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When can I claim a deduction under Section 80C?

You can claim a deduction under Section 80C in your income-tax return for the life insurance premium paid on a policy taken on your own life, the life of your spouse or child.

Print Edition: September 18, 2008

Last year, I earned a huge profit from trading in shares. Now, my chartered accountant tells me that the profit should be classified as business income because of the large number of transactions. What should I do?

—Rajesh Jain

There is no clear answer to your query. Even the Central Board of Direct Taxes is not very clear on this issue. It will probably depend on the income-tax officer’s view on the matter. Since you traded frequently, it is likely that the assessing officer may classify you as a trader and tax the income as business income. The exact classification is possible only after finding out the number and volume of transactions. Maintain all contract notes and other documents in case the proof is demanded by the income-tax office.

I file tax returns for my Hindu undivided family (HUF) and for myself. Can I take life insurance policies for myself and my children and claim a deduction under Section 80C in the HUF return?

—Sriram Khanna

You can claim a deduction under Section 80C in your income-tax return for the life insurance premium paid on a policy taken on your own life, the life of your spouse or child. The child could be dependent on you or even be an independent earning member.

In case of a Hindu undivided family, an insurance policy can be taken on the life of any member of the family, but the premium should be paid only from the HUF’s income. However, if you have any married daughters, they will not be considered as members of the HUF. So you will not be able to claim a deduction on the premium paid on their policies in the HUF’s return, but you can claim it in your individual income-tax return. The premium paid for the purpose of claiming deduction should not exceed 20% of the sum assured by the insurance policy.

My wife wants to open a Public Provident Fund (PPF) account in her name and another in the name of our minor daughter. I do not have a PPF account.Who will be eligible for the deduction for the money deposited in our daughter’s PPF account—my wife or I?

—Devinder Yadav

One can open a PPF account in one’s own name or in the name of a minor as a guardian. However, you can have only one PPF account in your name. If you have two PPF accounts, one will be closed and you will be refunded only the principal, not the interest. Also, two adults cannot open a joint account, though an account-holder is free to appoint nominees.

Since your wife is planning to open an account in her name, your daughter’s account will have to be under your guardianship. Therefore, you will be eligible to claim a deduction for contributions to that account. Your wife can claim a deduction for the contribution she makes to her own account. A PPF account can be opened even if you have an Employees’ Provident Fund account with your employer.

I paid Rs 68,000 as annual school fee of my son and claimed it as a deduction under Section 80C. However, my employer subtracted Rs 25,000 from this amount, saying that development fee is not allowed as a deduction. Is this true?

—Revati Raman

Yes, development fee is not allowed as a deduction. Only tuition fee paid for the full-time education of your own children (up to a maximum of two children) can be claimed as a deduction under Section 80C. Tuition fee does not include development fee, donations or other such payments. Also, this deduction is applicable only in case of recognised educational institutions in India.

I am planning to sell my house. How can I get tax relief on the capital gain I earn in the process?

—Sujoy Ghosh

If you sell the property after three years of purchasing it, it will be considered a longterm capital gain and taxed at 20% after indexation of cost. You can claim tax relief on long-term capital gain under Section 54 of the Income Tax Act by investing the gain or the total amount of sale proceeds in capital gain bonds from the National Highway Authority of India or the Rural Electrification Corporation.

Tax can also be saved if the sale proceeds are used to buy a new house within a year of the date of transfer of the property or within two years after that. Similarly, if you use the money to construct a new residential property within three years of the date of transfer, the capital gain will be exempt from tax.

I have resigned from my job and shall receive Rs 1.5 lakh in provident fund (PF) dues. Is this amount taxable?

—Shivraj Mule

If you are a member of a recognised PF, the withdrawal of the gross amount from the account on voluntary resignation after a continuous service of more than five years will not be taxable in your hands. Also, if you are planning to pick up another job, you can transfer the balance in your PF account to the account with your new employer. If you get the balance transferred to the new PF account, there is no tax liability even if the service period with the previous employer was less than five years.

My wife has started trading in shares after taking a loan from me, which she is paying me back. How will the income from trading be treated?

—Ritesh Arora

Since you have given her a loan and not gifted the money, the trading gains will be taxed in her hands. You should also charge a certain minimum interest (say, at savings bank rate) on the loan to avoid the clubbing provisions under Section 64 of the Income Tax Act. This interest will be taxable in your hands, but it will be a conclusive proof that the money was lent and not gifted to your wife.

My bank has asked me to deposit Form 15G if I do not want tax deducted at source (TDS) on my fixed deposit.Why is this form used?

—Raj Kumar Makkar

Form 15G is used to avoid tax deduction at source by people whose income does not fall in the taxable limit. If your annual income is below this limit (Rs 1.5 lakh for men, Rs 1.8 lakh for women and Rs 2.25 lakh for senior citizens), you can fill up Form 15G to declare the same, so that no tax is deducted at source, whether it is from interest income from fixed deposits or tax-saving bonds. The declaration in Form 15G has to be submitted on a yearly basis, generally at the beginning of the year.

Last year, I earned a huge profit from trading in shares. Now, my chartered accountant tells me that the profit should be classified as business income because of the large number of transactions. What should I do?

—Rajesh Jain

There is no clear answer to your query. Even the Central Board of Direct Taxes is not very clear on this issue. It will probably depend on the income-tax officer’s view on the matter. Since you traded frequently, it is likely that the assessing officer may classify you as a trader and tax the income as business income. The exact classification is possible only after finding out the number and volume of transactions. Maintain all contract notes and other documents in case the proof is demanded by the income-tax office.

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