If money is paid, it's not a gift

My wife is a homemaker. She earned bank/post office (MIS) interest yearly Rs 2 lakh (approx). She has LIC, Mediclaim premium of Rs 10,000. Please advise as to whether she will have to pay any Income-tax or some other scheme to get relief from I-Tax. She has not submitted tax return earlier.

—Bikas Shah

Under the Income tax Act, 1961 (“the Act”), an individual is required to pay income tax in case the taxable income during the Financial Year (FY) exceeds the income exemption limit prescribed for that FY. Further, the individual is also mandatorily required to file the personal tax return for the said FY within the prescribed due dates.

In case of a resident woman, the income exemption threshold for FY 2010-11 and FY 2011-12 is Rs 190,000. Interest earned by your wife amounting to Rs 200,000 in the FY, constitute taxable income under the Act. Further, the premium paid towards LIC and medical amounting to Rs 10,000 qualify as eligible deductions from such taxable income under section 80C and 80D of the Act. Accordingly, her net taxable income for the FY would be Rs 190,000, as her income does not exceed the threshold limit, she is not required to pay any taxes and is not mandatorily required to file an income tax return. However, in case any tax has already been deducted at source by the Banker/Post Office, she can claim a refund for the same from the Tax Department, by filing an income tax return.

A few other popular tax saving avenues are investment in National Saving Certificate, five-year term deposits with bank/post office, Public Provident Fund, units of specified Mutual funds, bonds issued by National Bank for Agriculture and Rural development, etc. A deduction up to a maximum of Rs 100,000 is available under Section 80C of the Act towards investment in these securities. Investment in specified long term infrastructure bonds is eligible for an additional deduction of Rs 20,000.

We are staying in a twin house owned by my mother and my aunt. My aunt has proposed to provide her share of the house as gift to my mother or in my name. In exchange, we have plans to arrange for payment of some amount to her. She intends to take it by cash and not through cheque to avoid tax. The property has been derived by them through a will which was originally purchased by their grandfather during 1930s. The property is more than 70 years old and an amount of Rs 2-3 lakhs has been spent by my grandfather (aunt's father) during the year 1982-83 for restructuring of both the houses, however there are no records for the same. I have to avail a loan for payment of the agreed amount to my aunt.

Will she be eligible for exemption of tax for the amount received under capital gains scheme? If so, to what extent and how much should she invest under capital gains scheme? Your answer would be of great help as I would like to borrow the money under housing loan under long repayment schedule and also get the tax benefits.

—Sukumar

Taxable Capital gains

Assuming the property referred are two separate residential units and the one proposed to be transferred by your aunt to you or your mother is for some consideration, the transaction cannot be construed as a gift from a relative. The gains arising to your aunt from transfer of such property may be taxable as capital gains in the hands of your aunt.

As the property has been received under a will, the period of holding shall be counted from the date of acquisition of property by the original owner i.e. her grandfather. Since, the property has been held for more than 36 months, the capital gains shall be termed as Long Term Capital Gains (LTCGs).

LTCG would be computed as difference between the net consideration (i.e. after reducing transfer charges such as commission/ brokerage) received by your aunt less the indexed cost of acquisition.

The cost of acquisition shall be the cost for which the original owner acquired the property as increased by cost of improvement made subsequently.

As the property has been acquired before April 1,1981, your aunt will have the option of taking cost as the actual cost of acquisition or Fair Market Value of the property as on April 1,1981. Also, any cost of improvement would need to be substantiated with appropriate documentation.

Please note that there is also a provision under the Act, whereby if the sale consideration of the transferred property is less than the assessed stamp duty value, such stamp duty value may be considered by the Assessing Officer as the value of the sale consideration.

Exemption of capital gains

Investment may be made by your aunt in a residential house or in specified bonds issued by National Highways Authority of India or Rural Electrification Corporation Limited (restricted to Rs 50,00,000) to avail a deduction of the LTCG from taxable income, under Section 54 and 54EC of the Act, respectively.

In case of investment in residential house, deduction is allowed if she purchases a new house within one year before or two years after the date of transfer of the old house.

In case of an under-construction house, the construction needs to be completed within a period of three years from the date of transfer of the old house.

The deduction is restricted to the LTCG or cost of new house, whichever is less. Further, the new house should not be sold within three years else the deduction gets revoked.

In case she is unable to make the new investment by the due date of filing the tax return, she should deposit the money in the “Capital Gain Account Scheme” with a prescribed nationalized bank to be able to claim this deduction, subject to conditions prescribed.

In case of investment in specified bonds, the same need to be purchased within six months from the date of transfer. The deduction is restricted to LTCG where cost of new asset is more.

(The author is Executive Director, Tax, KPMG)