What is the tax treatment for selling equity mutual funds where investments are made through the SIP (systematic investment plan) route?

— Adit

A mutual fund is treated as a capital asset and any gain or loss incurred on its sale will be regarded as income under the head ‘capital gain’.

Units held for a period of 12 months or less are treated as short term capital asset and units held for a period of more than 12 months are considered as long term capital asset.

Tax treatment on sale of equity oriented mutual funds is as follows:

In case such transaction is chargeable to securities transaction tax

Short term capital gain – Taxed at the rate of 15.45 per cent

Long term capital gain – Exempt from tax

In case such transaction is not chargeable to securities transaction tax

Short term capital gain – Taxed at applicable slab rate

Long term capital gain – Taxed at the rate of 20.6 per cent

We have a joint home loan of Rs 40 lakh in my wife’s and my name for 10 years at 10.75 per cent. We intend to complete construction of a house on this plot by 2014. This is a composite loan though I have not planned out the costing for the house and further loan enhancement during construction.

The house is intended to be self occupied. Is the maximum tax benefit possible on interest payment Rs 1.5 lakh per person? In other words, can each of us claim Rs 1.5 lakh as deduction from income once the house is complete and occupied? (Or is it total of Rs 1.5 lakh for both together in a given financial year?) Can we decide on the ratio of claim based on our income during the year or do we have to enter into some kind of agreement between us on each individual's share of the loan?

Can we claim the interest paid during construction as tax deductible post construction? I read that 20 per cent of the total interest paid during the pre-construction period is also allowed as tax deduction and that this is available for five years from the time the construction is complete till you get possession. Does this mean that this interest can be spread equally across the 5 years post construction?

— Ram

In case the property for which the loan has been obtained is self-occupied, then an amount up to Rs 1,50,000 is allowed as deduction on account of interest paid during the tax year.

The total pre-construction interest paid till March 31, prior to the tax year in which the construction of the house was completed, shall be allowed as deduction in five equal annual instalments (20 per cent of the total interest per financial year) commencing from the financial year in which the construction of the house is completed.

However, the overall limit of deduction in case of a self occupied house property including the interest paid during the pre construction period is Rs 1,50,000.

Accordingly, you and your spouse shall be eligible to claim the deduction up to Rs 1,50,000 provided the actual interest paid is Rs 3,00,000 or more. Further, please note that the ratio of claim will be dependent on the ratio in which the interest is paid by you and your wife. We are assuming that the interest will be paid by you and your wife out of your respective sources of income.

(The author is a practising chartered accountant.)

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(This article was published on August 4, 2012)
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