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T. Banusekar

I AM a 21-year-old college student. My father, who is a non-resident Indian working in the Gulf, sends me money to meet my expenditure for education. This is done by way of a credit to my bank account through wire transfer.

This one is used by me for education and also for buying and selling shares through online trading in my name. Will the amount sent to me by my father be treated as a gift and, hence, taxed in my hands?

Rubaina

Reply

So far as the money sent to you for your education is concerned, the same cannot be called a gift but only a payment made by your father to discharge his obligation as one. Hence, the question of taxing that portion as a gift in your hand will not arise.

As regards the balance of the sum, though the same can be treated as income in your hands as being received without consideration, under Section 56 of the Act, since the amount is received by you from your father, it will not be treated as income in your hands because of the specific exclusion in the section of sums received from certain relatives (including sums received from parents). Beanstalk

Query

It is understood that leave encashment is entitled for exemption under Section 10(10AA). It is also understood that this exemption can be taken into account by an employer in computing the tax to be deducted at source.

My employer, however, only takes into account earned leave computed at the time of termination of employment as exempt in computing the tax to be deducted at source.

My employer does not take into account the exemption in respect of earned leave, which is received while in employment, in computing the tax to be deducted at source. Is this correct?

Sathish Kumar

Reply

Your employer is right in not taking into account the leave encashed while in service in computing the tax to be deducted at source. The exemption under Section 10(10AA) is available in respect of leave encashed at the time of retirement whether on superannuation or otherwise subject to the limits prescribed in this section.

Query

Kindly clarify whether a short-term capital gain derived from transactions in derivatives will be in accordance with the normal provisions, that is, whether the gain will be treated on par with a gain derived from the transfer of regular shares?

Anonymous

Reply

You will have to first examine whether you can treat the gain as a capital gain. Whether the gain is to be treated as capital gain or business income will depend on the facts and circumstances of the case, including the volume of transactions, the mode of funding for the transactions, and so on.

If the gain is to be assessed as capital gains, the same will be taxed at the normal rates applicable. If the gain is assessable as business income, the treatment will be the same.

It may, however, be possible that there could be a difficulty in the assessing officer (AO) taking a view that the transaction is speculative in nature based on Section 43(5) of the Act which provides that any purchase and sale of goods or commodities, including shares and scrips, will be treated as speculative if it is settled periodically or ultimately otherwise than by actual delivery. This, however, will not affect you so long as you do not have a loss. If there is a speculation loss, you may note that such loss cannot be set off against any non-speculative income but can only be carried forward and set off against speculative income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Also, it may be argued that transactions in derivatives are not speculative in nature since actual delivery is not possible in such cases.

Further, the Finance Bill, 2005 proposes that trading in derivatives referred to in Section 2(aa) of SCRA 1956, carried on in a recognised stock exchange will not be treated as a speculative transaction. This benefit will be available only if the transaction is carried on through a registered broker, sub-broker, bank or mutual fund and where the transaction is carried out electronically on screen-based systems and which is supported by a time stamp contract note which indicates the client identity, the number allotted under the SEBI Act, the SCR Act or the Depositories Act and also the permanent account number of the client.

It is also proposed that insofar as speculative losses are concerned, the same can be carried forward and set off only within four assessment years immediately succeeding the assessment year in which the loss was first computed as against eight assessment years which is, at present, provided for in Section 73.

Query

I am the employee of a public sector company. I had taken a loan from my employer and purchased a house in 1989. The principal portion has already been recovered from my salary by way of deduction. The interest is now been recovered from out of my salary. I now propose to purchase another residential house in the same State but in a different city. What will be the tax implications when I purchase another residential house?

Nirmal Sharma

Reply

From the query it is not known what you propose to do with the houses. If one of them is to be let out the income therefrom will be assessable under the head "Income from House Property" subject to the deductions available. You may note that interest on capital borrowed for purchase or construction can be claimed as a deduction without any limit where a property is let out. It is presumed that the other property will be self-occupied.

In respect of this property the annual value will be taken as nil and interest on capital borrowed for purchase or construction can be claimed as a deduction subject to the maximum limit of Rs 1,50,000 (Rs 30,000 if the loan is taken before April 1, 1999 or if the construction or purchase is not complete within three years from the end of the financial year in which the loan is taken). If both the properties are not let and are self-occupied, you can take the annual value of one of them (of your choice) as nil and claim deduction in respect of interest subject to the above limits.

In respect of the other property you will have to offer the notional rent to tax and you will be able to claim deduction of interest without any limit. The rebate under Section 88 in respect of the principal repayment can be claimed if the gross total income does not exceed Rs 5,00,000.

The maximum amount that will qualify for the rebate will be Rs 20,000 and will also be subject to the limits in the section.

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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