Tax Talk

I have been investing in my PPF account since last 12 years. This year I have opened a PPF account in my minor daughter's name under my guardianship. Can I invest Rs 1 lakh in both accounts separately in the current financial year.

— T P Bhola

According to the provisions of the Provident Fund Scheme, “Any individual may, on his behalf or on behalf of a minor of whom he is the guardian, subscribe to the Public Provident Fund any amount not less than Rs 500 and not more than Rs 1,00,000 in a year.” .i.e. an individual can either invest in his name or on the behalf of his children, subject to cap of Rs 1 lakh in a financial year.

Further, according to the provisions of the Income-tax Act, 1961, deduction under section 80C, 80CCD and 80CCC is limited to Rs 1 lakh. This limit includes contribution to own account, spouse and children.

Hence, in view of the above mentioned facts, you can invest up to Rs 1 lakh collectively in your PPF account and in your minor child’s PPF account and the deduction available under the Income-tax provisions is also limited to Rs 1 lakh in total.

I purchased a residential site in Bangalore in a layout developed by a society after necessary land conversion and it was registered in 2001. I took up construction there in 2005 engaging a builder and completed it in 2008. I paid the site cost through the society on and off over several years prior to registration. I paid the cost of construction to the builder in a number of tranches during 2005 to 2008 according to an agreement. Over and above that, I directly incurred some expenditure for the construction.

In case I sell the property, can the capital gains that arise be computed separately for the site and the house? And can the total sale consideration be split for the purpose?

Can the computation of capital gains for the site as well as the house be done with reference to the part payments made for each, dividing the total sale consideration in proportion thereof?

— B. Balakrishna

In the above case, building was constructed on the residential site (land) which at the time of sale will yield a consolidated sales consideration i.e. the sale price towards composite item, building and land appurtenant thereto. Land and building are two separate capital assets and based on various judicial precedents, it is possible to separately compute capital gains in respect of land and building. Capital gains can be computed separately even in a case where a lump sum amount has been received as sale consideration in respect of both land and the building by splitting the same. It is advisable to maintain supporting for apportioning the total consideration (may be a valuer report)

Further, according to section 2(14) read with section 2(42A) of the Act, it can be concluded that property of any kind ‘held’ by the assessee for less than 36 months would be considered as short term capital asset. Therefore, for asset other than short term asset (i.e. long term capital asset) the total cost of acquisition of asset would be indexed cost based on the year during which the asset was held by the assessee. The payment of the total cost of asset in instalment does not have an impact on the computation of the indexed cost of acquisition of the asset.

Any expenditure subsequently made for the improvement of the asset will be indexed according to the year of the expenditure. Therefore, the total cost of acquisition would be indexed cost of acquisition plus indexed cost of improvement which would be allowed as deduction from total sales considered for computing capital gains/loss.

Hence, capital gains cannot be computed by splitting the sale consideration in the proportion of payments made for the acquisition of the capital asset.

(The author is a practising chartered accountant.)

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