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  Tax Planning

 
home > Tax Planning > FAQs
logo   FREQUENTLY ASKED QUESTIONS IN PERSONAL TAXATION
   
1
What is the tax treatment in respect to mutual fund investments in the current budget ?
 
The tax treatment of mutual funds:
  • Long term capital gains in the case of equity oriented mutual funds will be exempt from tax.
  • Short term capital gains will be taxed at 10% in the case of equity mutual funds
  • Mutual funds other than equity funds will be taxed at the earlier rates
  • Redemption of equity oriented funds will attract a securities transaction tax at 0.2%. (a hike from the earlier rate of 0.15%)
  • The dividends from equity funds continue to enjoy the taxfree status in the hands of the unit holder.
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2
In the current budget standard deduction and rebate under section 88 have been removed. Isn't this detrimental to the interests of the middle class?
 
The budget has been favourable for the middle class. The removal of standard deduction and section 88 has been off-set by an increase in exemption limit. For an income level of Rs.2,40,000 the tax (as per the earlier level) after considering standard deduction is Rs.37,740. However for the same income level for an income of Rs.2,40,000 the tax liability is Rs.23,460 (even after the removal of the standard deduction) due to enhanced exemption limit. The same principle will be applicable even in case section 88 is removed.
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3
Can I claim interest on a gratuity as a deduction under section 80L of the income tax act?
 
Interest income can be claimed as an exemption under section 80L. However, there are certain items which qualify for exemption as per the provisions under income tax law. Some of the examples are:
  • Securities of the central government or a state government
  • National savings certificates
  • Debentures and bonds issued by a co-operative society
  • Deposits with a bank or a co-operative bank etc
However, from assessment year 2006-07, it has been proposed to abolish section 80L (deduction of interest income up to Rs.12,000 and Rs.3,000 for government securities) of the income tax act.
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4
The 10% tax on short term capital gains is applicable from which date?
 
The 10% of the short term capital gains will be applicable form 1st October 2004. hence, in case you have short term capital gains then you can compute tax at 10%. In this context it should be noted that long term capital gains will be exempt from tax. This is the case on the sale of equity shares listed on a recognised stock exchange.
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5
I am a 27 year old working woman. What are the tax rates for me in this budget?
 
In this budget the finance minister has introduced gender budgeting. Hence the basic exemption limit for a woman assessee less than 65 years is Rs.1,35,000 as against Rs.1,00,000 for their male counterparts. However, the special rebate for woman assessee under section 88B up to Rs.5,000 has been abolished, along with the removal of standard deduction u/s 16. However, the increase in the basic exemption limit has off-set the removal of section 88B, section 88 and section 16.
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6
I want to know more about Public provident fund as a tax saving scheme. Please explain the features of the schemes ?
 
PPF are time tested investment avenues. The main features of public provident fund are (PPF)
  • Only one account can be opened at a Post Office or at a Nationalized Bank.
  • Not more than twelve deposits can be made in a financial year.
  • Minimum deposits in a year is Rs.500 and maximum is Rs.70,000/-.
  • Loan is admissible from the third financial year. Loan amount is limited to 25% of the balance is available at the end of the preceding second financial year.
  • Fresh loan is not allowed when previous loan or interest thereof is outstanding.
  • Interest is charged at the rate of 1% if prepaid within 36 months and at 6% on the outstanding loan after 36 months.
  • Withdrawal is permissible from seventh financial year. Only one withdrawal is allowed in a financial year.
  • Amount of withdrawal is limited to 50% of balance available at the end of the fourth preceding year or previous year; which ever is less.
  • Withdrawal is not allowed if the account is discontinued.
  • A subscriber can close the account after completion 15 completed financial year. The account can also be continued either with or without deposit but for a further block of 5 years.
  • Investment in PPF can be claimed as a deduction u/s 80C of the IT act.
  • Deposits completely exempted from wealth tax.
  • Interest is completely tax free
However, with effect from assessment year 06-07 it is proposed to abolish section 80L and the tax benefits associated with PPF may also be withdrawn.
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7
Will the interest income from public provident fund be taxed?
 
The interest on PPF is exempt from tax. But this rule may be changed. However, as of now the interest income from PPF stands exempt under section 10(10D). But since section 80L has been abolished, all interest income will be taxed in the hands of the recipient. The earlier deduction that was available under section 80L now stands abolished.
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8
I am a male assessee. What is the basic exemption limit for me? What are the various possible avenues where I can claim a deduction?
 
For salaried persons under the current budget income up to Rs.1,00,000 will be exempt from tax. However, standard deduction under section 16 has been abolished. For the assessment year 2006-07, you can claim a composite deduction under section 80C up to a maximum of Rs.1,00,000. This will include the following avenues:
  • Payment of insurance premium
  • Contribution towards national savings certificate and public provident fund
  • Contribution towards the tax saving scheme of mutual funds i.e. ELSS
  • Principal repayment of a housing loan
  • School fees (tution fees) for children
  • Contribution towards a pension plan
  • Contribution towards infrastructure bonds
You can also think of investing in a house property by taking a home loan. The interest on the housing loan is eligible for a deduction under section 24 up to Rs.1,50,000.

You can also consider taking up a mediclaim policy to get the benefit of deduction under section 80D up to Rs.10,000.

You can also consider making donations to approved schemes to get a deduction under section 80G. Examples of approved schemes are Prime Minister's Relief Fund, Chief Minister's relief fund etc.
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9
I purchased a new flat in 1987 for Rs73000. I sold the flat in July 2005 for Rs.6,75,000 What is the tax treatment? Also suggest the possible way to avoid payment of tax by way of investment.
 
You will have to pay long term capital gains tax at 20% without indexation or 10% with indexation on the difference between the cost of the flat and the sale consideration of the flat. According to section 54, if the gain on the sale of the earlier house property is invested in the purchase or construction of another house property then the gain will be exempt to the extent amount so invested. In case the investment is not made, the amount may be deposited in the specified capital gains account scheme to get the exemption.
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10
I will be in receipt of gratuity. What is the tax treatment of gratuity? Is ELSS a wise option to save on my taxes?
 
Gratuity received will be taxed as a part of salary. It will also include an education cess of 2%. The above tax liability can be reduced by availing various investment options like insurance schemes, NSC, PPF, infrastructure bonds, tax saving funds of mutual funds which are known as ELSS schemes. ELSS are a good bet to get income tax benefit along with market linked returns. The said tax benefit can be claimed under section 80C of the income tax act up to a maximum of Rs.1,00,000. In this context it is necessary to note that ELSS and infrastructure bonds have a lock in period of 3 years. Some of the top performing ELSS are Magnum Taxgain, Sundaram Taxsaver, and HDFC Taxsaver.
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11
I am confused about the tax rates applicable for senior citizens. Please clarify.
 
The finance minister has introduced differential slab rates for senior citizens in this budget. This means that different exemption limits are applicable for senior citizens and other assessees. For senior citizens the basic exemption limit has been enhanced to Rs.1,85,000. In this regard, it should also be noted that the special rebate for senior citizens under section 88 has now been abolished.
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12
Kindly guide me on the various items which are eligible for a deduction under section 80C?
 
The total amount that has been set aside for tax saving purposes is Rs.1,00,000 which is a deduction under section 80C. This includes: (a partial list)
  • Premium payable on insurance schemes (not including pension plans)
  • NSC
  • PPF - The maximum amount is restricted to Rs.70,000 as per the regulations of the PF Act.
  • ELSS (these are tax saving mutual funds schemes) and infrastructure bonds which have a lock in of 3 years
  • Deduction of the principle amount of housing loan up to Rs.1,00,000.
  • Deduction of tuition fees for the entire Rs.1,00,000.
  • The entire amount under section 80C can be invested in infrastructure bonds. Here, the fact that such bonds have a lock in period of 3 years needs to be noted.
Contribution towards mediclaim policy is not eligible for a deduction under section 80C. It is covered under a different section i.e. section 80D up to a maximum of Rs.10,000.

It should be noted is that the limit under section 80CCC comes within the purview of section 80C.
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13
My husband supported his parents financially to meet even the day today expenses. Is there any section under which he can claim deduction of medical expenses in respect of his mother, who is suffering from cancer?
 
Yes. Medical expenditure incurred for the medical treatment can be claimed under section 80DDB if the following conditions are satisfied.
  • The taxpayer is residing in India.
  • The taxpayer has paid the actual medical expenditure
  • The expenditure has been incurred for the treatment of his parents, husband or wife or children or brothers and sisters.
If the above conditions are satisfied then the amount of deduction will be Rs.40,000 or the actual amount incurred whichever is lower. In case the expenditure is incurred for a senior citizen, then the amount of expenditure will be Rs.60,000 or the actual amount incurred whichever is lower.
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14
What is the difference between infrastructure bonds and capital gains saving bonds? Kindly enlighten me on the tax implications of the same.
 
Both infrastructure bonds and tax savings bonds are eligible for tax benefits. Infrastructure bonds are eligible for a deduction under section 80C of the income tax act up to Rs.1,00,000. On the other hand, a capital gains saving bonds is used to save the capital gains under section 54EC of the Income tax Act. Infrastructure bonds are issued by financial institutions like ICICI and IDBI. However, section 54EC capital gains savings bonds are issued by Rural Electrification Corporation, (REC) and NABARD. In case the amount of capital gain is invested in such 54EC bonds, then the amount of capital gains to the extent of investment will be exempt from tax. As per the current income tax rules, the entire amount of Rs.1,00,000 can be invested in infrastructure bonds to get the benefit under section 80C.
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15
Infosys Technologies sponsored a secondary ADR program in May 2005,where in Indian resident share holders were given an opportunity to sell a part of their shares in USA. The company (Infosys) sold the shares on behalf of its share holders and remitted the sale proceedings to the Indian resident share holders bank a/c. in Indian rupees in June 05. Please let me know the long term/short term capital gains tax treatment for the above for assessment year 2006-07. Here, the investor is a resident Indian national staying in India and has received the sale proceedings in Indian rupees and the sale is not through Indian stock exchanges but directly by the company to US investors.
 
As per the new provisions of the Finance Bill, capital gains on the sale of any security that is listed on a recognised stock exchange will be exempt from tax. Short term capital gains will be taxed at 10%. On the sale of all other capital assets, the earlier rates of LTCG and STCG will be applicable. In other words LTCG will be taxed at 20% or 10% with indexation while STCG will be taxed at the maximum marginal rates. In the given case, the company has fully arranged the sale of the shares and the sale is not taking place through a recognised stock exchange in India. Hence, the tax rates will be 20% or 10% (with or without indexation) for LTCGT and maximum marginal rate for STCG.
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16
Kindly explain me detail about short term capital gains tax. Is there any rebate under the income tax law?
 
Any short term capital gains will be taxed at a concessional rate of 10% (if it is gain earned on the sale and purchase of securities) However on all other capital assets short term capital gains will be taxed at the maximum marginal rates. Under the current budget, all forms of rebate have been abolished. Earlier there was rebate under section 88, 88B, 88C. Such rebates have been abolished to simplify the income tax structure.
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17
What are the tax implications of creating a HUF?
 
Creating a HUF file is a good option for tax planning. All the investments which is made by the HUF will be eligible for a separate deduction in the hands of the HUF. For instance in case a contribution is made in ELSS from the funds of HUF, then the deduction under section 80C up to Rs.1,00,000 will be allowable in the hands of the ELSS. The same is the case with insurance premiums. It is possible to pay the insurance premiums from the HUF., but the deduction will then be available in the hands of the HUF and not in the hands of the individual. However, an important point that should be noted is that PPFs are investment avenues only in the hands of individuals. HUFs are not eligible for investing in HUF. Hence any investment that you may make in the PPF account should be made from your individual income and not from the income of the HUF.
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18
What is the significance of section 80C in the overall context of tax planning?
 
Section 80C is a new section which has been inserted in the current finance act, which provides a blanket deduction up to Rs.1,00,000. Some of the items which come under section 80C are:
  • Payment of insurance premium
  • Contribution towards ELSS
  • Contribution towards NSC and PPF
  • Payment towards infrastructure bonds
  • Tuition fees payable for school children
  • Principal repayment of home loans
In case if one or more of the above items are applicable to you, then you will be entitled to a deduction under section 80C up to Rs.1,00,000.
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19
What are the tax benefits associated with home loans?
 
Home loans often carry attractive tax benefits. The interest payable on a housing loan is eligible for a deduction up to Rs.1,50,000 as per the provisions of section 24. However, there are certain conditions that need to be fulfilled in this regard. The conditions are:
  • In case the money is borrowed on or after 1-4-1999 for the purchase or construction of a house property, the amount eligible for a deduction is Rs.1,50,000.
  • If the amount that is borrowed is to be used for repairs and maintenance then the amount eligible for deduction is Rs.30,000.
  • In case the amount is borrowed before 1-04-99 then the amount allowed as a deduction is Rs.30,000 irrespective of the purpose for which the funds are borrowed.
In addition to a deduction under section 24, the repayment of the housing loan is also eligible for a deduction u/s 80C of the IT act.
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20
I have taken a home loan for society flat. Society is under construction and I am paying pre EMI Interest. Can I take the tax deduction in this year?
 
In your case there are certain points that need to be understood. You have taken a loan and are paying EMIs. However, the construction is not as yet complete. This is known as interest on pre-construction period. In such a case interest payable during this period is eligible for a deduction in 5 equal installments. The first installment is deductible in the year in which the construction of the property is completed or in which property is acquired. Hence, in your case the interest can be claimed as a deduction from the date the construction of your house property is complete.

In this context it is also relevant to understand the meaning of "pre-construction" period. Pre-construction period refers to the period commencing from the date the loan was taken till 31st March immediately prior to the date of repayment of the loan or completion of the construction of the house property whichever id earlier. However, the moot point that needs to be noted is that the deduction shall commence from the date when the construction of the property is complete. Hence, you cannot claim any deduction this year.
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21
What are the tax implications of ESOPs?
 
Old approach of taxing ESOPs :
  • When the shares were issued under ESOP scheme - It was taxed as a perquisite valued at the difference between the fair market value and the cost of acquiring the shares. Being a perquisite it was includable as a part of salary income.
  • When the shares are transferred - in case of a transfer, ESOP were taxed as capital gains. The fair market value of the shares at the time of allotment was deemed to be the cost of acquisition and the price at the time of sale was the consideration.
  • When the shares are transferred as a gift to close relatives, friends etc - It will be taxed as a capital gain where the fair market value as on the date of making the gift will be deemed to be the sale consideration and the fair market value as on the date of allotment will be the cost of acquisition.
New approach - (which is being followed currently)
  • When the shares were issued under ESOP scheme - It is not chargeable to tax.
  • When the shares are transferred - It will be taxed as capital gains. However, the cost of acquisition will be the amount actually paid by the employee at the time of allotment. For example a share whose FMV is Rs.100 is issued to the employee at Rs.50, then the cost of acquisition under the new rules will be Rs.50 as against the earlier rule of Rs.100. The price at which the shares were sold will be the amount of consideration.
  • When the shares are transferred as a gift to close relatives, friends etc - It will be taxed as a capital gain where the fair market value as on the date of making the gift will be sale consideration. However, the cost of acquisition of the share will be the amount paid by the employee at the time of allotment of the ESOP.
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22
What is the procedure for taxing agricultural income?
 
The following steps will have to be followed for ascertaining the tax liability on agricultural income:
  • Club agricultural income with the basic exemption limit and compute tax thereon
  • Club agricultural income with non agricultural income and compute tax thereon
  • The tax will be the difference between the above 2 figures
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23
I had purchased a flat in 1988. I am planning to sell the flat. What will be the tax treatment of the same? Under what section can I avoid paying income tax? Please explain in detail.
 
You will have to pay a long term capital gains tax on the gain arising from the sale of the flat. This is because a flat which is a residential house property is treated as a capital asset from the perspective of the Indian Income tax law. The capital gains will be taxed at 20% without indexation or 10% with indexation whichever is less.

The capital gains can be exempt from tax if the provisions of section 54 are followed. Section 54 provides exemption to capital gains arising from the transfer of a residential house property, the income of which is chargeable to tax under the Income from House Property.

The exemption is subject to the fulfillment of the following conditions:
  • The house property is transferred by an individual or HUF
  • The asset transferred is a residential house property
  • The house property is a long term capital asset (it must have been in existence for more than 36 months)
  • The individual has purchased a residential house property within 1 year before the date of such transfer or within 2 years after the date of transfer OR has constructed a residential house within 3 years after the date of transfer.
  • The amount of exemption is limited to the extent of capital gains
  • The new house property that is acquired should not be sold within 3 years. In case if the property is sold within 3 years then the amount of capital gains that was exempted earlier and the capital gains accruing on the sale of the asset both, will be taxed in the year of receipt of consideration.
  • Where the amount of capital gains is not utilized for the appropriate purpose then the same amount can be deposited in any bank a/c in accordance with the capital gains account scheme and the proof of depositing the amount should be filed along with the return of income.
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24
I am interested in good returns coupled with attractive tax benefits. Where can I invest my money?
 
You can consider ELSS. ELSS is tax saving schemes of mutual funds which carry an additional tax advantage. Contribution towards ELSS is eligible for a deduction up to Rs.1,00,000 under section 80C of the income tax act. However, before investing in such funds it is necessary that you should note that such funds have a lock in for 3 years.

In case you want safety of corpus you can also consider post office savings schemes like NSC and PPF. Such avenues are also eligible for a deduction but such schemes also have a lock in for 6 years to 15 years. Compared to ELSS, schemes like NSC and PPF offer moderate returns of 8% per annum.
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25
I am confused about the tax rates applicable for women assesses. Please clarify.
 
The finance minister has introduced gender budgeting in this budget. This means that different exemption limits are applicable for male and female assessees. For women the basic exemption limit was initially Rs.1,35,000. However, this limit has now been enhanced to Rs.1,35,000.

This for a women all income up to Rs.1,35,000 will be exempt from tax. In this regard it should also be noted that the special rebate for women assessees under section 88C has now been abolished.
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26
I am interested in tax planning. Please guide me.
 
The total amount that has been set aside for tax saving purposes is Rs.1,00,000 which is a deduction under section 80C. This includes: (a partial list)
  • Insurance schemes
  • NSC
  • PPF
  • ELSS (these are tax saving mutual funds schemes) and infrastructure bonds which have a lock in of 3 years
  • Deduction for housing loan u/s 24 up to Rs.1,50,000
  • Deduction towards mediclaim policy up to Rs.10,000 and pension plans up to Rs.1,00,000 u/s 80D and 80C respectively.
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27
Is the tax deductions under ELSS restricted to Rs.10,000? What is the limit for investing in infrastructure bonds?
 
In the current budget the finance minister has introduced a new section 80C which provides a deduction of Rs.1,00,000. The investment avenues which will be eligible for a deduction under section are equity linked savings schemes, national savings certificate, public provident fund, insurance schemes, pension funds etc. Thus, the current limit for ELSS is not Rs.10,000 but Rs.1,00,000.

In addition to the above, infrastructure bonds will also be eligible for a deduction under this section. The earlier segregation between infrastructure bonds and other investment avenues has been done away. Now infrastructure bonds will also be eligible for a deduction up to Rs.1,00,000.
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28
In the current budget, there has been a change with respect to section 10(23G). Kindly elucidate the change.
 
According to the previous Income Tax rules, Income by way of dividends, interest or long term capital gains of an infrastructure capital fund or an infrastructure capital company or a cooperative bank from investments made by way of shares or long term finance in eligible businesses will be exempt from tax. This exemption was available under section 10(23G). Since long term capital gains are anyway exempt from tax, this section has been rendered redundant. Hence, section 10(23G) has been abolished.

After the Budget, are the tax benefits associated with Capital Gains saving bonds intact? Capital gains arising on the sale of long term capital assets will be exempt if they are invested in specified long term capital assets. The expression specified long term capital assets has been defined to include bond (redeemable after 3 years) issued by NABARD, REC, SIDBI, NHAI and NHB.

However, in the budget, the definition of specified long term capital assets has been modified to include only NHAI and REC. This will take away the tax advantage associated with NABARD, SIDBI and NHB.
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29
What are the revised rates of securities transaction tax?
 
The finance minister has announced a 0.25% hike in the STT for all kinds of trades. The necessary details are given below:
Transaction Old rates New rates
Delivery based purchase of an equity Share in a company or the units of an equity fund entered into a recognised stock exchange 0.1% 0.125%
Delivery based purchase of an equity share in a company or the units of an equity fund entered into a recognised stock exchange 0.1% 0.125%
Non delivery based sale of equity share in a company 0.02% 0.025%
Value of transaction in derivatives 0.0133% 0.017%
Sale of units of an equity mutual fund to the fund 0.2% 0.25%
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30
What have been the changes in the context of Fringe Benefit Tax?
 
The previous system of FBT was extremely complicated and harsh on corporates. In this Budget the finance minister has taken steps to rationalize the provisions of the fringe benefit tax. The following changes have been made in the Budget:
  • Distribution of free medical samples to doctors exempt from FBT
  • Payment to any person of repute for the promotion of sales of goods and services shall not be included within the meaning of sales promotion
  • Employer's contribution towards super annuation fund will be exempt till Rs.1,00,000.
  • Expenses on tours and travels reduced from 20% to 5%.
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