Is profit from mutual funds taxable?

When should you invest? How much tax you need to pay? MONEY TODAY answers all these and many other questions here. Read on.

Print Edition: February 8, 2007

My only mode of income for this financial year is from stock market trading where I have invested Rs 1 lakh in trading and earned about Rs 2 lakh as profit. Should I pay tax on the profit? What tax deductions can I avail in this financial year?

Congratulations on making a profit of Rs 2 lakh on an investment of Rs 1 lakh. In your case, only the profit that you have earned is taxable, and not the principal amount. The rate of tax and the amount of tax that you have to pay will depend on whether the transactions in shares are treated as business transactions or capital gains. This is a major controversy in itself. Presuming that the transactions are treated as capital gains, since the shares have been held by you for less than 12 months, they will be considered as short-term capital gains. The first Rs 1 lakh would be exempt from tax since that is the threshold limit for male tax payers. On the balance Rs 1 lakh, you will have to pay tax at the rate of 10% plus education cess of 2% of the tax. You cannot save this tax by investing in any asset as none of the deductions are available to you. However, if the transactions are treated as business income, then you will have to pay tax as per the slab rates on the balance Rs 1 lakh. This will work out to Rs 15,000 plus education cess of 2% of the tax. This income can be reduced by taking deductions under sections 80C and 80D. If you invest up to Rs1 lakh in schemes mentioned in Section 80C of the Income Tax Act such as ELSS, PPF, insurance premiums and NSC before 31 March 2007 then you will not have to pay any tax.

Ever since I retired six years ago, I have not taken up any job. Now at 62, I have a contract work offer.The company will deduct contract tax (5.5%) on the monthly payment. What is my tax responsibility?

What you will be earning will be considered as professional/business income. From this, you can reduce the expenses actually incurred by you for earning this income (such as travel expenses, stationery and other similar expenses). The balance will be added to your other normal income and you will have to pay tax on that total income depending on which slab you fall in. The amount deducted at source by the payer of the income will be reduced from the tax and the balance will have to be paid by you as advance tax.

How can I minimise my tax burden on the sale of an inherited house?

An inherited house would attract capital gains tax just as any other house would. In case of inherited assets, the date of acquisition and the cost of acquisition in the hands of the previous owner (from whom you inherited the house) would be deemed to be the date of acquisition and cost of acquisition in your hands. In order to minimise tax on the long-term capital gains on the sale of your house, you could either invest in another house or you could invest the capital gains in the capital gains bonds issued by NHAI and Nabard within six months from the date of sale of the house.

I am an NRI (PIO card holder) and I bought shares of a company in India about 19 years ago. Will I owe any tax on long-term capital gains if I decide to sell those shares?

If the shares that you purchased are listed and if you now sell them on a recognised stock exchange then the broker would recover Securities Transaction Tax from you. In such a situation, the long-term capital.

It's now more than 10 years since a blue chip company issued me bonus shares and my total holding in this scrip has been the same ever since. I intend to sell all these shares now. Am I liable to pay any capital gains tax on the sale value?

According to Section 10(38) of the Income Tax Act, the gains arising from the sale of shares which are subject to Securities Transaction Tax (STT) and which are held for more than 12 months (long term) is exempt from tax. In your case, you have held all the shares (original and bonus) for more than 12 months. Therefore, when you sell these shares on a recognised stock exchange, the long term capital gains that you earn will be completely tax free in your hands.

Gain earned by you on the sale of the shares would be completely tax free under section 10(38) of the Income Tax Act. If the shares are unlisted shares then you will have to compute the capital gains after indexing the cost based on the index for the year of purchase and the year of sale. The resultant capital gains would be taxed at the rate of 20% plus surcharge and education cess.

I am an NRI and would like to invest Rs 1 lakh in mutual funds for 2 years. Will there be any TDS when I redeem these?

Whether it is an equity-based MF scheme or a debtbased scheme, dividend is tax-free in the hands of the investor. However, in the case of debt-based schemes there is a dividend distribution tax at the rate of 14.025% payable by the MF directly to the exchequer. Equity-based schemes are exempt from this tax as well as from long-term capital gains tax. Therefore there is no TDS. The short-term capital gains are taxed at the rate of 10.2% and the TDS rate is also the same. In the case of debt-based schemes, short-term gains are treated as normal income of the assessee and taxed at the rates applicable to the assessee. Here the TDS rate is 30%. The long-term gains will attract tax at the rate of 10.2% without indexation or at the rate of 20.4% with indexation, whichever is more beneficial to the assessee. In this case the TDS rate is 20%.

Can I show the medical expenses incurred for my father's treatment for tax exemption?

If a medical allowance is part of the CTC borne by your employer, you can claim a medical reimbursement of up to Rs 15,000. But if this facility is not provided to you, then under Sec 80D of the Income Tax Act a deduction is allowed on the premium that you pay on medical insurance. Section 80DD and Sec 80DDB allow deduction from gross total income in respect of expenditure incurred on medical treatment of disabled dependants or those suffering from specified diseases like Parkinsons disease, cancer, etc. For this you will have to provide a certificate from a hospital recognised by the commissioner of income tax.

I am a resident but not ordinarily resident in accordance with the Income- Tax Act. I have funds deposited in India in NRE account and the interest on the deposit is credited quarterly to my NRE savings account. These deposits are due to mature in 2007. Will the interest from these NRE accounts be taxable in India?

If the individual is a non-resident in accordance with the Foreign Exchange Regulation Act then the interest on money standing to the credit of an NRE account in any bank in India can be claimed as exempt under Section 10(4)(ii). A person who is a resident but not ordinarily in accordance with the Income Tax Act can also claim exemption under Section 10(15)(iv)(fa) in respect of interest on deposits in foreign currency where the acceptance of such deposits by the scheduled bank is approved by the Reserve Bank of India. You will, therefore, be able to get exemption in respect of interest if you satisfy the conditions stated above.

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