Readers' Corner: Taxation

Kuldip Kumar, partner and leader, Personal Tax, PwC India, answers your questions

Is money received as leave encashment at the time of retirement taxable?

Taxability of money received as leave encashment depends whether you are a government employee or work in other sector. In case of government employees (central and state government), leave encashment is fully exempt. In case of other employees, leave encashment is exempt up to 10 month’s average salary or the leave encashment actually received, whichever is lower. For the purpose of encashment, unavailed leave is calculated on the basis of maximum of 30 days leave for each year of completed service. Average salary is computed on the basis of average salary during the last 10 months immediately preceding retirement. Further, where the leave encashment is received from two or more employers in the same/different years, the total exemption cannot exceed Rs 3 lakh as contained in section 10(10AA) of the Income Tax Act, 1961. Therefore, while changing their jobs, employees should keep records of the leave encashment received and the exemption availed so that they do not end up claiming an exemption more than Rs 3 lakh. Leave encashment in excess of Rs 3 lakh is taxable as salary income. Employers ask for a declaration from employees whether they claimed any leave encashment exemption in the past or not so as to correctly allow the exemption at the time of withholding tax at the time of payment of leave encashment.

My parents live with me and my grandparents live in another town. I have included my parents in my family floater health insurance and bought another policy for my grandparents. Can I claim tax exemption on both policies?

Under section 80D of the Income Tax Act, 1961 you are eligible to claim a deduction in respect of medical insurance premium paid for your parents. But you will not be able to claim deduction in relation to the health insurance of your grandparents as they are not permitted to be covered for deduction under Section 80D. It is only the parent who are covered. However, your grandparents or parents can avail the deduction where they pay for the health insurance of your grandparents, if they have taxable income.

My daughter has a home loan of Rs 20 lakh to repay. If I give her money to repay the loan, will she have to pay tax on it? If she repays me through EMIs can she claim tax exemption?   

There are several aspects to your question. Where you are gifting a sum of money to your daughter, it will not have any tax implications for you as there is no gift tax in India. Even your daughter will have no impact as gifts from close relatives are not taxable. However, it is important to maintain appropriate documentation substantiating that you made the gift to your daughter. On the other hand , if you are extending a loan to your daughter wherein she repays the home loan and pays you the money through EMI, there would be different consequences. In case you are charging any interest, then your daughter would be able to avail a deduction with respect to interest on loan u/s 24 of the Income Tax Act, 1961 ("Act") as she used to claim for home loan interest. You will also need to report and include the interest earned from your daughter as your income from other sources and pay tax accordingly. But where you are not charging any interest, she cannot claim any deduction.

In relation to repayment of loan (principal component) she will not be able to claim any deduction under Section 80 C as section 80C of the Act specifically provide for such deduction only where such amount is borrowed from Government, any bank, LIC, National Housing Bank, any public company, employer etc. When you give your daughter money as a loan, it is important to document it appropriately through an agreement and also documenting the purpose of loan (housing loan).

The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in