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'What tax benefits do donations provide?'

We take a look at all your tax-related queries and try to offer the best possible solution.

Print Edition: May 31, 2007

Please explain long-term capital gains on the sale of stocks after a year of buying. Should I mention the gain while filing my income tax returns? Please explain with an example.

Long-term capital gains arise on the sale or transfer of a capital asset held for a long term. The definition of long term depends on the nature of the capital asset. In case of immovable property such as land or building, the prescribed long-term holding is three years whereas for shares or stocks, the period is one year.

When you sell a listed share after holding it for one year or more, and the transaction is subject to the payment of securities transaction tax, but the long-term capital gain earned is free from income tax. However, you are required to mention the amount of gain in your income tax return under the head “capital gains” and claim exemption.

For example, if you bought 100 shares of a listed company on 1 January 2006 at the rate of Rs 50 per share for Rs 50,000 and sold the entire lot on 15 January 2007 at the rate of Rs 125 per share, your total income from the sale was Rs 1,25,000 and you made a gain of Rs 75,000. Since you held the shares for more than a year, the capital gain of Rs 75,000 will be exempt from income tax. You will, however, have to show an income of Rs 75,000 from the long-term capital gain and claim a deduction of the above amount as income exempt from tax.

I switched over to a new job in November 2006. My previous employer did not deduct any tax. In my new company, with the five months salary that I have received, I do not fall under the tax bracket. But if I add both, my salary is taxable. Can I ask for Form 16 from both the companies and file my returns independently?

Ideally you should have obtained the salary certificate from your previous employer and handed it over to your current employer for the computation of income tax and deduction of tax at source. You can now obtain the two salary certificates, compute your tax liability, deposit the self-assessment tax and file your return of income.

What documents do I need to claim reduction of HRA from net income?

When you get a house rent allowance as part of your salary, employers ask you to submit the proof of actual payment of rent. The payment can be substantiated by producing rent receipts that you will obtain from your landlord. Under Section 10(13A) of the Income Tax Act, 1961, the employer passes the benefit of HRA to the employee and deducts the tax at source accordingly. In case the credit for HRA deduction is given by the employer, the employee does not have to submit the proof of payment of rent to the income tax office along with the return of income. Otherwise the rent receipts will have to be enclosed with the return of income.

What is the minimum annual interest on bank fixed deposits which will call for tax deduction at source for the financial year 2007-8?

If the interest income from deposits in a bank account exceed Rs 5,000 the bank will deduct income tax at source. In case an individual holds more than one account in the same bank, tax will be deducted in case the total interest payment exceeds Rs 5,000 in a financial year. However, if the total income of the depositor including the bank interest does not exceed the basic tax exemption limit, the depositor can submit Form 15H to the bank, based on which the bank will not deduct income tax at source.

My portfolio management service provider has opened a demat account in my name and invests my money in derivatives. He is giving me 40% returns every month. Out of this profit I pay him 40% and retain 60%. Can I reduce the 40% share paid to him as expense in my income tax statement? If yes, under what head should I show this expenditure?

If the purchase and sale of shares and securities is your business, your income from derivatives will be considered as income under the head “profits and gains from business or profession”. In that case, the amount paid to the portfolio manager under a contract will be allowed as expenditure while computing your business income. However, if your foray in the stock market is that of an investor, you will not get the benefit of deduction.

What is the tax benefit on donations to charitable organisations or causes? How much can I give away and what is the tax liability that I will carry by donating?

You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act, 1961. The rate of deduction is either 50% or 100% depending on the fund you chose. There is no restriction on the amount of charity you give away. However, only donations of up to 10% of your gross total income qualify for deduction. If you contribute to a charity or cause that is entitled to a 50% deduction from the gross total income, the remaining 50% will be taxed in your hands as per the applicable rate.

Recently I moved into the tax payers list. My annual salary is Rs 2.30 lakh per annum. My salary break up is— Basic: Rs 88,800, HRA: Rs 53280, Conveyance: Rs 44,400, Provident Fund: Rs 10,656, LTA: Rs 10,000, Medical: Rs 7,400, Bonus: Rs 15,464. I would like to know how much tax I have to pay and how much I can save in tax saving instruments.

Your tax liability will depend on how much rent you actually pay, if you have really availed the leave travel concession, how much money you have spent on medical expenses for self and family, etc. You can claim a deduction of Rs 800 per month on account of conveyance allowance. As an individual assessee, you can save up to Rs 1.1 lakh in tax saving instruments such as public provident fund, equity linked savings schemes etc. If you live in a non-metro city and pay a rent of Rs 3,000 per month and have spent the entire amount of medical allowance, your taxable salary will be around Rs 1,67,000. For the financial year 2007-8, if you save approximately Rs 60,000 a year in addition to the tax saving schemes, you will not be required to pay any taxes.

Is the amount received on the maturity of a Ulip plan tax free? What happens if I make a partial or full withdrawal after three years?

The amount received on the maturity of a unitlinked insurance plan (Ulip) is free of income tax. However, if you withdraw any sum before the completion of five years of the Ulip scheme, the income tax benefit already claimed will have to be paid back.

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