What are the different heads of income?

There are five heads of income—salary, income from house/property, profit from business or profession, capital gains and income from other sources.

     Print Edition: December 14, 2006

Q. My wife invests in shares through her demat account using my money. If her total income (capital gains from share trading) is less than Rs 50,000 a year, does she have to pay income tax and file a return?

A. Your wife is using your money to invest, which means technically the capital gains arising out of the investments made using your money are included in your income and cannot be shown as her individual income. In case these investments have been made by your wife out of an allowance you give her (an allowance given by a husband for his wife’s personal expenses and other household expenses) or out of household savings, the income from such investments will not be included in your income. Assuming that the income from the investments are not included in your annual income and are attributed solely to your wife, then she is liable to pay tax only when the income exceeds Rs 1,35,000 in a year. In case your wife’s income exceeds this limit, she can still save on tax by investing in financial instruments specified under section 80C of the Income Tax Act.

Q. I have been giving home tuitions to students and doing accounting work for enterprises. Under what head will my income from tuition fee be classified? What are the available deductions on these heads of income?

A. Your income from tuition fees will be taxed under the head “income from business or profession”, against which you can claim all legitimate expenses incurred for the purpose of carrying on your profession. These expenses would include rent, electricity charges, telephone expenses, assistant’s salary, vehicle expenses (including depreciation) and stationery. I suggest you maintain a proper book of accounts as well as bank accounts in support of your income and expenses so that the Income Tax Department can verify them easily.

Q. What is the tax status of single-premium insurance policies? I have taken a Rs 75,000 single-premium policy from LIC.

A. The amount eligible for deduction would be only up to a maximum of 20% of the policy amount. In other words, premium in excess of 20% of the policy amount will fall by the wayside and will not make the grade under Section 80C. The rationale for such a move is to discourage impetus to policies that are more in the nature of fixed-return schemes. As you have not mentioned the sum assured against your policy, I cannot comment on how much you will qualify under the exemption.

Q. In the current financial year, I have received a sum of Rs 25,550 from United India Insurance Co against the accident
claim on my car. Where can I show it in my income tax return?

A. Any money received from an insurance company as settlement of your claim is not treated as your income. As a principle, no one can profit out of a contract of insurance. Therefore, since the amount paid by the insurance company is of the nature of an indemnification of loss, it is not treated as income of the insured. You don’t have to include this receipt as your income in your income tax return.

Q. I started working in September 2006 with a salary of Rs 2,10,000 per annum. Do I have to file a return this year?

A. Your gross income for seven months of employment would be approximately Rs 1,22,500. As the income is in excess of the stipulated base limit of Rs 1,00,000, the answer is yes, you will need to file your tax returns. In case of working women the base limit is fixed at Rs 1,35,000.

Q. I invested Rs 30,000 in National Savings Certificate (NSCs) in 2000. It matured in March 2006. How much tax do I have to pay on the interest gained? The total maturity value is Rs 57,100.

A. There are five heads of income—salary, income from house/property, profit from business or profession, capital gains and income from other sources. Interest on NSC is taxable under the head “income from other sources”. Till the financial year 2004-5, an individual could avail of a deduction on interest earned from NSCs under Section 80L of the Income Tax Act. Deduction limit was Rs 12,000 of interest-income received/accrued to him during the financial year. This deduction has been done away with from financial year 2005-6. Now, the entire interest-income is taxable at the slab rate that is applicable to the individual. Ideally, one should declare accrued interest on NSCs on a yearly basis. So over a period of six years, you should have declared the interest income for each year. In such a case, it does not amount to a huge sum. But in your case, if you have never declared the interest accrued on a yearly basis, then the entire interest (difference between the amount deposited and the maturity value) would be taxable now on receipt at your current applicable tax rate.

Q. I am staying with my brother in a flat, which is owned by him, in a society. Now he plans to give it to me as a gift.What are the possible effects of society transfer fee, stamp duty and income tax while signing the agreement?

A. You will have to prepare and execute a gift deed. As the gift is from a relative, the stamp duty will be levied at a concession. The gift deed will have to be registered under the provisions of the Registration Act, 1908, as an immovable property that can be transferred only by a duly registered deed. You will also have to fill in the requisite society transfer forms as per the applicable by laws of your society. There will not be any society transfer premium as it is a transfer to a member of the family. Also there will not be any capital gains by your brother as there is no consideration. Even provisions of newly inserted Section 56(2) (v) taxing gifts will not be applicable to such a gift.

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