My wife is a home maker. Can I gift her Rs 10 lakh to invest in tax-free bonds? As the interest received on tax-free bonds is not taxed I would like to know if it will be clubbed to my income? But she will invest this interest amount and will earn income from it.

— Baljit Singh

According to the Income-tax laws, any sum of money received from a relative (which includes spouse) as gift is exempt from tax. Hence, the sum gifted to your wife shall be tax exempt in her hands. Clubbing provisions would apply in respect of income accruing or arising to your spouse from any sum gifted by you. Hence, the interest income from the amount invested by your wife will be clubbed in your hands. As the bonds are tax-free, the income will be exempt in your hands but you would need to disclose this exempted interest income in your income tax return.

If your wife invests the interest to earn another income, then the second generation income shall not be clubbed in your hands. It shall be taxable in your wife’s hands.

I had invested Rs 5 lakh in equity mutual funds six years ago and will redeem them later this year. The current value of the units is Rs 8.37 lakh. At the time of redemption, should I disclose the gains made in my I-T returns? I ask this question as long term capital gains are anyway not taxed, should they be disclosed?

— Guna

According to the Income-tax provisions, any unit of mutual fund shall be a long term asset if it is held for more than one year. Further, any gain from the sale of a long term equity oriented mutual fund will be exempt from income tax if:

a) The sale is made on or after October 1, 2004 and;

b) Security Transaction Tax (STT) has been paid on such sale.

Therefore, if you have invested Rs 5 lakh in a equity oriented mutual fund and sold the same after holding it for a period of one year, the gain derived on such a sale shall not be added to your taxable income provided the above two conditions are satisfied.

Please note that you need to disclose the amount of exempted income in your income-tax return for reporting purposes.

Mail your queries to >taxtalk@thehindu.co.in

(The author is a practising chartered accountant)

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