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'Will pension plans give extra benefits?'

You can't claim a deduction of more than Rs 1 lakh by contributing to a pension plan.

Print Edition: March 22, 2007

Q. I am a lawyer and earn professional income from my practice. What type of accounts do I have to maintain and do they have to be certified by somebody? Do I have to produce receipts of the expenses incurred?

A. Your income will be taxed under the head income from business or profession. However, you have to maintain an account of your income and expenditure. Keep all bills and vouchers for expenses incurred by you for discharging your professional duties. These include expenditure on conveyance, petrol, fixed and mobile phone, stationery, books, periodicals, newspapers, magazines, computer and peripherals and postage. If you have an office at home, you can also include a small proportion of the power bill and rent paid in the expenses. Besides, you can claim depreciation on fixed assets like car, furniture and appliances used for your professional work. You are also eligible to claim deduction for the salary paid to peons, typists and sweepers. You don’t need to submit the receipts with your income tax returns but must keep them for the record. If your income in a financial year exceeds Rs 10 lakh your accounts will need to be audited by a chartered accountant.

TAX REBATE
Contribution to pension plan qualifies for deduction under 80CCC, the maximum deduction available is Rs 1 lakh. You can invest over Rs 1 lakh but do not expect tax rebate here
Q. Can I invest in a pension plan and get tax rebate of Rs 1 lakh?

A.
From the assessment year 2006-7, the total amount of deduction available under Sections 80C, 80CCC and 80CCD cannot exceed Rs 1 lakh. Since the contribution to pension plans qualifies for deduction under Section 80CCC, the maximum deduction available is Rs 1 lakh only. Therefore, you would not be able to claim a deduction of more than Rs 1 lakh by contributing to a pension plan. If you decide to park in more funds here you can do so, without any tax benefits.

Q. Are EMIs for two home loans eligible for tax rebate, considering both flats are in my name? My office insists that tax rebate can be claimed for only one EMI.

A.
Under the provisions of the Income Tax Act, 1961, a deduction is allowed for the return of loan taken on a self-occupied residential property. The return of principal amount of loan qualifies for deduction under Section 80C subject, however, to a maximum of Rs 1 lakh. In addition, the interest paid up to Rs 1.50 lakh on loan also qualifies for deduction under the head income from house property. This deduction is provided only for a self-occupied property and cannot be provided for two houses. As you can’t live in two houses at the same time, the benefit is available only on the property where you are living.

Q. I am a homemaker. My husband is a salaried employee and a taxpayer. Over the last three years my husband gave me Rs 2 lakh that I have invested from my demat account and have earned short-term capital gains of Rs 50,000. What are the tax implications?

A.
The tax treatment of the income earned will depend on the nature of receipt in your hands. The amount which you received from your husband can either be a loan or a gift. If you received the amount of Rs 2 lakh as a loan from your husband then the income of Rs 50,000 earned by way of capital gains will be taxed in your hands. The basic exemption limit of Rs 1.35 lakh will be applicable on the gross total income, including the capital gains. However, if you received the amount as gift from your husband, the entire amount earned will be clubbed with the income of your husband and taxed in his hands.

Q. How is the short-term capital gain tax on sale of shares, for which securities transaction tax has been paid, calculated? I have income from interest also. Is the short-term capital gain amount to be added to my other income for calculating taxable income?

A.
If you sell your shares within one year of acquiring them, any profit generated will be termed as short-term capital gains which is taxed at a flat rate of 10% provided the transaction is routed through a recognised stock exchange and securities transaction tax has been paid. Your income from other sources will be added to the short-term capital gains to arrive at your gross income. You can then avail Section 80C deduction according to your tax slab. Also, you have to pay 2% education cess on the total income tax payable.

INCOME FROM PROFESSION
Income from tuitions is taxed under the head income from business or profession. Deductions can be claimed for the expenses incurred for the business
Q. I teach at home and earn about Rs 18,000 a month. Besides this I also earn from interest, capital gains and rental income. Please clarify (i) which form is applicable, (ii) under which head the income from tuition is to be shown and (iii) do I need to submit any documents regarding income from tuition with my income tax returns?

A.
You have to file your return of income for the current year in form 2D or any other form which may be applicable on the date of filing of the return. The income from tuition will be taxed under the head income from business or profession. While arriving at the net income under this head you can also claim deduction for the expenses directly related to coaching. For this you must keep proper record of the receipts, which are not required to be submitted along with your income tax returns. But you will have to attach a summary of your income and expenses in the form of profit and loss account with your returns.

Q. I want to invest my capital gains in the Rural Electrification Corporation (REC) bond launched in January 2007. When should I invest?

A.
Investment in the REC bonds entitles one to save tax if the amount of long-term capital gain is invested in these bonds for a minimum of three years. The profit earned by an assessee on the sale or transfer of a long-term capital asset (the asset which is held by the assessee for a minimum period of three years) is termed as long-term capital gain. In order to avail this benefit, one must invest the amount within six months of the conclusion of the transaction.

Q. I am salaried employee. How will I be taxed on capital gains from selling shares within a year of buying? Please clarify.

A.
For the purpose of taxation, income of an assessee is divided into five heads: income from salary, income from house/property, profits and gains from business or profession, capital gains and income from other sources. If you sell your shares within a year of acquiring, the capital gains generated will be termed as short-term capital gain. This gain is taxed at a flat rate of 10% provided the securities transaction tax has been paid on the transaction. Your salary will be taxed under the head income from salary. If your net taxable amount under the head income from salary comes to Rs 3.6 lakh a year and during the same financial year you have earned Rs 1 lakh on the sale of shares held for less than a year, assuming you have no other income, your gross total income will be Rs 4.6 lakh. After deductions under chapter VI of the Income Tax Act (say you have paid a premium of Rs 60,000 on life insurance policies) Rs 3 lakh (Rs 3,60,000-Rs 60,000) will be taxed at the normal rates of income tax. The short-term capital gain of Rs 1 lakh will be taxed at 10%. On the total tax, 2% education cess is also payable.

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