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Will gifting money to son help cut down on tax?

The I-T Act does not provide for deduction on gifts made to relatives. Therefore, the amount will be taxable.

Print Edition: October 18, 2007

I am the sole proprietor of a shop. My business has increased and I wish to make my wife a partner. She does not file income tax return. If I give her a share of the profits, how will it affect my and the company’s tax liabilities?

R N Lala

To make your wife a partner, you will have to draw up a partnership deed on a stamp paper stating the nature of the business and the capital brought in (if any) by all the partners. The interest paid on the capital provided by partners (in this case your wife), the profit and loss sharing ratio and the salaries of the partners have to be specified in the deed. The maximum rate of interest allowed on capital (for which you can claim income tax deduction) is 12% per annum. The salary paid to working partners is also allowed as a deduction.

Your shop will be assessed separately in its own capacity as a firm. The tax rate on business profit of the firm is 30% plus 10% surcharge and 3% education cess. Your wife’s share of profit is exempt since the firm has already paid tax on business profits. Salary and interest earned on capital from the firm will be taxed in your individual return. Your wife will have to file her individual return as a partner.

In August, my company transferred me to Bangalore where I stayed in a hotel till I got accommodation. My company paid for my 20-day stay. The HR department now tells me that the hotel bill amount is taxable and will be included in my salary. Are they correct?

Raghav

When an employee is transferred and he is provided accommodation in a hotel for a period not exceeding 15 days, the value of such hotel accommodation is not chargeable to tax. As your stay in a hotel was more than 15 days it is taxable as a perquisite. Your income tax liability will be 24% of salary paid for the period during which such accommodation was provided or actual hotel charges, whichever is lower.

I have just started an advertising company. I have been told that cash payments exceeding Rs 20,000 are disallowed as expense for purpose of income tax deduction. Is it true? Can I make payments through bearer cheques?

Ramesh R

Yes, the Income Tax Act has restricted the amount of cash payments that can be claimed as business expense. If payment of any expense for an amount exceeding Rs 20,000 is made by ways other than an account payee cheque or a draft drawn on a bank, then the assessing officer is empowered to disallow the expenditure. Payment by bearer cheque is treated as payment in cash. The object of this provision is to counter evasion of tax. When payments are made through account payee cheques, the identity of the payee and the reasonableness of the payment can be established, unlike in cash transactions where the payee’s identity cannot be traced and confirmed.

My son is 17 years old and has become interested in the share market. I started trading in his name from this year. If I gift him some money every year so that he can trade, will that money be exempt from tax in my hands? Inwhose hands will the profits be taxable when he turns 18?

Arjun Singh

Income of a minor child is clubbed with the income of the parent. So the profits made in share trading in your son’s name will be clubbed with your income. After your son attains the age of 18, income earned by him will be taxable in his hands. The Income Tax Act does not provide for any deduction on account of gifts made by an individual to his relatives.

Therefore, the amount gifted by you to your son will not change your taxable income. However, this amount will not be taxable in your son’s hands either. He will only be taxable for the profits made by him by investing that amount in shares. We advise that you draw up a gift deed for the amount you gift to your son.

My health insurance premium is reimbursed by my employer. Is it taxable as a perk? Also, my mother’s hospitalisation expenses were reimbursed by my company. Is this amount taxable?

Rita Raman

Reimbursement of health insurance premium is exempt in your hands and not taxable as a perk. According to the Income Tax Act, any amount of health insurance premium reimbursed by the employer to keep in force an insurance policy on the employee’s health, including his dependents is exempt from tax. The amount paid by your company for the medical treatment of your mother in a private hospital is exempt up to Rs 15,000.

My monthly salary break-up is: basic Rs 12,000, DA Rs 2,500 and HRA Rs 5,500. I stay in Faridabad and pay a monthly rental of Rs 6,000. Is my entire HRA exempt from tax?

Rohan Arya

The Income Tax Act has laid down the criteria for calculating HRA exemption. Salary for the purpose of calculating HRA exemption includes only basic salary and dearness allowance plus commission on sales if given on fixed percentage on the company’s turnover. The least of the following shall be allowed as a deduction in your case: • 40% of salary in case of non-metro locations: 40% of Rs 12,000+Rs 2,500=Rs 5,800 • Actual HRA received: Rs 5,500 • Excess of rent paid over 10% of salary: Rs 6,000-Rs 1,450=Rs 4,450. In your case, Rs 4,450, which is the least of the above will be free from income tax.

I plan to rent out my house along with the furniture for one year. How will the entire rent be taxed? Will I get the standard deduction of 30% from the total rent?

Ashok Ram

If a furnished house property is let out, the annual rent will be estimated exclusive of the rent of the furniture. The total rent shall be divided into rent from house and rent from furniture. Rent from house shall be shown under the head of “income from house property” and the standard deduction of 30% for repairs, etc shall be allowed from this amount. The rent from furniture will be taxed separately under the head “Income from other sources” and will not be eligible for the standard deduction of 30%.

Every month, I donate Rs 1,000 to a charitable organisation. What is the amount of exemption that I can claim?

Viren Alva

According to the Income Tax Act, if you donate up to 10% of your gross total income to an approved charitable institution, it will qualify for deduction under Section 80G. Therefore, subject to this limit, the entire amount of Rs 12,000 donated by you should qualify for deduction.

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