The Hindu Business Line : Tax jitters after golden handshake

I RETIRED at the close of business on March 31, 2005, under a voluntary retirement scheme. The VRS compensation was paid to me by cheque at 4 p.m. on March 31, 2005. After including the VRS compensation as my income, to the extent it exceeded Rs 5 lakh my employer deducted tax at source for the financial year 2004-05. However, my bank account in respect of the VRS compensation got credited only in April 2005. Since the VRS compensation in excess of Rs 5 lakh was taken as the income of the financial year 2004-05 and tax was deducted at source, the benefit of rebate under Section 88 was denied since my gross total income exceeded Rs 5 lakh.

The VRS compensation to the extent taxed also suffered tax at 30 per cent due to my income falling under a higher slab.

Can I treat the VRS compensation as the income of the financial year 2005-06 as this was credited into my bank account only in April 2005 which will help me get the rebate under Section 88 for the financial year 2004-05 and also bring the VRS compensation to the extent taxable to a lower slab of tax in the financial year 2005-06.

Anonymous

Reply

The VRS compensation will be taxable only in the financial year 2004-05 and not in financial year 2005-06. Income under the head `salaries' is taxable when it is due or received, whichever is earlier. VRS compensation will be taxable under the head salaries and will, therefore, be taxable in the year in which it is due or received, whichever is earlier. In your case, the compensation has become due in the financial year 2004-05 and has also been received in the same year and can, therefore, be taxed only as an income of that year. The mere fact that it was credited into your bank account only in the financial year 2005-06 cannot be a reason for it to be taxed in the financial year 2005-06.

Query

I am a NRI staying in the Middle East. I propose to transfer money from here into my father's bank account for him to meet his personal expenses and make investments in his name. Will there be any tax implications on such transfer of funds into my father's bank account in India?

Nitin

Reply

There will be no tax implications on the transfer of such funds into your father's bank account in India. This sum, even if treated as a gift, cannot be subjected to tax in India since Section 56, which deems gift to be the income of the recipient, excludes sums received from certain specified relatives. Your father will fall within the category of being a specified relative and, hence, the sum received will not be chargeable to tax in his hands. The same will also not be subjected to tax in your hands. It may be noted that gift tax on the donor is no longer leviable under the Gift Tax Act.

Query

For the financial year 2004-05 I have earned short-term capital gains from sale of shares, some of which were in respect of sales made up to September 30, 2004, while the balance was in respect of sales made after this date. The shares are listed in a recognised stock exchange and securities transaction tax has been paid on the sales made after September 30, 2004.

I understand that the capital gain on sale of shares which has suffered securities transaction tax (STT) on sale will be chargeable to tax at 10 per cent while the gain on the sale of shares on which STT has not been paid on sale will be chargeable at the normal slab rates applicable to the individual. Is this correct? If so, should I maintain a separate statement for the two periods? Also will gain from day trading be treated as short-term capital gain or business income?

Ramesh S.

Reply

You are correct in your understanding that short-term capital gains on which STT has been collected at the time of sale will be chargeable to income-tax at 10 per cent. This is provided for in Section 111A of the Act. You are also correct in your understanding that short-term capital gains earned up to September 30, 2004, will be charged to tax at the normal slab rates. You may also note that short-term capital gains even if earned after September 30, 2004, will suffer tax at the normal slab rates if STT is not charged at the time of its sale.

You may further note that STT is only chargeable on transactions on or after October 1, 2004, and which are done through a recognised stock exchange. If the rate of tax is different in respect of different transactions as it is in your case, you will have to maintain separate statements for the two periods. Gain from day trading cannot be treated as capital gain but should be taxed only as business income. You may also note that since there is no delivery in day trading, the same could be treated as a speculation business by virtue of Section 43(5) of the Act.