Who is taxed for transfer of assets?

As per Section 64(1), if you transfer an asset to a spouse, the income from it is included in the hands of the person making the transfer.

Print Edition: January 11, 2007

Q. I live with my retired parents in their house. I get house rent allowance from my employer. If I pay rent to my parents, can I claim tax exemption? How much of the rent paid is eligible for exemption?

A. It is perfectly legal to pay rent to your parents and claim tax exemption for the house rent allowance. You will need to submit rent receipts to your employer to claim the exemption. However, the rent that you pay to your parents then becomes their income and is taxable in their hands. Since your parents are retired and have no other source of income, the arrangement will not put any tax burden on them. However, if the rent received is above the tax free limit, they will be liable to pay tax.

The exemption on house rent allowance is subject to certain limits. There are three options for calculating the tax exemption. The first is the actual house rent allowance received from the employer. The second is actual house rent paid minus 10% of the basic salary. The third option is 50% of the basic salary. For nonmetros, it is 40% of the basic salary. The least of the three options is the house rent allowance that is eligible for exemption under Section 10(13A) of the Income Tax Act.

Q. I want to transfer some shares to my wife’s demat account as a gift. I bought these shares two years ago for Rs 5,000 and they are now valued at Rs 7,500. If my wife was to sell these shares for Rs 8,000, will the gain be treated as long- or short-term? Will the income derived from the sale be assessed as my income or hers? If she were to use the sale consideration of Rs 8,000 to purchase more shares, will the gain on the sale of these shares be taxed in my hands or hers?

A. The gain from the sale of shares gifted will be assessable in your hands. As per Section 64(1), if you transfer an asset to a spouse, the income from it is included in the hands of the person making the transfer. The gain would be treated as long-term since your wife and you held the shares for more than 12 months. A gift is not regarded as a transfer by virtue of Section 47.

Also, under Section 2(42A), when the asset transferred is a gift, the period of holding of the asset by the previous owner will also be taken into account in determining whether the asset is shortor long-term. If your wife uses Rs 8,000 to acquire more shares, the proportionate part of the income, attributed to the original price of the gifted shares (Rs 5,000), from the sale of the new shares will be included in your hands. The income attributed to the tune of Rs 3,000 will be assessable in the hands of your wife.

Q. I bought a flat in November 2005 with a housing loan. I propose to repay this loan by August 2007. Will I be eligible for tax benefits on the interest and principal repayment?

A. Yes, the principal and the interest payment will qualify for deduction. Interest will qualify for deduction under Section 24. The maximum amount that you can claim here, if the house is self-occupied, is Rs 1.5 lakh. If, however, the property is let out, there is no ceiling limit on the interest that can be claimed as a deduction. The principal repayment will qualify for deduction under Section 80C, the limit being Rs 1 lakh.

Q. My father and his brother have jointly inherited an agricultural plot from my grandfather. Will the income from sale of the plot be taxable as capital gains? Can the proceeds attributable to my father be treated as belonging to the Hindu Undivided Family (HUF) comprising my father, mother and I?

A. In your case, the agricultural land does not meet the criteria defining a capital asset so no capital gains tax will be payable. If the property was held by your grandfather in his individual capacity, it would devolve on his legal heirs only in their individual capacity. If it was held by your grandfather as HUF property, it would remain that of the HUF. This applies if no will was left by your grandfather. If a will was left stating that the property would belong to your father and his brother in their capacity as karta of HUFs for the benefit of the HUF, it would be treated as HUF property even though it was held by your grandfather in his individual capacity. If the property devolved on your father in his individual capacity, the proceeds would only belong to him and cannot be treated as that of the HUF.

Q. I bought a plot of land in 1997-98 on which I constructed a house in May 2004. I propose to sell the property now. Will the capital gains be treated as long- or short-term?

A. The income from the sale of the property will be treated as long-term capital gains since the land has been held by you for over 36 months, while that from the sale of the building will be treated as short term. In your case, the land is sold along with a super structure and they can be treated as two different assets.

Q. What will be the tax liability if I sell shares that I own jointly? Is the gain to be offered equally in the hands of the two holders or will the first named holder alone be taxed?

A. The tax liability will arise in the hands of the real owner of the shares. But if the joint owners own the shares equally, the gain will be taxed equally.

Q. I am a senior citizen with no taxable income. I still file my returns. To discontinue, should I inform the assessing officer?

A. You do not need to continue filing returns since you have indicated that you do not have any taxable income. Also, there is no need for you to intimate the assessing officer. In the event of there being any query from the Income Tax Department, you can always explain your status.

Q. I have a three-year-old daughter who is in play school and I pay Rs 7,200 per annum as her school fees. Will I be able to claim deduction under Section 80C in this respect?

A. No. Under Section 80C, tuition fees (excluding development fees, donations or other payments of similar nature) paid for full-time education of any two children of an individual will qualify for deduction. This payment of tuition fee should be made to a university, college, school or other educational institutions within India. In your case the fee paid would not qualify for the deduction because this cannot in the strict sense be called a tuition fee nor can it be called a school, regardless of the nomenclature used in the receipt given by the institution.

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