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Columns - Tax Talk


A senior citizen saved of surcharge burden

T. Banusekar

I AM a senior citizen under the Income-Tax Act and my income for the financial year 2003-04 is Rs 1,50,000. Out of this, my dividend income from shares of Indian companies and income distributed by mutual funds is Rs 50,000. The balance of Rs 1 lakh includes long-term capital gains of Rs 20,000. How is my tax to be computed? Will I be liable to surcharge? -- N. S. Rajagopal

Reply

Apparently, your tax on Rs 1 lakh would be less than Rs 20,000. Therefore, you would have no tax liability since your entire tax would be eligible for rebate under Section 88B. The question of levy of surcharge therefore does not arise. You may note that the sum of Rs 50,000 being dividend and income from mutual funds will be exempt in your hands.

Query

I have invested in the post office monthly income plan. This entitled me to a monthly interest and also to a maturity bonus. Under what head is the maturity bonus taxable? -- Sharad Hatekar

Reply

The maturity bonus received will take the character of interest and will be assessable under the head `income from other sources'.

Query

The Finance Bill, 2004 proposes to exempt individuals having a total income of up to Rs 1 lakh from payment of tax. Is the total income to be computed after allowing normal deductions otherwise allowable from the gross income? Further, the Bill proposes that long-term capital gains on sale of securities will be exempt while short-term capital gains on the same will be taxed at a flat rate of 10 per cent.

Under the circumstances, will the short-term capital gains have to be included as part of the total income in determining whether I would be exempt? For example, if my `other income' is Rs 93,000 and my short-term capital gains from sale of securities Rs 10,000, will I be exempt from the payment of tax? -- Arunachalam. V

Reply

Long-term capital gains arising from the sale of securities is proposed to be fully exempt from tax, provided:

  • the sale is made through a recognised stock exchange in India; and

  • the sale is on or after the date appointed by the Central Government by notification in the Official Gazette for levy of securities transaction tax.

    Short-term capital gains, it is proposed, will suffer tax only at 10 per cent as against the normal rates of tax that are currently applicable.

    Individuals and HUFs, if their basic exemption is not exhausted against their other incomes, can set off the un-exhausted portion against such short-term capital gains and pay tax at 10 per cent only on the balance.

    Deductions under Chapter VI-A can be claimed against such short-term capital gains. Rebates can also be claimed against the tax on such short-term capital gains.

    The lower rate of 10 per cent will be applicable only in when:

    the sale is made through a recognised stock exchange in India; and

    the sale is on or after the date appointed by the Central Government by notification in the Official Gazette for levy of securities transaction tax.

    It is proposed that resident individuals having a total income which does not exceed Rs 1,00,000 will be entitled to a rebate, which will be equal to the the individual's tax amount. For this, the total income will exclude long-term capital gains which is exempt and include short-term capital gains, which suffers the lower rate of tax of 10 per cent. In other words, you will not be entitled to the proposed rebate under Section 88D in case your `other income' is Rs 93,000 and your short-term capital gains Rs 10,000.

    Query

    Can a short-term capital loss of the current year be set off against a long-term capital gain of the current year? -- J. L. Thacker

    Reply

    A short-term capital loss of the current year can be set off either against a short-term capital gain or a long-term capital gain of the current year. The prohibition is only on the set off of a long-term capital loss against a short-term capital gain. It can only be set off against a long-term capital gain. Similarly, a brought forward short-term capital loss can be set off either against a short-term capital gain or a long-term capital gain of the current year while a brought forward long-term capital loss can only be set off against long-term capital gains of the current year.

    Query

    I had purchased 100 shares of Company A in 1999. In 2004, a part of the business of Company A was sold to Company B, which is also a listed company. Due to the sale of business by Company A to Company B, I was allotted 10 shares in Company B. I now hold 100 shares in Company A and 10 shares in Company B. Will the 10 shares that I hold in Company B be treated as a long-term capital asset if it is sold in 2004 itself? How is the cost of the 10 shares in Company B to be determined? -- Vijay Gupta

    Reply

    It is not clear from your query whether the transfer of business by Company A to Company B is under the scheme of demerger. If it is so within the meaning of Section 2(19AA) of the Act, the cost of acquisition of the shares in Company A and the cost of acquisition of shares in Company B will be as follows:

    Company A: Cost of acquisition of the shares in Company A before the demerger as reduced by the cost of acquisition of the shares in Company B after the demerger.

    Company B: Cost of acquisition of the shares in Company A before the demerger x net book value of assets transferred in the scheme of demerger / networth of Company A before the demerger.

    If the transfer of the business by Company A to Company B is not a demerger within the meaning of the Income-Tax Act, capital gains would be attracted when the shares of Company B are allotted to you. The capital gains will be computed taking the market value on the date of allotment of the shares of Company B to you as the full value of consideration. This market value will also be treated as the cost of acquisition when you sell the shares of Company B.

    If the transfer of business by Company A to Company B is a demerger under the Income-Tax Act, the period of holding of shares in Company A will also be taken into account in determining whether the gain is short-term or long-term which means, in your case, the gain would be long term as the shares of Company A have been acquired in 1999 itself. However, if the transfer of the business by Company A to Company B is not a demerger under the Income-Tax Act, the gain would be short term since the asset, being shares of Company B have been held by you for less than 12 months.

    Return when required

    I AM a non-resident under the Income-Tax Act. My only income in the financial year 2003-04 which is chargeable to tax in India is by way of capital gains and dividends. Tax has already been deducted at source on these incomes. Do I still have to file a return of income in India with the tax authorities? -- Diya

    Reply

    If the dividends are received by you from an Indian company, it is exempt from tax in India. If you derived the capital gain from the sale of shares of an Indian company acquired in convertible foreign exchange and if the gain is long term, you will not have to file a return of income in India.

    This will be by virtue of Section 115-G. Else, you will have to file a return in India even though the entire tax has been deducted at source.

    This will be required only if your income exceeds the maximum amount not chargeable to tax.

    (Mail your queries to taxtalk@thehindu.co.in or by post to Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

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