A N Shanbhag: Q&A corner

A N Shanbhag answers readers queries on capital gains and standard deduction

The bull run in the stock market has helped me to book long-term capital gains of Rs 140,000. I am a general insurance agent and my income along with short-term capital gains is around Rs 70, 000. Please advise regarding long-term capital gains:

1. What's the best option to save tax in your opinion?
   
2. Will I be allowed exemption u/s 54 ED if I subscribe to ongoing public issues? To what extent (entire sale consideration or capital gains only).
   
3. Which banks offer Capital Gains Deposit Scheme, if I wish to consider taking exemption u/s 54 and 54 F?

Yogesh R Shah

Investment u/s 54ED is a good option; however, remember that you have to hold on to the shares for one year. Also, the exemption is available to the extent of allotment and not on the application money. Therefore, it's a good idea to keep the option of Section 54EC (capital gains bonds) open to the extent of the shortfall if any. You have six months from the date of transfer. Only the capital gains portion has to be invested and not the entire sale consideration.

All the nationalised banks are required to offer CGAS. These are nothing but ordinary bank FDs or saving accounts where the bank has to ensure that all the withdrawal are made only for the express purpose of purchasing or constructing a residential house.

I have some doubt regarding the present rules on standard deduction and deduction u/s 88 of Income Tax Act.

1. In the 2003-04 Budget, standard deduction at 40 per cent of salary or Rs 30,000, whichever is less, has been allowed for persons having 'salary income (before allowing deduction u/s 16)' upto Rs 5 lakh. Am I right in interpreting that income from other heads, viz., house property, interest on securities have no relevance here.
2. Whereas, for deduction u/s 88, the criteria is 'gross total income' before giving effect to deductions under Chapter VIA. Here,

1. will salary income be computed after deduction u/s 16? Can the Professional tax also be deducted?
2. For a self occupied property, can the loss on account of interest on borrowed capital be deducted?
3. Capital gains, if any, during the year are to included on gross basis or setting of previous year's accumulated loss can be done?
4. 'Other income' has to be taken on a gross basis or deduction u/s 80L can be allowed?
5. Can the gross total income be reduced by pension contribution u/s 80CCC, to bring it down under Rs 5 lakh?

Goutam Chatterjee

Standard deduction is related with the income from salary only. An employee with a salary of Rs 5 lakh or less (before standard deduction and deduction for professional tax) is entitled to a standard deduction of 40 per cent of the salary or Rs 30,000, whichever is less. Salary over Rs 5 lakh attracts a deduction of Rs 20,000.

Section 80B defines "gross total income" to mean the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA. It is clear that the gross total income is computed after deducting standard deduction, professional tax, interest on borrowed capital either on self-occupied property or otherwise, etc., but not deduction u/s 80L or 80CCC et al. It includes capital gains less accumulated loss.

I am a pensioner and receive annual pension of Rs 65,000. In 2003-04, I had invested in shares, I sold part of share holding which I bought in April '03 in the month of January '04 and have thus earned Rs 400,000 as short-term gain.

Please advise me how I can reduce my tax liabilities. I would like to donate some money to a organisation on which I can get 100 per cent tax deduction (please inform me to whom I have to pay to get the deduction)

R Singh

The best method of saving tax is by contributing Rs 70,000 to PPF and Rs 30,000 to infrastructure related bonds of ICICI. There is no separate deduction or exemption as such available on short-term capital gain. However, you may certainly set-off any current or carried forward long-term or short-term loss against the gains.

Making donations to the following organisations will offer 100 per cent tax rebate:

• National Defence Fund set up by Central Government
• Prime Minister's National Relief Fund
• Prime Minister's Armenia Earthquake Relief Fund
• Africa (Public Contributions - India) Fund
• National Foundation for Communal Harmony
• A university or any other educational institute of national eminence as maybe approved by the prescribed authority
• Any fund set up by the Government of Gujarat for providing relief to victims of earthquake in Gujarat
• Zila Saksharta Samiti
• National Blood Transfusion Council and State Councils for Blood Transfusion
• Fund set up by a State Government for the medical relief to the poor
• Central Welfare Fund of the Army and Air Force and the Indian Naval Benevolent Fund
• Andhra Pradesh Chief Minister's Cyclone Relief Fund
• National Illness Assistance Fund
• Chief Minister's Relief Fund
• National Sports Fund or National Cultural Fund or Fund for Technology Development

Could you please answer the following:

1. Interest u/s 234D has been introduced w.e.f. June 1, 2003. However, in my assessment order u/s 143(3)the department has charged interest u/s 234D w.e.f. date of refund issued i.e. October 1, 2002. Has interest u/s 234D been introduced with retrospective effect?
2. Whether taxable value of gratuity received on retirement and taxable value of leave encashment received on retirement are to be considered for calculating the value of perquisite of rent free unfurnished accommodation.

   Sumit Jain

1. I agree with you. This subsection has been introduced w.e.f. June 1, 2003 and no retrospective effect can be given by any authority to it.

2. 'Salary' includes pay, allowances, bonus or commission or any monetary payment, by whatever name called, from one or more employers, payable monthly or otherwise but does not include a) DA unless it enters into the computation of superannuation or retirement benefits; b) employer's contributions to the PF; c) exempt allowances and d) any payment and expenditure specifically excluded u/s 17. This definition is the same as per old Rules. The only change is that, medical allowances and reimbursement for treatment of serious illnesses as prescribed in proviso below Section 17(2vi) have now been excluded. l

The author may be contacted at anshanbhag@yahoo.com