I am a shareholder/member in a credit cooperative society registered under the State Cooperative Societies Registration Act. I regularly receive a dividend @18 per cent on my share amount invested. Is the dividend exempt from income tax? What is the taxability of the dividend if received from a cooperative bank?

CV Gayathri

As per Section 10(34) of the Income Tax Act, any dividend income received as referred under Section 115-O of the Act shall be exempt from tax (up to ₹10 lakh, as per Section 115BBDA). Further, as per Section 115-O of the I-T Act, domestic companies are required to pay dividend distribution tax (DDT) for the dividend distributed to its shareholders.

As cooperative societies/banks are not required to pay DDT, the dividend received from them shall be taxable in your hands.

However, in light of the above provisions, it is important to check whether the dividend distributed by the credit cooperative society/cooperative bank has been subjected to DDT. If yes, the same should be exempt in the hands of the recipients.

I am under the impression that the government in 2015 or 2016 removed the restriction on interest accrued in an inoperative PF account after three years by changing the definition of inoperative PF accounts. Am I right or is my understanding wrong?

S Muralidharan

In accordance with the regulations of the Employees’ Provident Funds Scheme (EPFS), 1952, interest was not credited to the account of a member from the date on which the account became ‘inoperative’.

Para 72(6) of the EPFS defines an ‘inoperative account’: one in which no application for withdrawal or transfer has been preferred within a period of 36 months from the date it becomes payable (ie, after retirement/resignation/termination, post which the contribution was stopped).

The Ministry of Labour and Employment, vide its notification dated November 11, 2016, amended the provisions relating to inoperative accounts. In view of this amendment, the account will not become inoperative/dormant on cessation of employment, and interest will continue to accrue.

Thus, your understanding is correct.

We reside in our own flat bought in 2001 in my name for ₹15 lakh. I intend to sell it so that I can use the sales proceeds for demolishing/reconstructing another existing (old) house in my wife’s name. The sales proceeds from the flat could be ₹40 lakh and the reconstruction could cost around ₹60 lakh over a period of 18 months. What are the implications of income tax on the capital gains (if any) on the sale of the flat?

Can I get any benefit on the reinvestment for reconstruction and for the interest on a loan?

Vasudev RB

As per the provisions of the I-T Act, the residential flat held by you will qualify as a long-term capital asset (as you have held it for more than 17 years). Any gain/loss arising from the transfer of this property will be chargeable as long-term capital gains (LTCG) or long-term capital loss (LTCL).

LTCG/LTCL will be required to be calculated as per the provisions laid down in the I-T Act after considering the indexed cost of acquisition, along with the indexed cost of improvement, if any, to be reduced from the full value of net sales consideration.

LTCG arising from sale of house property is taxable @ 20 per cent (plus, surcharge and cess, as applicable). It is also important to note that no deduction under Sections 80C to 80U of the I-T Act can be claimed from LTCG.

However, exemption under Section 54 of the I-T Act on account of purchase/construction of a residential house shall be only available to the same assesse/owner. Since the reconstruction is in the name of a difference assesse (your spouse), you shall not be eligible for exemption under Section 54.

I presume that the old house in your wife’s name was purchased from the funds contributed by her. In case the reconstruction is funded through a housing loan provided by you to your wife, the benefit of the interest paid on reconstruction/repair/renovation done with borrowed capital, shall be available up to a maximum of ₹2 lakh per year for self-occupied property, provided the construction is completed within five years from the end of the financial year in which the capital was borrowed.

The same shall be available to your spouse (from the year in which the property is ready/possession is available), she being the owner of the property being constructed.

It is also pertinent to note that the interest incomes earned by you from the interest paid by your wife for the capital borrowed for the housing loan will become taxable in your hands.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

Related Topics
comment COMMENT NOW