale of those shares?

Since you held those shares for more than one year, the profit earned from the sale is categorised as long-term capital gain. If you paid the securities transaction tax on the sale of those shares, the long-term capital gains earned by you will be totally tax-free.

I have not been given a certificate in Form 16 of my salary since my employer does not have a permanent account number. Under such circumstances what proof should be submitted by me about my income along with the income tax return?

Form 16 is required to be issued when the employer deducts the income tax and deposits it with the government on behalf of the employee. If no tax was required to be deducted from your salary, you can ask your employer to issue a salary certificate of salary drawn on month-to-month basis, on their letterhead. It may help if a signatory from the office signs it as well with an official seal of the organisation. You can attach the certificate issued by the employer with your income tax return.

During the financial year 2005-6, I invested in a mutual fund, which is an equity-linked savings scheme. I have not claimed any deduction in respect to the investment. If the units are redeemed after three years, will there be a tax incidence?

If the investment in the mutual fund is by way of units in an equity-oriented fund, you can get the exemption under Section 10(38) of IT Act 1961, provided securities transaction tax is paid at the time of sale. If the redemption is by the mutual fund itself and the transaction is not through a recognised stock exchange, you will be liable to pay capital gains tax.

I am a salaried person with an annual income of Rs 4.8 lakh. This year, I joined a part-time management course and paid Rs 30,000 as tuition fee. Am I eligible for tax benefits extended to payment of tuition fee?

The tax benefit is available only if one has taken an education loan or is paying for his children’s tuition fees. There is no tax deduction if the individual pays his own tuition fee.

Can a proprietorship or a partnership firm buy a keyman insurance policy? Can the premium paid on the policy be treated as a business expense?

Keyman insurance covers the life of people who are crucial for a business. The main objective of the plan is to protect the company’s interest by reducing financial consequences due to death of the keyman. It is a clever way of reducing tax liability while enjoying the benefits of life insurance. Unfortunately, a proprietorship firm cannot buy a keyman insurance policy. However, a partnership firm can take a keyman insurance policy and treat the premium as a business expense.

I am a self-employed insurance adviser and earn about Rs 3.5 lakh a year. The insurance company deducts 11% tax at source from the commission payable to me. How can I reduce my tax liability?

Self-employed professionals like you have a very wide scope of reducing their tax liability. All expenses--conveyance, telephone, printing, stationery and other relevant expenses in procuring business is deductible from your income. However, you will have to maintain proper accounts and meticulously record every expenditure that you incur as you go about work. Since your gross annual commission is more than Rs 60,000, you will have to maintain books of accounts. Had your gross commission been lower than Rs 60,000, you could have claimed 50% of the amount as deduction on your first year’s commission and 15% on renewal commission if both are maintained separately.

I have misplaced the copy of the Saral income tax returns form that I had filed this year. Do I need to file it with my income tax returns next year?

It is not essential for an assessee to submit a copy of the previous year’s tax return as long as he has his PAN card. However, the tax return form is a useful document. When you apply for a housing loan, HFCs and banks want to see the previous three years returns. Hence it is advisable to have a proper filing system for your tax documents.

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