Capital gains, housing loans and foreign allowances

T. Banusekar

THIS week, `Tax Talk' looks at rates of the capital gains tax and the important aspects of housing loans. The column will also answer queries on the taxability of Indian and foreign allowances such as pension.

Query

I had sold 600 shares of Hindustan Lever Ltd. on September 7, 1998. The total consideration for sale of these shares was Rs 10,27,200. This sale was through an unregistered sub-broker who paid me Rs 2,50,000 out of the consideration of Rs 10,27,200. The balance of Rs 7,77,200 has not been paid to date. I have filed a suit against the sub-broker, that is pending. In the return for the assessment year 1999-2000, I have stated all the above facts and agreed to pay the capital gains tax as and when the balance is received from the sub-broker.

I now wish to know the date from which I have to pay interest and the rate of interest on the capital gains tax. I also wish to know the rate of tax on capital gains.

D. M. Raju

Reply

The rate of tax on capital gains will depend on whether the gain is long-term or short-term. If it is short-term, it will be taxed at the normal rate. If long-term, it will be taxed at the rate of 20 per cent. In both cases, the tax has to be increased by a surcharge.

As regards the first part of the query, it is felt that the liability to capital gains tax will arise on the entire consideration as reduced by the allowable deductions in the assessment year 1999-2000 itself. It is not that no tax need be paid on the unrealised sum until realisation. Under section 45(1) the charge to capital gains will arise in the previous year in which the transfer takes place. In the instant case, the transfer took place in the previous year 1998-99. The liability to capital gains tax would, therefore, arise in the assessment year 1999-2000.

In this connection one may cite the decision of the Andhra Pradesh High Court in Mrs G. Y. Chenoy versus CIT (1997) 234 ITR 89 (AP), where the Court held that the liability to capital gains tax would arise even if the consideration is embezzled by an agent of the transferor. It was so held because the transfer had taken place and the charge had arisen. They further held that the loss on account of embezzlement was not incurred wholly and exclusively in connection with the transfer, which would be the same in this case too.

The Court also held that no deduction could be allowed on the basis that the loss was incidental to the operation of the transaction and that the loss was incurred as the property's owner, which would be true in the case posed by the querist as well. Therefore, the entire capital gains would accrue only in assessment year 1999-2000. The question of paying the tax later and therefore, having to pay interest, thus, does not arise.

Query

A loan was taken for a specific purpose of purchase of plot for the construction of a house on July 27, 2000. A housing loan was also availed on October 31, 2000 for the construction. Can relief be claimed on the instalment and interest paid on the above two loans? If so, what is the quantum of relief available?

P. R. Santhosh

Reply

Interest would be allowable as a deduction in computing ``Income from House Property'' under Section 24(1)(vi). For such interest to be allowed as a deduction, the loan must have been taken for acquisition, construction, repairs, renewals or reconstruction of the property. In this case, the first of the loans was taken for a plot's purchase. Therefore, a view can be taken that the interest on such loan will not be allowed as a deduction.

However, it may be argued that the interest on such loan should also be allowed as a deduction. For such a loan should also be taken as part of the loan taken for construction of the house property, as no house property can be constructed without land. The second view expressed is the fair and better one in the columnist's opinion.

In support of this reference may be made to Circular No. 667 dated October 18, 1993, of CBDT. This circular was issued in the context of exemption from capital gains under Section 54/54F where the CBDT clarified that the cost of the plot should also be taken into account for determining the quantum of deduction under Section 54/54F. Sections 54/54F provide for an exemption from long-term capital gains in certain cases where investment is made in a residential house.

As regards the principal repayment, the rebate is allowable under Section 88(2)(xv). The view expressed in the context of allowability of deduction in respect of interest would be applicable to principal repayment as well.

The quantum of deduction in respect of interest would depend on whether the property is self-occupied or let out. If the property is let, deduction would be allowable in full. If the property is self-occupied, the deduction shall be restricted to Rs 1 lakh. As regards the interest paid during the construction period, the deduction would be allowable in five equal instalments, commencing from the year in which the construction is completed. This will also be subject to the ceiling limit stated above.

As regards the principal repayment, a rebate of 20 per cent will be available on the amount repaid subject to a maximum rebate of Rs 4,000. It may also be noted that the rebate in no case can exceed the overall ceiling stipulated by Section 88.

Query

I refer to this column dated September 17, 2000. It talks of the taxability of the Indian and foreign allowances received when on deputation outside India. The article also gives a table on the relief from double taxation on the basis of the Double Taxation Avoidance Agreement (DTAA) between India and the US. Please clarify with an example as to how the same would work in the context of the DTAA between India and UK.

If any part of the allowance received by me in UK is saved, is there a possibility that tax can be reduced on such savings. In such a case, what documentation from the UK would be required?

Vijay

Reply

It has been stated in the above referred article that the relief available in India in accordance with the DTAA between India and the UK would be:

(Tax paid in the UK on doubly taxed income) x (Income doubly taxed/Entire income charged in India).

If the doubly taxed income is say Rs 5 lakh, the tax thereon in the UK is Rs 1.25 lakh and if the entire income chargeable in India were Rs 7.5 lakh, the relief available in India would be:

(Rs 1.25 lakh x 5 lakh)/7.5 lakh = Rs 83,333.

As regards the savings made, the same may be taxed either in accordance with the Income-Tax Act (ITA) or DTAA, whichever is more beneficial to the assessee. If it were taxed on the basis of the ITA, then the amount of savings would be fully taxable in India. However, if it is taxed on the basis of the DTAA, the relief will be allowed in the above manner. There would be no scope for planning the affairs to reduce tax liability.

Query

Is pension received from a foreign employer taxable in India?

Reply

Pension received from a foreign employer would be taxable in India on the basis of residential status as given in the table.

Thus, the salary, if received outside India, will not be taxable so long as the person is a non-resident/resident but not if he is ordinarily resident. It will be taxable only if he is a resident in accordance with section 6 of the Income-Tax Act. However, if the pension is received in India, it will be taxable here in all cases.

(The author is a Chennai-based practising chartered accountant.

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600 002, or by e-mail to vaidy@thehindu.co.in