The Hindu Business Line : Taxation of retirement proceeds

At the time of retirement I will be receiving provident funds which comprises of only my contribution to the provident fund, gratuity and a certain amount on commutation of pension.

Will these sums be taxable in my hands? Also clarify whether I am eligible for deductions under Section 24 and 80-C in respect of the interest and principal repayment on the housing loan even after my retirement? — G. Vasudeva Prasad

The sums received from the provident fund, gratuity and on commutation of pension will generally be exempt on the following basis:

Section 10(10)(i): The entire amount of death-cum retirement gratuity received by Government servants.

Section 10(10)(ii): Any gratuity received under the Payment of Gratuity Act is exempt to the extent of the least of the following: i) Rs 3,50,000; ii) 15/26 x last drawn salary for every completed year of service or part of the year in excess of 6 months; or iii) Gratuity actually received.

Note: Salary for this purpose means basic salary and dearness allowances.

Section 10(10)(iii): Any other gratuity received by employee/legal heirs on retirement, termination of services, death, etc i) Rs 3,50,000; ii) Half months salary [on the basis of last 10 months average] for each completed year of service (fraction to be ignored); iii) Actual gratuity received

Note: Salary for this purpose means basic salary, dearness allowance if provided in terms of employment and commission as a percentage of turnover achieved by the employee.

Section 10(10A): Any commuted pension received by a Government employee is wholly exempt from tax.

A non-government employee can avail exemption to the following extent: i) If the employee is in receipt of gratuity, one-third of the amount of commuted pension which he would have received had he commuted the whole (100 per cent) of the pension ii) If the employee is not in receipt of gratuity, half of the amount of commuted pension which he would have received had he commuted the whole (100 per cent) of the pension.

Section 10(12): The entire accumulated balance payable to employee participating in recognised provident fund

Conditions: i) In the case of an employee who has rendered continuous service with his employer for a period of 5 years or more; ii) In the case of an employee whose service has been terminated by reason of the employee’s ill health or by the contraction of discontinuance of the employer’s business or other cause beyond the control of the employee;

iii) In the case of an employee who obtains employment with any other employer who maintains any recognised provident fund to which the accumulated balance becoming due and payable is transferred. Where the accumulated balance due and becoming payable includes any amount so transferred, the period of service under the former employer shall also be included in calculating the period of continuous service.

You will be eligible to claim deduction under Section 24 in respect of the interest on housing loan and the principal repayment of the housing loan will qualify for deduction under Section 80-C. These deductions can be claimed even after your retirement.

I bought a flat along with my wife in 2002. We both contributed equally out of our own funds. The flat was registered in our joint names and I happen to be the first holder. We have been living in this flat since we purchased the same. We are now planning to purchase another flat.

If this new flat is purchased in our joint names or any one of us, it appears that since one flat is already jointly owned by us, the new one should be taken as deemed to have been let and a notional income should be offered to tax.

In order to avoid this confusion, I propose to return the 50 per cent contribution of my wife made available for purchasing the first flat treating it as a temporary loan. This would mean that the entire contribution for the first flat would be mine.

The second flat could now be purchased in the name of my wife or in our joint names with my wife as the first holder.

If this is done, will the department still treat my wife also as the owner of the first property since her name also appears in the document of purchase or will it be possible to explain that her name was included only for convenience and as a matter of abundant caution?

Please note that the payment for the purchase of the second flat will also be out of our own funds and there will be no borrowals for the same. Also clarify whether I am required to pay any interest to her on the loan taken. — Venkat Rajan

You will have to decide which one of you is the owner of the property. If at the time of the acquisition of the first property, it was your intention that you would both be joint owners of the property, it may not be possible to change that intention merely by repaying your wife’s contribution for the purchase of the property.

You will have to examine all the facts in arriving at a conclusion whether to take a decision on the aspect of ownership of the first flat at this point. It may be possible for you to do so subject to examining all the facts.

If your wife can in fact be shown to have given only a loan while the property was to be owned by you as the real owner, the mere fact that you wife’s name appears as a joint holder will not make her the owner of the property. In such a case you would not have much of difficulty in treating both the properties as self occupied provided they are in fact self occupied and not let out. In the event of repayment of the loan to your wife, there is no need to pay interest on the same.

(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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