Dealing With The Taxman

Abdul Khader, Abu Dhabi

A: Your data is not complete. I assume you had purchased the house with convertible foreign exchange. If you had not, you will have to pay heavy gift tax; but even if you did, the gift will still be chargeable to gift tax. Gifts of immovable and movable property outside India by a non-resident Indian (NRI) are free from tax.

In this case, the house is situated in India and the gift will take place in India. The correct method of gifting a house to your son is to transfer money from your non-resident external (NRE) account to his account. If you would like to send a draft to him, you will have to ask him to beg for a gift from you and then do the needful. (The begging is a necessary part of the game. Otherwise, it would be construed as a gift of movable property in India. Every finance minister dreams of making the tax provisions simple and the procedure smooth, but in practice, it continues to be a nightmare.)

 

But it is not clear why you want to gift the house to your son. Gifts are given for the express purpose of mitigating the future liability of income tax and wealth tax of the donor. Usually the donee has very little, or no, income and wealth. The main advantage is obtained by the donee investing the gifted corpus in high-yield avenues so that his assets grow at accelerated rates. The house property gives very little income and hence is an unsuitable gift. This is even more true for an NRI, since in his case the clubbing provision is more or less toothless.

Nevertheless, if you have some strong reasons for transferring the house in your sons name, you can a adopt a strategy which would take the least financial toll on you. If you have enough foreign exchange available, give him a draft or cheque from your NRE account as a gift to enable him to purchase the house from you. This strategy can be employed if you have purchased the house by using foreign exchange and following the proper procedure. In that case, the sale proceeds are repatriable.

Q: While replying to a query of one NRI reader, you have observed that the facility of filling Form 15-I is available to avoid tax declared at source (TDS) while effecting withdrawals from NSS-87. I wish to draw your attention to the fact that Section 197A(1) makes this facility available only to persons who are resident in India as per the Income Tax Act, 1961. As a matter of fact, para 5 of Form 15-I specifically requires the applicant to declare that he is a resident.

M P Dand, Andheri, Mumbai

A: Thank you for drawing my attention to this provision. After reading your letter, I took up the matter with the Directorate of Small Savings, Government of Maharashtra their officials were also taken by surprise.

NSS-87 was meant for offering deduction from income chargeable to tax in India. It was rarely used by NRIs. However, those persons who used NSS-87 when they were residents and have now become NRIs will find themselves trapped. They will have to submit to the atrocity of TDS and then arrange for the filing of tax returns to claim the refund of this tax. It is a known fact that it is very difficult for an NRI to arrange for all this. I only hope the Department will see the light and do the needful.

As requested by the Directorate of Small Savings, I am sending a copy of this correspondence to enable them to take up the issue with the authorities.

Q: If we invest in relief bonds and sell them before their maturity, does the interest already received become taxable? And will there be a problem if we take these bonds from a source other than the Reserve Bank?

Aquila Begum, Hyderabad

A: The interest on relief bonds is tax free both for the original subscriber and future holders in due course. If the holder in due course has purchased the bonds from the market and holds them until their maturity, he will have to pay tax on the capital gains.

The computation of the quantum of capital gains is confused. Take, for instance, the case of your friend purchasing Rs 5 lakh worth of these bonds directly from RBI and giving them as a gift to his major son, taking advantage of their one-time freedom from gift tax up to Rs 5 lakh. The son sells these bonds to you within a month of their issue at 10 per cent discount, since these do not enjoy freedom from gift tax. You are happy with them because you earn 10 per cent p.a., payable half yearly on the face value. Considering that you will earn 10 per cent on Rs 5 lakh even if your capital is Rs 4.5 lakh, coupled with the fact that you will receive Rs 50,000 over and above the original capital invested, the effective annualised rate works out to 13.17 per cent. And this is tax-free!

Well, almost tax-free. The interest earned is free from tax but there is still the issue of the extra Rs 50,000 got at maturity. Will it be considered a part of the normal income and taxed accordingly, possibly at the rate of 30 per cent? Will it be treated as capital gains and taxed at the flat rate of 20 per cent? If so, will you be allowed to take the benefit of indexation and pay tax on the reduced amount, or will you be required to pay the tax on Rs 50,000? I am afraid no one not even CBDT has the answers to these questions.

Q: In February 1992 I booked a flat with a property developer for Rs 10.50 lakh. So far I have paid Rs 9 lakh towards the total cost. The building is now ready and the builder has asked me to take possession after paying the last instalment of Rs 1,50,000.

Now, a friend of mine is interested in buying this flat. He is prepared to pay the last instalment directly to the builder and Rs 15 lakh to me. Can I consider this profit of Rs 6 lakh as subject to the provisions of tax on long-term capital gains which gives the benefit of indexation and the flat rate of 20 per cent?

Gulab Primlani, New Delhi

A: You have earned a certain right in the property in FY 91-92. The cost of acquisition of this right is Rs 10.50 lakh. The fact that you did not pay the entire sum in 1992 is immaterial. If the transaction goes through before the house is ready for possession, you have earned long-term capital gains.

Though you have not posed the query, I would like to deal with a situation where you pay the last instalment, take possession of the house and then sell the house immediately. Here, you will not be selling the right of possession, but the house itself. The cost of acquisition remains Rs 10.50 lakh, and since you have not held this new asset for over three years, you will have earned short-term capital gains. This will be added to your normal income and charged to tax.

It is strange how a small action can make a big difference to the tax liability it is illogical and unkind to assessees. I strongly feel that the legislation should permit the assessee to consider the date of the booking of the flat, and not the date of its possession, as the date of acquisition of the flat.A N Shanbhag answers readers queries on a range of matters of a strictly taxing nature