Q.I have sold a residential property for Rs 50 lakh. I bought the property five years ago for Rs 15 lakh without taking a loan. I don’t intend to buy another property for at least six months. How can I minimise the tax on the income from the sale?
A.Income from sale of residential property is liable to capital gains tax after deducting the indexed cost of acquisition. In simple terms, indexation is a way of arriving at the present value of a purchase made in the past. In your case, the cost of acquisition is Rs 15 lakh and the indexed cost would be around Rs 20 lakh. So, the long term capital gains is Rs 30 lakh which would be taxed at the rate of 22.44%.
If you plan to buy property in the future with the sale proceeds, you can keep this money in a bank account under the capital gains scheme. There would be no tax on the sale income if this money is used to either purchase a residential property within two years or construct a property within three years from the date of the sale of the property. Alternatively, you can invest the sale income in the capital gains bonds of the National Highway Authority of India or the Rural Electrification Corporation for a period of three years. On maturity, the entire sale income will be tax free. These bonds presently offer around 5% interest. However, the interest earned on these bonds is taxable.
Q.I plan to foreclose the 10-year home loan of Rs 15 lakh I took two years ago. What is the tax implication? Is there an ideal period of maintaining a home loan to reduce tax outgo?
A.Foreclosure of home loan account per se does not have any tax implication. Interest paid on home loan is eligible for deduction up to Rs 1.5 lakh a year in case the property is self-occupied. On foreclosure of the home loan you will cease to get tax deduction on the interest paid. From the tax saving point of view, there is no ideal period for maintaining a home loan account because it is supposed to be a need-based borrowing.
Q.My employment status changed from a salaried employee to a consultant after two months in this financial year? Will this impact my tax liability and the procedure of filing incom e tax return next year?
A.Change of status during the year from a salaried employee to a consultant does not impact income tax liability or the procedure of filing the return. The only change will be in the form you will use to file your return. You will now file your return on form No. 2 and not form No. 3, which is meant for individuals who do not have income from business or profession. In case of losses in the consultancy, they can’t be adjusted against the salary income.
Q.I make a small but regular contribution of about Rs 1,000 to a charity every month. How do I avail tax benefits on such contributions? From tax efficiency point of view, is there an optimum level of annual charity?
A.50% of the contribution to an institution recognised under Section 80-G of the Income Tax Act is eligible for deduction from the income for the year. But the amount eligible for deduction cannot exceed 10% of the total income computed before deduction to charity. For claiming the benefit, one needs to submit the receipt of such a contribution withhis income tax return along with the evidence that the beneficiary institution is eligible for exemption under Section 80-G. Under special circumstances, some donations to charity are given 100% tax exemption by the government.
Q.I have not disclosed one of my bank accounts in my income tax return. There are hardly any transactions in this account and I earn only a small amount as interest from it. What are the legal or penal implications?
A.Under the law, you don’t have to disclose all your bank accounts. But interest earned from bank deposits is taxable. After the withdrawal of Section 80-L from April 1, 2005—which provided for tax exemption of up to Rs 12,000 of interest earned on bank deposits in a year—not including bank interest in the income declared would amount to concealment. You should revise your income tax return after paying tax on the interest earned from the undeclared bank account.
Q.I was in the US on a work assignment between May and September this year. I was earning in US dollars and had to open an ordinary non-resident (NRO) account. I wish to transfer this sum to my account in India.What is the tax implication?
A.The income you earned abroad will be taxable in India because your status during the year was that of a resident Indian. Anybody who has resided in India for more than 182 days in a year is categorised as a resident Indian for taxation purposes. A resident is required to pay tax on the global income, irrespective whether the money received is transferred to a rupee account in India or not. However, if any tax has been paid on such income in the US, you can take credit against the tax liability in India.
Q.My son lives in Singapore and has gifted me Rs 2 lakh. If this sum is treated as my income for the year, it would put me in the highest tax slab.What should I do to prove that this sum is a gift?
A.Gifts received from specified relatives, including sons, is exempt from income tax. Gift tax was abolished in 1998 so there is no gift tax liability. But to prove that it is a gift from your son, you need to show a bank statement of the account from which these funds were transferred to you. Also get proof of the source of income of your son.
Q.My son’s school gives me a receipt for only about 80% of the total tuition fee. Does that affect the tax benefit I enjoy on the fee?
A.Tuition fees of up to Rs 1 lakh a year paid to a university, college or school for the full-time education of a child is eligible for deduction from the income. Since you have received proof of only 80% of the fees you will be able to claim 80% deduction. The balance 20% will not be eligible for deduction.
Q.I have invested Rs 15 lakh in the senior citizen savings scheme with my wife as the nominee. Can she also invest Rs 15 lakh in her own name after she turns 60?
A.Under the senior citizen’s savings scheme, one is considered a senior citizen on turning 60. So your wife can invest Rs 15 lakh in her name. But under the Income Tax Act, a person is considered a senior citizen on the completion of 65 years at any time in the previous year.