The Hindu Business Line : Taking stock of gifted shares

I was allotted 100 shares of a company at Rs 10 each in 1996. I got a bonus at 1:1 ratio in 2000. I currently hold 200 shares including the bonus. The current market price of the share is Rs 500 per share. If I were to gift these 200 shares to my parent who would sell it immediately through a recognised stock exchange, what will be the tax liability of my parent who receives the gift at the time of such sale? Devbrat

There will be no tax implication on the sale of the shares by your parent. The gifted shares would be treated as a long-term capital asset in the hands of your parent who receives the gift from you. This would be so since Section 2(42A) specifically provides that the period of holding of the previous owner should also be taken into account in determining whether the asset is short term or long term. When the shares are sold through a recognised stock exchange, the securities transaction tax will be payable on the sale. Therefore, the gain, which will be long term, will be exempt in the hands of your parent under Section 10(38).

In the light of the recent amendments to the definition of the term `speculative transaction', kindly clarify how profits from trading in derivatives will be taxed? In a case where the trading is done by paying only margin money, will the entire contract value be included as turnover for the purpose of determining whether tax audit under Section 44AB is required? Deepak Agarwal

The Finance Act, 2005 amended Section 43(5) of the Act. Prior to this amendment, the Section provided that if there is purchase and sale of goods or commodities including shares and scrips, the transaction would be treated as speculative if there is no delivery either periodically or ultimately. The amendment makes it clear that trading in derivatives where the same is carried on electronically on screen based systems through a broker or sub-broker or other intermediary registered with SEBI or under the Depository Act, transaction will not be treated as speculative even if there is no delivery.

This, however, would apply only if the broker issues a contract note to each client or sub-broker, which is time stamped and indicates the unique client identity number and the PAN of the person. Thus with the amendment, it can be said that trading in derivatives will not be treated as a speculative transaction if all the above conditions are fulfilled. Trading in derivatives will essentially be without delivery. In such cases only the net income and not the gross receipts should be treated as turnover. For this proposition reference may be made to the decisions in M/s Babu Lal Enterprises v ACIT, ITA No.6031/Mum/1996 (Mumbai Bench) and Royal Cushion Vinyl Products Ltd, dated January 4, 1994. This would mean that a tax audit needs to be conducted under Section 44AB by a Chartered Accountant only if the net income exceeds Rs 40 lakh and not if the gross receipts exceed Rs 40 lakh.

What are the tax implications on the payment of premium on single premium life policies? R. Sankaranarayan

Section 80C, which allows a deduction in respect of life insurance premium places a restriction that the premium in excess of 20 per cent of the capital sum assured (excluding premiums agreed to be returned and bonus) will be ignored in computing the deduction. Further, Section 10(10D) does not permit any exemption where the money is received on an insurance policy issued on or after April 1, 2003 in respect of which the premium payable in any of the years during the term of the policy exceeds 20 per cent of the capital sum assured. This, however, will not apply in respect of sums received on the death of the insured.

I had purchased bonds of the Rural Electrification Corporation for Rs 7 lakh three years ago to claim exemption under Section 54EC on long-term capital gains earned then. I have now received Rs 8,96,980 on its maturity. The interest that I have earned on the bonds is Rs 1,96,980. How would this have to be offered to tax? Sandhya Sonawane

The interest from these bonds will be chargeable to tax under the head income from other sources. Income under this head will be assessable based on the method of accounting regularly employed by the assessee being the cash or mercantile system of accounting. The option to choose the method of accounting would be that of the assessee. This being so you can choose to offer the interest accrued in each of the years, in those respective years even though the same may not have been received or the entire interest in the year of maturity when the interest is received based on the cash system of accounting.

I had taken a housing loan of Rs 2 lakh. I have since taken additional loans from the bank of Rs 75,000 and Rs 50,000 for the purchase of the same property. Will the interest and principal repayment on these loans also qualify for tax benefits? K. Nagalakshmi

You have not indicated the purpose for which you have taken the additional loans. Assuming that these are taken for the purpose of repairs, renewal or reconstruction of the existing property, the interest thereon will qualify for deduction in computing income from house property under Section 24. The principal repayment will, however, not qualify for deduction under Section 80C in computing total income since only the repayment of principal on a housing loan taken for purchase or construction will qualify for the deduction under this section.

My house is now under construction. The construction will be completed in May . The bank has released Rs 10 lakh out of the total amount. The bank has given me the option of paying only the interest up to the date on which the construction is completed or pay the entire EMI comprising principal and interest. If I were to start paying the entire EMI how will the tax benefits be available to me? Balaraman Saptarishi

The interest up to the year ending March 31, 2005 can be claimed in five equal annual instalments beginning from the financial year 2006-07 (assessment year 2007-08) which is the year in which the construction is completed. The interest of the financial year 2006-07 can be claimed in full in that year. The principal repayment will qualify for deduction in the year in which it is paid.

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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