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Income tax on property sale

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I purchased a house in September, 2004 for Rs 2.64 lakh and sold it four years later for Rs 4.94 lakh. My annual salary is Rs 1.90 lakh. Do I need to show the capital gains as part of my income? What would be capital gains tax?

- K. Nagaraja, Bangalore

The long-term capital gains on the sale of a house is applicable, if the property has been held for over three years and should be included in your salary. However, you can claim the benefit of indexation on the gains.

The benefit of indexation can be calculated by multiplying the cost of property with the Cost Inflation Index (CII) of the year of sale and dividing the result by the CII of the year of purchase.

In your case, the indexed cost works out to be Rs 3,03,050 (2,64,000 * 551/480). The long-term gain works out to Rs 1,90,950 (4,94,000 - 3,03,050). The amount of capital gain will be taxed at a flat rate of 20 per cent, which works out to Rs 38,190.

However, you can save this tax under section 54 by purchasing a house within two years from the sale or if you construct a new residential property within three years from the sale. In r this case, your salary will be taxed as per the usual rate of tax applicable.

Alternatively, you can invest the capital gains of Rs 1,90,950 in Rural Electrification Certificates (RECs) or to save the tax. But remember that there is a three years lock-in period on these bonds. Also, the interest income on these bonds is taxable.

I earn Rs 60,000-80,000 in a financial year through intra-day and short-term trading activity. Under what head will this income be taxed? Can I set off losses against my futures and options (F&O) trading profit and claim deductions for expenses incurred during the course of trading? My annual salary is Rs 6 lakh

- Abhishek Zaveri, Mumbai

Any income from trading in derivatives on the stock market is taxed under the head "business". It is no longer treated as speculation business. Thus, profit on intra-day trading can be set-off against loss made in F&O.

You can also claim deduction of the securities transaction tax (STT) paid on intra-day and F&O contracts as business expense along with any other expenditure on motor car depreciation, petrol, telephone and rent. The net result of the exercise will constitute your business income, which should be given to the tax authorities, along with the salary income.

I gifted Rs 1 lakh to my brother in February by cheque. Should I include the same in my return of income for assessment year 2008-2009 due in July 2008. What documents should I have for this gift?

- Mamta Thadani, Ulhas Nagar

Gifts to close relatives, including one's brother, sister and parents do not attract any income tax in the hands of the recipients. There is no requirement to mention the fact of gift in your tax return.

But you may mention it in your return as a note in the income sheet. As for documentary evidence, it's advisable to draw up a simple gift deed on a stamp paper for your records as well as for your brother's records. This will help him during his income tax assessment.

I am an American working in India for 5 years. I have my visa, residential permit and a PAN card. Am I eligible for investing in tax savings instruments to get deduction?

- William Carter, Mumbai

Since you have been living and working in India for five years, your current residential status under the Indian Income Tax Act is that of an Indian Resident. You are eligible to invest in savings instruments that give tax deduction unless the investment scheme specifically excludes non citizens of India. PPF and NSC are not available to you.

But life insurance premiums and ELSS mutual funds are available to you under section 80C subject to a maximum deduction of Rs 1 lakh.

The writer is a chartered accountant

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