Q & A corner

I have read your article 'The investors dilemma' in Business Standard (January 17, 2004). Could you please let me know the potential investment opportunities for NRI's during this 'strange situation' as mentioned in your article.

Dr Naresh Talwar

Your investment strategy will depend upon the financial biodata of your family and yourself as well as your return expectation, risk appetite, liquidity requirements and the desired tax optimality.

Unfortunately there is no one-size-fits-all panacea and the investment planning has to be tailormade for the situation.

However, for residents and NRIs alike, some of the offers in the current round of IPOs offer a good investment opportunity. Also mutual funds, appropriately chosen of course, continue to remain an attractive investment vehicle.

In your article in Business Standard, dated February 14, 2004, is it correct to read that 10 per cent surcharge on income tax for the current year (AY 2004-05), which is applicable if the net income is over Rs 8.5 lakh, will be "payable only on income exceeding by Rs 8.5 lakh"? Can you please clarify by an example where taxable income, net of rebates, is over Rs 8.5 lakh?

B S Mehra

Income up to Rs 50,000 is not taxable. Income from Rs 50,000 to Rs 60,000 is taxed at 10 per cent. Income between Rs 60,000 to Rs 1,50,000 is taxed at 20 per cent and above that level, it is at 30 per cent.

There is a surcharge of 10 per cent of the income tax for income over Rs 850,000. In such cases the tax payable along with the surcharge, is limited to the excess over Rs 8.50 lakh. Surcharge is payable by both residents and NRIs. For instance, if the income is Rs 8,70,000, then
Tax on Rs 60,000= Rs 1,000
Tax on Rs 90,000= Rs 18,000
Tax on Rs 7,20,000= Rs 216,000
Total tax on Rs 870,000= Rs 235,000
Surcharge @10% =23,500
Limited to Rs 20,000
Total tax payable= Rs 255,000

If I purchased a flat during F.Y 03-04 for Rs 8 lakh including Rs 1 lakh on account of stamp duty and registration charges through borrowed capital of Rs 6.5 lakh and my own savings of Rs 1.5 lakh, six months prior to the following long term transactions during 03-04, how much exemption under Section 54F can be claimed and how much long term capital gain/loss will remain for paying tax or carrying forward to the next year? My other income through salary and other sources is Rs 2.5 lakh.

1. Sale of shares (> 12 months holding) in 10 different companies resulting in net consideration of Rs 80,000 and long term loss after indexation of Rs 1.5 lakh, and;
2. Sale of shares (> 12 months holding) in 12 other companies resulting in net consideration of Rs 11 lakh and long term gain after indexation of Rs 6 lakh.

Kindly also let me know if to claim the above benefit under Section 54F, I have to pay back the borrowed capital to the extent of net consideration on which this exemption has been claimed.

Alka Kalanee

For the sale in which you have earned capital gains, your net consideration is Rs 11 lakh on which the net long-term capital gain is Rs 6 lakh. You have reinvested Rs 8 lakh in purchase of a housing property within the time period permitted by Section 54F.

Had you invested Rs 11 lakh, you would have got exemption on capital gain of Rs 6 lakh. Because you have invested only Rs 8 lakh, you get an exemption of Rs 4,36,364(= (6/11)x8). Capital gain chargeable to tax is Rs 1,63,636.

Now, you can set off the capital loss in the earlier transaction of Rs 1,50,000 against this amount. The net remaining capital gain amounts to Rs 13,636. The tax on this worked at the 20 per cent rate is Rs 2,727. So far so good.

Now, some complications to arrive at the strategy to reduce this tax. Realise that you can claim exemptions and setoffs scrip by scrip and transaction by transaction.

1. Exemption u/s 54F: Imagine there are two transactions, each with net sale value of Rs 100. The first contains a capital gain of Re 1 whereas the second contains Rs 2. It makes sense to claim exemption on the second transaction in preference to the first. Therefore, take the ratios of capital gains and sales, scrip by scrip. Choose the transaction with highest ratio first for claiming the exemption and then the next highest and so on until you end up claiming total exemption of Rs 6 lakh.

2. Option to pay tax at 10 per cent without indexation and at 20 per cent with indexation: Imagine that you are reinvesting only Rs 100 in purchasing a house. Compute the tax at 10 per cent and at 20 per cent. Do not select those transactions where the tax at 10 per cent is less than that at 20 per cent for claiming the exemption.

3. Set-off Loss: You have earned some loss and some gain during the year. The loss can be set-off against the gain, again transaction by transaction. Here also some similar algorithm can be used. Ditto if you have some carried forward loss.

However, this is a complicated exercise and the complication becomes confounded when all the three concessions exist together.

A number of companies such as ONGC, Gail, TCS, Maharashtra Bank, Haldia Petro, LNG Petronet etc, are about to float their IPOs. Please advise where I should invest my money.

M D Yahiya

This is a difficult question to answer since investment in any issue would primarily depend upon your existing financial portfolio, your risk appetite, your investment horizon etc.

However, yes, this time most of the companies that are tapping the capital market are fundamentally sound businesses and not fly by night operators. Therefore, while investing in the IPOs, choose carefully, weighing the price asked for against the value offered.

The author may be contacted at
anshanbhag@yahoo.com