The Hindu Business Line : Tax relief on housing loan EMI and HRA

I am a mechanical engineer and work for a public limited company. I purchased a flat in Akola (Maharashtra) last year for which I had taken a loan from State Bank of India. After about 6 months I changed my job and am now working in Goa, where I live in a rented house paying a rent of Rs 7,000 a month. I would like to know if I can claim the tax benefit for the EMI on the loan taken for the purchase of the flat and also the tax benefit for the rent paid in Goa as I am in receipt of HRA. You may note that the flat that is owned by me is not let out to anybody. — Rohit Sheth

A house property can be treated as self-occupied and the annual value can be treated as NIL if it cannot be occupied by the owner as he has to stay at another place and in a building not owned by him to carry on the assessee’s employment, business or profession. Against such annual value of NIL, deduction can be claimed u/s 24 for interest on capital borrowed. The principal repayment will qualify for deduction u/s 80-C. You can claim tax benefits for the principal repayment of the loan and also the interest on the loan taken for buying the Akola flat. There would also be no bar on your claiming exemption u/s 10(13A) for the rent paid in Goa as long as you get house rent allowance from your employer.

I had purchased some shares a year ago and the value of these shares has fallen by about 80 per cent. I have not declared the purchase in my tax returns. Can I claim the loss as a result of the fall in value of shares and get any tax benefit? — Manjunath

The claim for deduction in this case will depend on whether the shares are held as stock in trade or as investment. If they are held as investment, the question of claim of deduction as a result of fall in value will not arise unless the shares are sold and a loss is incurred. If the shares are held as stock in trade, they would be treated as closing stock, which is to be valued at the lower of cost or net realisable value on the last date of the previous year. In such a case the loss could get recognised even though there is no actual sale of the shares, and this would result in a tax benefit, depending on the circumstances. The fact that the purchase is not declared in the tax return may not affect the claim for deduction as such if the facts otherwise are as stated above.

My mother purchased a flat in Ahmedabad in July 2003. This flat was sold in August 2008. How is the tax payable on such sale to be computed? What is the time frame within which reinvestment must be made in the purchase of another house or in capital gain bonds to claim exemption? What will be the tax liability if the new house, which is purchased, is sold? — Sandeep

As the flat has been held by your mother for more than 36 months, the gain will be treated as long-term capital gains.

Full value of consideration less expenditure incurred wholly and exclusively in connection with the transfer is net consideration. Reducing indexed cost of acquisition and indexed cost of improvement from this will give long-term capital gains subject to exemptions. The capital gains will be eligible for exemption u/s 54 if the assessee is an individual or HUF; the gain arises from the transfer of a residential house being a long-term capital asset and the income from such asset is chargeable to tax under the head income from house property.

The reinvestment must be in a residential house. If the reinvestment it via purchase, the purchase must be one year before or two years after the date of transfer. If the reinvestment is by way of construction, the construction must be completed within three years from the date of transfer.

If the reinvestment cannot be made before the due date of filing the return of income there is also a requirement that the sum not invested must be invested in a capital gains account scheme.

Exemption may also be claimed by reinvestment under sections 54EC if the the asset transferred is a long-term capital asset and if the investment is in bonds of the NHAI or the REC and redeemable after three years. If the exemption should be claimed under section 54EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset.

The exemption would be whole of the capital gain if the amount invested is more than or equal to the capital gain. The exemption is to the amount invested if the amount invested is less than the capital gain.

The investment for claiming exemption u/s 54EC cannot exceed Rs 50 lakh.

If a new house is purchased and exemption is claimed u/s 54, on the sale of such house within three years, a capital gain on the sale of the new property will be computed by reducing from the cost of acquisition the amount of exemption which was earlier claimed u/s 54. If the asset is sold within three years, the gain would be short-term and, therefore, the capital gains will be computed without the benefit of indexation.

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