The Hindu Business Line : Site in tax-man's sight

I am a government employee. I was allotted a site — 1,200 square feet — in 1996 by the Urban Development Authority. I paid Rs 25,000 for the allotment. I now propose to sell it. Will I be eligible for any tax exemption? If not what would be the amount of tax, and under which Section will I have to pay it? R. D. Shedbalkar

You will not be eligible for any exemption on the gain unless you reinvest the proceeds in a residential house or the capital gain in bonds. The exemption in such cases will be available under Sections 54F and 54EC respectively subject to satisfying the conditions in those Sections. The quantum of tax can be determined only after knowing the sale consideration. You may, however, note that the gain will be long-term since you have held the land for more than 36 months and will be taxed on the gain at 20 per cent (as increased by the appropriate surcharge and additional surcharge). The capital gain is to be computed after indexation in accordance with Section 48 of the Income-Tax Act and the tax is charged under Section 112.

I am employed as an officer in a bank. I have earned a short-term capital gain from sale of derivatives. Will the income be classified so classified or as business income for tax purposes? As a bank employee I am not allowed to carry on any business activity. Antony Rodrigues

Income from dealing in derivatives will normally be treated as business income for tax purposes. It will be difficult to classify the same as capital gain. Income from dealing in derivatives will be classified as speculation income unless the following conditions are satisfied:

The derivatives are referred to in Section 2(aa) of the Securities Contracts Regulation Act, 1956 and the trading is carried on in a recognised stock exchange

The transaction is carried on through a registered broker or sub-broker or by banks or mutual funds

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 and the number allotted under the SEBI Act or the SCRA or the Depositories Act and also gives the Permanent Account Number of the client.

The fact that the income will be assessed as business income for tax purposes should not affect you with reference to your employer so as to say that you are actually involved in a business activity. It may be noted that the classification of the income is for the limited purpose of assessability to income tax.

Will a life-insurance premium paid on a policy taken in my grandson's name qualify for deduction under Section 80C? S. Thanikachalam

Under Section 80C deduction in respect of life-insurance premium can be claimed by an individual only where the policy is taken for the benefit of such individual or his or her spouse or child. In your case, since the policy is taken in your grandson's name, you will not be able to claim the benefit of deduction under Section 80C in respect of the premium paid by you.

I understand that the cost of acquisition of bonus shares is to be taken as nil. The bonus shares were allotted to me more than a year ago. If I sell them now, will I be liable for tax on the gain? If not, will it be necessary to reflect the sale of these shares in the income tax return? S. Prakash

Since you have held the shares for more than 12 months, the gain arising there from them will be a long-term capital gain and will be exempt if you sell it through a recognised stock exchange, where the Securities Transaction Tax (STT) is paid at the time of sale. It may be advisable to reflect the sale in the return of income and to claim exemption in respect of the same under Section 10(38).

My mother bought some quoted shares in a stock exchange several years ago, before the introduction of the STT. She had also acquired shares by subscribing for them in companies at the time of their IPO. She is now gifting these shares to me. I propose to sell these shares through a recognised stock exchange. Will the capital gain that I earn be exempt? V. Shanmugam

The capital gain that you earn on sale will be exempt since STT will be payable by you at the time of sale when it is routed through a recognised stock exchange. The shares will be treated as long-term capital asset since the period of holding of the previous owner will also have to be taken into account in determining whether the asset is short- or long-term, where the asset is acquired by way of gift.

I have invested money in shares. I want to know the following with regard to share transactions where the sale is through a recognised stock exchange for the financial year 2005-06:

the rates of tax on long- and short-term capital gain,

the availability of deductions under Chapter VI-A against the long- and short-term capital gain,

the applicability of slab rates of tax on the long- and short-term capital gain,

whether the short- or long-term losses can be set off against short- or long-term gain, and

the availability of deduction under Section 80G against the capital gain.

C. Murugan

If the shares are sold through a recognised stock exchange, the STT is payable at the time of sale, in which case the long-term capital gain will be exempt and the short-term capital gain will be taxed at 10 per cent (as increased by the appropriate surcharge and additional surcharge).

The benefit of claiming deductions under Chapter VI-A, that is, from Section 80C to 80U, which will include Section 80G as well, will not be available against the short-term capital gain. The long-term capital gain being exempt, the question will not arise. The slab rates of tax will not be applicable to the capital gain. Short-term capital losses can be set off either against short- or long-term capital gain (to the extent they are not exempt but are taxable).

Long-term capital losses on sale of shares through a recognised stock exchange will have to be ignored and cannot be set off against the short term or long term capital gains.

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