'Will investing for family member save tax?'

Tax exemptions are available only on investments made in the tax payer’s name.

Print Edition: December 28, 2006

Q.Under the Income Tax Act, what are the tax benefits I am eligible for if I invest in the name of a  family member?

A.Tax benefits are received either as exemptions or as deductions. An exemption is the income which is ignored while computing the gross total income on which tax is calculated. Deductions are made on the tax calculated on the gross total income. Section 80C and 80CCC of the Income Tax Act provide for deductions on investments to the tune of Rs 1 lakh in insurance, PPF (Public Provident Fund), NSC (National Savings Certificate), infrastructure bonds, ELSS (Equity Linked Savings Scheme), education of children (up to two children only), repayment of housing loans, FDs (fixed deposits), and pension plans. You will get tax relief if you invest in insurance and PPF in your name or in name of your wife or children. Investments in NSC, FD, ELSS and repayment of housing loan are tax deductible only if they are made in your name, so is investment in pension plans. Tax exemptions are available only on investments made in the tax payer’s name.

Q.My brother has been allotted shares under an employee stock option scheme. If he sells these shares after holding them for more than one year, will he be liable to capital gains tax?

A.The first issue that needs to be addressed is whether the employee stock option received by your brother was taxable in his hands at the time of the allotment. It would have been taxable as a perquisite if the allotment were not in accordance with the guidelines issued by the Centre. In that case the income would have been taxable as a perquisite under the head “salaries”. If the allotment has been in accordance with the guidelines issued by the Government, it would not have been taxable as salary at the time of allotment. The taxability at the time of sale will depend on whether the shares are listed and sold through a recognised stock exchange or sold otherwise. If they are sold through a recognised stock exchange, the securities transaction tax will be levied at the time of sale. Since the shares have been held for more than 12 months, the gain will be long-term and exempt under Section 10(38). Under this section long-term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after 1 October, 2004, and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax. If the sale is not through a recognised stock exchange, then the gain will be taxable. The cost of acquisition will be taken as the price at which the shares were allotted to your brother, if no tax was paid at the time of allotment. If it was taxable at the time of allotment, the cost of acquisition will be the market price as on the date of allotment.

Before making any
monetary gifts in foreign
currencies, even to a family
member, it is advisable to
check its FEMA (Foreign
Exchange Management
Act) implications

Q.I have three school-going children, including a set of twins. Can I claim tax deduction on their tuition fee for all my children?

A.Section 80C allows deduction for tuition fees but it restricts such a claim by an individual to two children. You can, therefore, claim the deduction for two of your children. Rule 2B of the Income Tax Rules, which talks of the limit in respect of exemption under Section 10(5) on LTA, makes a specific provision that multiple births after the first child can be taken into account for the purpose of the exemption. However, there is no corresponding provision in Section 80C and, therefore, you cannot claim the benefit in respect of a third child, even though they were born subsequently as twins.

Q.What will be my tax liability if I gift my son a Kisan Vikas Patra worth Rs 1 lakh or more as gift money? Who will pay the tax when the minor becomes an adult?

A.The problem arises when you make a gift to a minor child, particularly when the minor’s income is clubbed with that of the mother or father. As the maturity period of a Kisan Vikas Patra is seven years, you should show the estimated accrued interest in your income every year. But if your son becomes a major before the date of maturity, he can show it in his income saying that he follows the cash system of accounting and has got the income for the past seven years, during this year. Since his income will be zero, therefore, income from Kisan Vikas Patra will be exempted from tax.

 Taxability of ESOP shares
depend on whether or not
the shares are listed and
sold through a recognised
stock exchange. In the
former, equity-oriented
funds are exempt from tax

Q.How do I estimate the tax on the perk value of a leased accommodation?

A.In this case 20% of the salary will be taken as perquisite if the population of that place is more than 4 lakh. And if you want to save tax, go to a smaller place that has a population of less than 4 lakh, where perquisite value will be taken as 15% of the salary. The taxpayer is supposed to pay it and your employer will add that to your salary and deduct the tax accordingly. Alternatively. the employer can also pay the tax.

Q.My children are settled in the US and I propose to gift them some money, which I earned as long-term capital gains from sale of shares. I have already paid securities transaction tax on it. My children want the amount to be given to them in dollars.What will be the tax implication on the gift?

A.There will be no tax implications when you make a gift to your children. You may note that Section 56(1) (v) seeks to bring to tax any sum of money exceeding Rs 50,000 received without consideration by an individual or HUF (Hindu Undivided Family) from any person, as such recipient’s income. This provision, however, excludes a gift received from a relative, and the term "relative" is defined also to include the children of an individual. You should check on the FEMA (Foreign Exchange Management Act, 1999) implications of making such gifts in foreign currency.

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Q.I am salaried and for the year ended March 31, 2006, I failed to file a return. Since my only source of income is salary and tax has been entirely deducted on the same by my employer, I will have neither a tax payable nor a refund due. If I were to file this return now, will there be any penalty?

A.No penalty will be levied on you. Penalty under Section 271-F can be levied only when the return is not filed up to the end of the relevant assessment year, that is, up to March 31, 2007. Also, as there is no tax payable in your case, no interest will be levied. Interest under Section 234A, which is levied for failure to furnish a return, will only be levied on the tax on income reduced by the tax deducted at source. In your case this will be nil and therefore, there will be no interest levied.

Q.I have started a partnership firm with my friend who is a namesake.When we got our PAN cards, our names got exchanged.What should I do?

A.This is a unique case, but to get the problem sorted you need to fill up form 49 A, and in the last column write the mistake you want corrected. You will get the corrected PAN card within 15-20 days.

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