The Hindu Business Line : What of one flat, two loans

I have taken a housing loan from ICICI Home Finance of Rs 10 lakh to purchase a flat. I have also borrowed a further sum of Rs 6 lakh from other banks for renovation of the same flat. Will the interest on both of these loans qualify for deduction? Pravin Patil

The interest on both of these loans will qualify for deduction under Section 24 in computing your income from house property.

Though in your case, the interest on the loan taken for renovation will not exceed Rs 30,000 per annum, it may be remembered that in general only a loan taken for purchase or construction will qualify for a higher deduction of Rs 1,50,000 while the interest on the loan taken for repairs, renewals or reconstruction will only qualify for a deduction up to a maximum of Rs 30,000.

It may also be remembered that the total interest payable on loans taken for purchase, construction, repairs, renewals or reconstruction cannot exceed Rs 1,50,000.

My wife is a clerk in a bank. In the financial year 2005-06 she received arrears under a settlement with IBA. What will be the tax liability on the arrears received? Babu

The tax arrear will form part of salary and will be taxed under the head salaries. Your wife may, however, be able to claim relief under Section 89(1) in respect of the arrears if they relate to more than one year. The relief will be computed and reduced from the tax in the manner shown below:

Calculate the tax payable on the total income, including the additional salary of the relevant previous year in which the same is received.

Calculate the tax payable on the total income, excluding the additional salary of the relevant previous year in which the same is received.

Find out the difference (3) between the tax at (1) and (2).

Compute the tax on the total income after including the additional salary in the previous year to which such salary relates.

Compute the tax on the total income after excluding the additional salary in the previous year to which such salary relates.

Find out the difference (6) between tax at (4) and (5).

The relief will be (3) minus (6)

I have been trading in shares through a recognised stock exchange since October 1, 2004. My own funds are the main source of investment; I have also borrowed some money from my father. Will the gain be taxed as capital gains or as business income? Will it be possible for me to claim the basic exemption against such gain? Nikhil Ahuja

Insofar as the buying and selling of shares is concerned, the issue of whether the same should be treated as giving rise to capital gains or business income is one which will have to be determined on the facts and circumstances of the case. Broadly, the issue of whether such income will be treated as business income or capital gains can be decided based on the period of holding, the frequency of such transactions, the motive of the transaction which is to be examined on facts, the entries in the books, the infrastructure deployed (such as employees), the nature of systems monitoring, and the source of funds — whether own funds or borrowed funds. None of these factors can be taken in isolation to determine whether the transactions by way of buying and selling of shares are in the nature of business or in the nature of investment. The answer to your query will, therefore, have to be examined on the facts of the case. You may have to examine all these aspects to determine whether your income will be taxed as capital gains or as business income. You can claim basic exemption against such income.

I have invested in the bonds of Rural Electrification Corporation and claimed exemption under Section 54EC against the capital gains that I earned in an earlier year. I am now receiving interest on the bonds. Will interest be exempt? Praveen

The interest from the bonds will be taxable. This will be taxable under the head `income from other sources.' Section 54EC allows an exemption on an investment made in certain bonds provided the conditions in the Section are satisfied. There is no provision in the Act to allow an exemption in respect of the interest earned from the bonds. This will be taxable in the year of receipt or in the year of accrual based on the method of accounting regularly employed by you.

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