Is encashed earned leave taxable?

No tax exemption is available for earned leave encashed during service period. Hence, the amount of earned leave encashed will be taxable.

Print Edition: Nov 29, 2007

I wish to encash my earned leave which has been accumulating for the past 12 years. Will this amount be taxable? Will encashment affect the tax exemption that one gets on earned leave at the time of retirement?

— Rakesh Nair

No tax exemption is available for earned leave encashed during the service period. The amount of earned leave you encash will be taxable as salary income in your hands.

The encashment of earned leave at the time of retirement is exempt from tax, subject to certain conditions and up to a maximum amount of Rs 3 lakh.

The total amount of earned leave will be calculated as 30 days leave for every one year of completed service. The average salary for the past 10 months is taken into account for calculating the encashment amount.

At the time of retirement, the amount of leave encashed during the service period will be reduced from the total amount calculated.

I want to take a home loan to buy a flat. My income is Rs 26 lakh a year and I am already saving Rs 1 lakh under Section 80C. What tax exemption will I get?

— Rishi Raj

The EMI for a home loan consists of two parts—the principal amount and the interest component. The principal amount is eligible for deduction under Section 80C of the Income Tax Act up to a maximum amount of Rs 1 lakh. But you have already exhausted the limit of investment under Section 80C.

The interest portion of the EMI amount is eligible for deduction of up to Rs 1.5 lakh a year under Section 24(b). In your case, the income tax liability will come down by a maximum of Rs 50,000 a year. However, this deduction is available only if the house bought with the loan is self-occupied.

Moreover, you will not be eligible for exemption on HRA if you claim the deduction on the interest paid on the home loan. If you continue living on rent and let out your flat, the rental income will be added to your income and taxed at the rate applicable to you.

I want to sell some shares. How much tax will I have to pay? How long should I hold these shares so that I can avoid capital gains tax on the profits?

— Mohit Sareen

Profits from the sale of shares are defined as capital gains. How much tax you will have to pay depends on how long you have held the shares.

In case you sell the shares within a year of purchase, your profits will be treated as short-term capital gains and will be taxed at a flat rate of 10%.

However, if you hold the shares for more than a year, your profits will be treated as long-term capital gains and will be completely tax free. If you trade through a recognised stock exchange, securities transaction tax will be deducted on all transactions.

I have my own business and recently inherited my father’s business. I discovered that he carried forward a loss of Rs 3.5 crore last year. Can I carry forward his business losses? What if I discontinue his business for some time? Can I still carry forward the losses after I resume business?

— Rajesh Bhasin

As you have inherited your father’s business, you are entitled to carry forward the previous losses. However, the total period of carry-forward cannot exceed eight assessment years immediately succeeding the assessment year for which the loss was first computed.

Under the current tax laws, losses can be carried forward even if the business is discontinued for some time and resumed later. Prior to assessment year 2000-1, there were conditions that were binding to carry forward the losses, which are simplified now.

My son stays in a flat owned by me and shows that he is paying rent to me. Does this increase my tax liability? Can I show the house as self-occupied?

— P Sinha

The Income Tax law allows payment of rent by a son to his father. In case your son is actually paying you rent for the flat, you cannot show the house as self-occupied. Your son can claim exemption under Section 10(13A) for the exemption of house rent allowance only if he is actually paying rent to you.

That would increase your total income, as the rental income will be included in your income under the head “income from house property” and taxed at the rates applicable to you.

I lost my PAN card recently. I have a photocopy of the same and know the PAN number. What should I do to obtain a duplicate card?

— Manohar Rai

You can get a duplicate PAN card by filling up the prescribed application form for a duplicate card through either UTI or NSDL. You will be required to attach a photocopy of the old PAN card, your photograph, address proof and an identity proof. The duplicate card will be issued to you within one to two months.

I was recently hospitalised but since my wife could not place my medical insurance card, I could not avail myself of cashless hospitalisation benefit. The insurance company has told me to file my claim. Is this reimbursement taxable?

— Manish Kumar

Any amount reimbursed under a medical insurance policy is not taxable. The claim received under a health insurance policy is only a reimbursement of expenditure already incurred. Since there is no profit element in this process, the receipt of insurance claim amount is not taxable in your hands.

I have recently joined an MNC and have the option to choose between HRA and rent-free accommodation. What is more beneficial from the income tax point of view?

— Sunil Kulkarni

Rent-free accommodation is a perquisite that is taxable as part of the salary. The value of the lease rent amount paid by your employer will be included in your salary income as a perk and taxed at the rates applicable to you.

However, if you opt for house rent allowance, you can reduce your taxable income, as the actual rent paid can be claimed as a deduction from the house rent allowance. The amount of HRA exemption is calculated as the least of the following three:

• 40-50% of basic (50% in case of metro and 40% for other cities)

• Actual HRA received

• Actual rent paid minus 10% of basic salary

In case 10% of your salary is more than the rent paid, you will not get any deduction from the HRA and it will be taxed in full. In that case, either option will not make any difference to your taxability.

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