Exceptions to the second basic condition:

Additional conditions:

Resident and ordinarily resident: An individual will be a resident and ordinarily resident in India if he satisfies one or both basic conditions, and both additional conditions.

Resident, but not ordinarily resident: The individual satisfies one or both of the basic conditions and one or none of the additional conditions.

Non-resident: An individual not satisfying any of the basic conditions will be a non-resident. It is not relevant whether or not he satisfies the additional conditions.

Query

I have subscribed to the Unit Linked Insurance Plan (ULIP) of the UTI for Rs 30,000 for a period of ten years.

The annual premium is Rs 3,000. I have so far paid the instalment for three years, that is Rs 9,000 and have enjoyed a tax rebate under Section 88 in respect of such payment.

I now wish to surrender the policy as even without the ULIP premium, I have crossed the limit for claiming rebate under Section 88.

I understand that when I surrender the ULIP, I will get around Rs 6,800 as per the NAV.

I will, therefore, incur a loss of around Rs 2,200. What are my tax liabilities on such surrender and what will be the tax benefit I will get on account of the loss due to reduction in the NAV?

Y. Narayana Murthy

Reply

Under Section 88(7) where any person terminates his participation in an ULIP, before contributions in respect of such participation have been paid for five years, the rebate that has been allowed under Section 88 in respect of such contribution will be added to the tax chargeable in the year in which the participation is terminated.

Therefore, in the instant case, the reader will be liable to pay a tax in respect of such termination of Rs 1,800 in the year in which he terminates his participation.

It may be noted that the reader has participated in the ULIP only for three years.

The reader will be entitled to claim the loss of around Rs 2,200 as one under the head `Capital Gains'.

If the asset is a long-term capital asset, the benefit of indexation would also be available and the loss would be higher.

Query

Under the new guidelines relating to valuation of perquisites, a notional interest on housing loan at 10 per cent is treated as a perquisite.

Will this notional interest qualify for deduction in computing income under the head, `Income from House Property'?

K. Ramanathan

Reply

Under Section 24, in computing income under the head, `Income from House Property', a deduction shall be allowable in respect of any interest payable on capital borrowed for acquiring, constructing, repairing, renewing or reconstructing a house property.

Since the notional interest, which is treated as a perquisite in computing the income under the head `Salaries' is not "interest payable", the same will not qualify for deduction under Section 24 in computing income under their head `Income from House Property'.

Query

I have already crossed the maximum limit of investment that can be made for the purpose of claiming rebate under Section 88.

I have an option of taking a housing loan at 11 per cent interest and purchasing a house or closing my PPF/NSC and using them for the same. Which of these is the better proposition?

S. Vikhanasa Murthy

Reply

The interest from the tax saving schemes would be only 9.5 per cent (likely to be further reduced).

The housing loan according to the reader would cost him an interest of 11 per cent.

Given that the reader will not be entitled to any rebate under Section 88 in respect of further investments made, it prima facie appears that it would be better for the reader to close his PPF/NSC and use this for investment in the house property.

He could also refrain from making further investments, which would be useful for the investment in the house property.

The reader will, however, be well-advised to consult a professional in the matter for that there may be other aspects that may have to be looked into before taking such a decision.

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