The Hindu Business Line : Gaining a fortune

I am a 75-year-old doctor. I stopped practising three years ago. My only source of income is a State government pension of Rs 8,000 per month. I have been furnishing my tax returns every year though I do not have any tax payable. I have an old house on a 600-square-yard site in a prime Visakhapatnam locality. The market value of the property is about Rs 1 crore. I propose to sell the house and divide the proceeds of sale equally among my three sons.What would be the capital gains tax quantum, and can it be avoided or reduced? M. V. Ramana Rao

The capital gain is to be computed by reducing the cost of acquisition (after indexation if the gain is long term, that is, if the asset was held by you for more than 36 months) from the full value of consideration. If the asset was acquired by you prior to April 1,1981 you may at your option substitute the fair market value as on April 1,1981 as the cost of acquisition and also index the same in arriving at the capital gains.

The division of the sale proceeds between you and your sons will not affect the computation of capital gains. You may avoid or reduce the capital gains if the gain is long term by reinvesting in another residential house, which will entitle you to exemption under Section 54 or by investing in bonds of the Rural Electrification Corporation or the National Highways Authority of India, which will entitle you to an exemption under 54EC. The tax on long-term capital gains will be computed at 20 per cent (as increased by the appropriate surcharge and additional surcharge) and on short-term capital gains at the normal rates applicable to an individual (as increased by the appropriate surcharge and additional surcharge).

I purchased a residential plot 20 years ago. I have not constructed a house on it. I now propose to sell the plot. Will the gain be treated as long-term capital gains?

During the financial year 2005-06, I invested in a mutual fund, which is an equity linked savings scheme. I have not claimed any deduction in respect of the investment. If the units are redeemed after three years, will there be a tax incidence? M. K. Jain

The gain on sale of the residential plot will be treated as long-term since you have held the land for a period exceeding 36 months.

If the investment in the mutual fund is by way of units of an equity-oriented fund, the exemption can be got under Section 10(38) if the Securities Transaction Tax is paid at the time of sale. If the redemption is by the mutual fund itself and the transaction is not through a recognised stock exchange, the capital gains tax will be payable by you.

I had on December 29, 1995 invested Rs 10,000 in Kothari Pioneer Tax Shield 96, an equity-linked savings scheme. On redemption of the units on March 31, 2006, I was paid Rs 87,530 out of which Rs 175 was recovered by Franklin Templeton towards the STT. Since the tax has been paid on the gain at the time of redemption, will the capital gains be exempt? In the case of its new Templeton India Equity Income Fund, it has been clarified that no long-term capital gains tax is chargeable on redemption of the units since the investors are liable to pay STT. Kapil K. Advani

If the STT is paid at the time of sale and if the units are by way of investment in an equity-oriented fund, the capital gains, which is long-term, will be exempt under Section 10(38). Equity oriented fund means one where the investible funds are invested in equity shares of domestic companies to the extent of more than 65 per cent of the total proceeds of the fund and which has been set up under a scheme specified in Section 10(23D).

I am a pensioner; I retired from a public sector undertaking. I have some accumulated balance in my PF account. Since interest on PF withdrawn is taxable, how can I avoid the tax on the same, by gifting the amount withdrawn to my relatives? M .Gopal

Interest on PF account is not taxable at the time of withdrawal provided the it is after rendering continuous service for five years or more or where the service is terminated due to ill health of the employee or due to contraction or discontinuance of the employer's business or for any other reason beyond the control of the employee. It appears that in your case you would have rendered more than five years of continuous service, which would mean that there will be no tax on the withdrawal. There would be no need for you to resort to any planning to avoid the tax. You may note that there is only a proposal to tax the interest on PF when it is withdrawn. The law in this regard has not been framed and implemented.

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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