Salary normally includes wages, annuity, pension, gratuity, commission, perquisites, etc. and any other payment received by an employee from the employer received during the year.

Allowances

Most allowances are taxable like City Compensatory allowance, tiffin allowance, fixed medical allowance and servant allowances; encashment of any concession is also taxable.

A) House Rent Allowance
Out of house rent allowance received during the year, least of the following three amounts will not be included in income:

• The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai, Calcutta or Delhi, but 40%, for others
• The actual amount of house rent allowance received
• The amount of rent actually paid in excess of 10% of annual salary

Here, salary includes basic salary, dearness allowance, and commission on fixed percentage, but not other allowances.

B) Transport allowance
Transport allowance for traveling from residence to office is exempt up to Rs 800 per month.

C) Any allowance granted for encouraging the academic, research and other professional pursuits 
To the extent the allowance is utilised for the purpose specified.

D) Children Education Allowance 
Rs. 100 per month per child up to a maximum of two children

E) Any allowance granted to an employee to meet the hostel expenditure on his child 
Rs. 300 per month per child up to a maximum of two children

Perquisites

The following perquisites are not taxable either under the executive instructions of the Central Board of Direct Taxes or by virtue of specific provision in the Act/Rules :

Rent-Free House

• Rent-free official residence provided to a judge of a High Court or of the Supreme Court.
• Rent-free furnished residence (including maintenance thereof) provided to an official of Parliament, a Union Minister or a Leader of Opposition in Parliament
• Accommodation provided in a 'remote area' to an employee working at a mining site or an onshore oil exploration site, or a project execution site or an accommodation provided in an offshore site of similar nature.
• Accommodation provided on transfer of an employee in a hotel for not exceeding 15 days in aggregate.

Car

• Reimbursement of expenses in respect of car (which is owned by employee and used for personal and official purpose) (amount not taxable is up to Rs. 1,200 per month for car having engine capacity of not more than 1600cc, Rs. 1,600 per month for car of above 1600cc and Rs. 600 per month for driver).
• Conveyance facility provided to High Court Judges and Supreme Court Judges.
• Conveyance facility provided to an employee to cover the journey between office and residence.

Interest-Free Loan

• Interest-free / concessional loan of an amount not exceeding Rs.20,000

Others

• Gift-in-kind up to Rs.5,000 in a year.
• Employer's contribution to staff group insurance scheme. 
  

Leave Encashment

Leave encashment while in service is taxable. Encashment of sick leave is taxable.

Leave encashment received at the time of retirement is fully exempt in the case of Government Servants. In the case of non-Govt. Employees, leave encashment is exempt to the extent of the least of the following four amounts:

• Rs. 3,00,000/-
• Ten months' average salary;
• Cash equivalent of the leave due at the time of retirement;
• Leave encashment actually received at the time of retirement.

Here the average salary means the average of the salary drawn during the last ten months before retirement.

Gratuity

Any death cum retirement gratuity received by Government or Local Authority employees is exempt from tax. For Non-Government Employees the taxability depends on whether Gratuity is covered under the Gratuity Act

A) Gratuity covered under the Gratuity Act 
For Gratuity covered under the Gratuity Act, total of gratuity received by an employee, covered by the Gratuity Act, from various employers in whole of service is exempt from tax to the extent of least of the following three amounts:

• 15 days' salary, based on the last drawn salary, for each completed year of service
• Rs. 3,50,000/-; or
• The gratuity actually received.

B) Gratuity not covered under the Gratuity Act
For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts

• The half month's salary for each completed year of service; or
• Rs.3,50,000/-; or
• The gratuity actually received.

VRS Compensation

Compensation received at the time of voluntary retirement is exempt up to Rs 5 lakhs under certain conditions.

Deductions from Salary income

Certain deductions are available while determining the taxable salary income.

A) Standard Deduction

Standard deduction from the Assessment year 2004-05

B) Professional Tax
Professional tax, which is paid, is allowed as deduction.

C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.

Tax is on the annual value of the house property after allowing certain deductions. House Property consists of any building, flat, shop etc., and the land attached to the building.

Computation of income from Self Occupied property

Income is computed after giving certain deductions from the annual value of the property.

A) Computation of annual value of self occupied property
The annual value of Self occupied property is taken as NIL if the property is fully utilized for own residential stay during the year or if the property is not actually occupied as owner and is also not let out. If a property is let out for only a part of the year, proportionate annual value will be calculated.

B) Entitled deductions for self occupied property
The only entitled deduction is interest, if any payable, on loan taken for the purchase or construction of the house property. The maximum deduction on this account is Rs.30,000/-; However, for properties acquired or constructed between the 1st April 1999 and the 1st April 2003 out of borrowed funds, maximum limit is Rs. 1,50,000/-

Computation of income from let out property
Income is computed after giving certain deductions from the net annual value of the let out property.

A) Computation of net value of let out property
For let out properties the gross annual value will be the greater of the following three amounts:

• Municipal value of the property;
• Actual rent received during the year;
• Fair rent i.e. rent of similar properties in the same or similar locality.

Out of the gross annual value, municipal taxes actually paid during the year has to be deducted to arrive at the net annual value.

B) Entitled deductions for let out property
The deductions available for computing House Property Income are:

• 30% of the net annual value for repair and maintenance and rent collection expenses for the property
• Interest on money borrowed to build, buy or repair the property;

Ownership of property
Besides owning property in own name, a person is deemed as owner in following three cases:

• As transferor of the property to spouse or minor child for inadequate or no consideration;
• As holder of an impartible estate or a property in part performance of a contract under the Transfer of Property Act;
• As share holder of a co-operative society or a company, which entitles to hold any property

If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place.

Definition of capital asset

Capital Asset means all moveable or immovable property except trading goods, personal effects, agricultural land other than within municipal areas or within 8 kilometers from it wherever notified and gold bonds. Jewelry and ornament are not personal effects and their sale will attract capital gains.

Distinction between short term and long-term asset

Capital Assets are of two types i.e., long term and short term. Long-term capital assets are assets held for more than 36 months before they are sold or transferred. In case of shares, debentures and mutual fund units the period of holding required is only 12 months. Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.

Computation of Capital Gains

Capital gains are to be computed by deducting the following three amounts from the consideration money received on transfer of the asset.

1. The actual cost of the asset or its estimated market value as on 1.4.81, if acquired earlier;
2. The cost of improvement, if any, for the asset;
3. Expenses incurred on transfer of the asset; and

In case of a long-term capital asset, the costs are increased as per a Cost inflation index for the year.

Cost Inflation index

Exemptions from Capital Gains
In case of Individuals and HUF, long-term capital gains are exempt if the sale proceeds are reinvested in certain assets.

Some examples:

A) Profits on sale of residential house is reinvested in a new residential     house.

B) Long term capital gains are invested in notified bonds

These exemptions are subject to certain conditions and the reinvestment has to be made within the prescribed time.

Any income other than (a) salary, (b) house property income (c) Income from business or profession, or (d) Capital Gains income, will be taxed as Income from Other Sources. Examples are interest from deposits, winnings from lotteries, races, income from the hiring out of machinery, or machinery compositely with building, royalty, copyright fees, family pension, dividends other than from domestic companies and mutual funds etc.

Allowable Deductions

• In case of winnings from lotteries and races no deduction is allowable.
• For family pension, the allowable deduction is 1/3rd of the pension or Rs. 15,000/- whichever is lower.
• For other cases, any revenue expenditure, exclusively incurred for earning such income is allowed as deduction.
• In case of income from hiring of machinery, depreciation on such machinery is also allowable as deduction.

Deduction is the amount, which is reduced from the gross total income before computing tax.

There are other deductions such as for donations, for repayment of loans taken for educational purposes etc.

Deductions on Interest etc. U/s 80L

If interest is earned on Govt. Securities, Bank deposits, Post Office deposits, debentures, National Savings Certificates etc., deduction up to Rs. 12,000/- u/s 80 L is allowable from the net income after deducting the expenditure incurred in earning it. Further, an additional deduction up to Rs. 3,000/- will be allowable on interest from Govt. Securities, if not already covered in the Rs. 12,000/- limit mentioned earlier.

Deductions on premium for medical insurance

If premium for medical insurance is paid by cheque for a person, or his dependent family member or member of the HUF, deduction up to Rs. 10,000/- for insurance premium paid is allowable. In respect of senior citizens the maximum limit for deduction will be up to Rs. 15,000/-.

Deductions on expenditure on handicapped dependent

If any expenditure has been incurred on the treatment, nursing, training of a handicapped dependent, or for creating an insurance benefit for such person a deduction up to a maximum limit of Rs. 40,000/- u/s 80DD is allowable subject to the condition that doctor working in a government hospital has issued the necessary certificate.

Deductions on treatment of diseases

If an individual or an HUF actually incurs expenditure for treatment of certain specified diseases for himself, dependents or a member of HUF, deduction up to Rs.40,000 /- u/s 80DDB is allowable. For treatment of senior citizens, the amount of deduction will be up to Rs.60,000 /-. This deduction is available only for certain specified diseases.

Deductions on contribution to pension funds

If an individual contributes to specified pension funds deduction up to Rs.10,000 /- u/s 80CCC is allowable. The pension will however be taxable on receipt.

Rebate u/s 88
For the assessment year 2003-04, the amount of rebate is as follows

1. Tax rebate under section 88 is available at 30% of the net qualifying amount if the following two conditions are satisfied.

a. income chargeable under the head "Salaries" (before giving deduction under section 16) does not exceed Rs. 1,00,000; and

b. income chargeable under the head "Salaries" is not less than 90% of gross total income.

2. If gross total income does not exceed Rs. 1,50,000 ,tax rebate is available at 20% of the net qualifying amount.

3. If gross total income exceeds Rs. 1,50,000 but does not exceed Rs. 5,00,000, tax rebate is available at 15% of the net qualifying amount.

4. If gross total income exceeds Rs. 5,00,000 tax rebate under section 88 is not available.

Rebate for senior citizens

Taxpayers of the age of sixty-five and above, at any time during the relevant previous year, will get an additional rebate from tax payable up to a maximum of Rs 20,000/-.

Rebate for women taxpayers

All women resident in India get a special rebate up to Rs. 5,000/- out of the tax payable by them. This rebate will not be allowable for women tax payers above sixty five at any time during the relevant previous year, who will get senior citizen rebate of Rs. 20,000/-.

Tax Saving Schemes Assessment Year 2008-2009 (Fin. Year ended - 31-03-2008)

First, let's start by assessing your income tax liability. Once you have identified your tax liability, you can then create the right plan. Please note that this applies only to salaried individuals.

Following rates are applicable for computing tax liability for the current Financial Year ending on March 31 2008, (Assessment Year 2008-09).

Note: The rules for "Senior Citizens" are the same for 'Men' as well as 'Women'. Any person who turns 65 years on any day prior to or on March 31, 2008 will be treated as Senior Citizen.

Filing of Income Tax Return

1. Filing of income tax is compulsory for all individuals whose gross annual income exceeds the maximum amount which is not chargeable to income-tax i.e. Rs. 1,45,000 for Resident Women, Rs. 1,95,000 for Senior Citizens and Rs. 1,10,000 for any other individual or HUF.
2. The last date of filing income tax return is June 30, 2008 in case of individuals who are not covered in point 3 below.
3. If the income includes business or professional income requiring tax audit (turnover Rs. 40 lakhs), the last date for filing the return is September 30, 2008.
4. Form 2 E (Naya Saral) / e-filing used to file the income tax return.
5. Cellular/Mobile Phone subscribers now need not file income tax return under the One by Six Scheme. However, those who have incurred an expenditure of Rs. 50,000 or more towards consumption of electricity during the previous year, now have to furnish the income tax return.
6. The penalty for non-filing of income-tax return is Rs. 5000.

A) Surcharge on Income-tax:

Surcharge on income tax on all firms and companies with a taxable income of Rs.1 crore or less will get removed.

B) Surcharge on T.D.S. on the payment other than salaries:

The amount of income tax deducted in accordance with the provision of Chapter XVII B shall be increased by a surcharge calculated, 
• In the case of every individual, HUF, association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent of such tax where the income or the aggregate of such income paid or likely to be paid and subject to the deduction, exceedsrupees ten lakh. 
• In the case of every firm, artificial judicial person & domestic company, at the rate of ten percent of such tax. 
• In the case of every company other than domestic company, at the rate of two and half per cent of such tax.

C) Education Cess:

An additional surcharge called as ‘Education cess’ shall be levied at the rate of three percent on the amount of tax deducted inclusive of surcharge as stated in paras ‘A’ and ‘B’ above.

3. Section 192 of the income-tax Act, 1961:
Broad scheme of tax Deduction at source from "salaries" etc.

3.1 Every person who is responsible for paying any income chargeable under the head "salaries" shall deduct income-tax on the estimated income of the assessee under the head "salaries" for the financial year 2007-2008. The income-tax is required to be calculated on the basis of the rates given above and SHALL BE DEDUCTED ON AVERAGE AT THE TIME OF EACH PAYMENTS e.g. FROM SALARY EVERY MONTH.

Any income falling within any of the following clauses shall not be included in computing the income from salaries for the purpose of section 192 of the Act:-

Any sum received under a life insurance policy, including the sum allotted by way of bonus on such policy other than,
• any sum received under sub- section(3) of section 80DD 
• Any sum received under a Keyman insurance policy 
• Any sum received under an insurance policy effected on or after 1-4-2003 in respect of which the premium paid in any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured.

"Deduction" U/S 80C :
In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year out of his Income chargeable to tax being the aggregate of the sums given below not exceeding one lakh rupees. 
• Payment of insurance premium to effect or to keep in force an insurance on the life of the individual, the wife or husband or any child of the individual; provided the premium paid is not in excess of twenty per cent of the actual capital sum assured.
• Any payment made to effect or to keep in force a contract for a deferred annuity, not being an annuity plan of the Life Insurance Corporation of India or any other insurer as the Central government may by notification in the official gazette specify on the life of the individual, the wife, the husband or any child of the individual provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity
• Any sum paid as contribution in the case of an individual, for himself, spouse or any child,
i) for participation in the Unit-Linked Insurance Plan, 1971, of the Unit Trust of India; specified in Schedule II of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
ii) for participation in any Unit-Linked Insurance Plan of the LIC Mutual Fund notified by theCentral Government under clause (23D) of section 10, as the Central Government may, by notification in the Official Gazzette, specify in this behalf
• Any subscription made to effect or keep in force a contract for such annuity plan of the Life Insurance Corporation as the Central Government may by notification in the Official Gazette, specify.

NOTE: Section 80 CCE.
The aggregate amount of deduction under section 80C, section 80CCC, and shall not, in any case exceed one lakh rupees.

Under section 80D, a deduction can be allowed for a sum not exceeding Rs.15,000 per annum to the extent payment is made by cheque out of his income chargeable to tax to keep in force an insurance on the health of the assessee or on the health of the spouse, dependent parents or dependent children of the assessee provided that such insurance is in accordance with the scheme framed by
• the General Insurance Corporation of India as approved by the Central Government in this behalf or 
• any other insurer and approved by the Insurance Regulatory and Development Authority. 
However, the deduction can be allowed for a sum not exceeding Rs.20,000 per annum where the assessee or his wife or husband, or dependent parents is a senior citizen which means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

4. Under section 80DD an assessee, has during the previous year 
• Incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a handicapped dependent; or 
• Paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or the Unit Trust of India for the maintenance of handicapped dependent-shall in accordance with and subject to the provisions of this section be allowed a deduction of a sum of fifty thousand rupees in respect of the previous year. 
Provided that where such dependent is a person with severe disability, the provisions of this section shall have effect as if for the words “fifty thousand rupees”, the words “seventy five thousand rupees” had been substituted.

The assessee claiming a deduction under this section shall furnish a copy of the certificate issued by the medical authority in the prescribed form and manner, along with the return of income under section 139 in respect of assessment year for which the deduction is claimed.

Tax Saving Schemes Assessment Year 2009-2010 (Fin. Year ended - 31-03-2009)

First, let's start by assessing your income tax liability. Once you have identified your tax liability, you can then create the right plan. Please note that this applies only to salaried individuals.

Following rates are applicable for computing tax liability for the current Financial Year ending on March 31 2009, (Assessment Year 2009-10).

Note: The rules for "Senior Citizens" are the same for 'Men' as well as 'Women'. Any person who turns 65 years on any day prior to or on March 31, 2009 will be treated as Senior Citizen.

Surcharge on income tax on all firms and companies with a taxable income of Rs. one crore or less has been removed. 

B) Surcharge on T.D.S. on the payment other than salaries:

The amount of income tax deducted in accordance with the provision of Chapter XVII B shall be increased by a surcharge calculated, 
• In the case of every individual, HUF, association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent of such tax where the income or the aggregate of such income paid or likely to be paid and subject to the deduction, exceedsrupees ten lakh. 
• In the case of every firm, artificial judicial person & domestic company, at the rate of ten percent of such tax. 
• In the case of every company other than domestic company, at the rate of two and half per cent of such tax

C) Education Cess:

An additional surcharge called as ‘Education cess’ shall be levied at the rate of three percent on the amount of tax deducted inclusive of surcharge as stated in paras ‘A’ and ‘B’ above. 

3. Section 192 of the income-tax Act, 1961:
Broad scheme of tax Deduction at source from "salaries" etc.

3.1 Every person who is responsible for paying any income chargeable under the head "salaries" shall deduct income-tax on the estimated income of the assessee under the head "salaries" for the financial year 2007-2008. The income-tax is required to be calculated on the basis of the rates given above and SHALL BE DEDUCTED ON AVERAGE AT THE TIME OF EACH PAYMENTS e.g. FROM SALARY EVERY MONTH.

Any income falling within any of the following clauses shall not be included in computing the income from salaries for the purpose of section 192 of the Act:-

Any sum received under a life insurance policy, including the sum allotted by way of bonus on such policy other than,
• Any sum received under sub- section(3) of section 80DD. 
• Any sum received under a Keyman insurance policy. 
• • Any sum received under an insurance policy affected on or after 1-4-2003 in respect of which the premium paid in any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured.

"Deduction" U/S 80C :
In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year out of his Income chargeable to tax being the aggregate of the sums given below not exceeding one lakh rupees. 
• Payment of insurance premium to effect or to keep in force insurance on the life of the individual, the wife or husband or any child of the individual; provided the premium paid is not in excess of twenty per cent of the actual capital sum assured.
• Any payment made to effect or to keep in force a contract for a deferred annuity, not being an annuity plan of the Life Insurance Corporation of India or any other insurer as the Central government may by notification in the official gazette specify on the life of the individual, the wife, the husband or any child of the individual provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity.
• i) for participation in the Unit-Linked Insurance Plan, 1971, of the Unit Trust of India; specified in Schedule II of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
ii) for participation in any Unit-Linked Insurance Plan of the LIC Mutual Fund notified by theCentral Government under clause (23D) of section 10, as the Central Government may, by notification in the Official Gazzette, specify in this behalf
• Any subscription made to effect or keep in force a contract for such annuity plan of the Life Insurance Corporation as the Central Government may by notification in the Official Gazette, specify.

NOTE: Section 80 CCE.
The aggregate amount of deduction under section 80C, section 80CCC, and shall not, in any case exceed one lakh rupees.

Under This section, a deduction up to Rs 10,000 (Rs 15,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like "Mediclaim". Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children of the assessee provided that such insurance is in accordance with the scheme framed by, 
• The General Insurance Corporation of India as approved by the Central Government in this behalf or 
• any other insurer and approved by the Insurance Regulatory and Development Authority. 
However, the deduction can be allowed for a sum not exceeding Rs.20,000 per annum where the assessee or his wife or husband, or dependent parents is a senior citizen which means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

4. under section 80DD an assessee, has during the previous year. 
• a. Incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a handicapped dependant; or 
• b. Paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or Unit Trust of India subject to the conditions specified in sub-section (2) and approved by the Board in this behalf for the maintenance of handicapped dependant. The assessee shall in accordance with and subject to the provisions of this section, be allowed a deduction of a sum of forty thousand rupees in respect of the previous year. 
Provided that where such dependent is a person with severe disability, the provisions of this section shall have effect as if for the words “fifty thousand rupees”, the words “seventy five thousand rupees” had been substituted.

The assessee claiming a deduction under this section shall furnish a copy of the certificate issued by the medical authority in the prescribed form and manner, along with the return of income under section 139 in respect of assessment year for which the deduction is claimed.

Tax implication of an investment if not the sole but is the most important consideration while evaluating various investment opportunities. It is impertinent for a person to know the tax aspect of an investment opportunity before he parks his money. This is important because of the fact that tax paid reduces the returns generated and it becomes necessary for an investor to know the real rate of return on his investments.

However, with a view to increase the level of investments in the economy the government has from time to time announced various investment options to the investors which give them tax relief. One of such investment option is Equity Linked Savings Scheme.

What exactly are Equity Linked Savings Schemes?

Equity Linked savings scheme is floated by the mutual funds. It is basically a scheme, which according to the rules invests in the equity shares of the companies. Such investment will have to be made in the mutual fund specified u/s 10(23D) of the Income Tax Act to be eligible for rebate.

What is nature of the ELSS?

Usually ELSS are open ended in nature which involves a compulsory lock in of 3 years of claiming deduction u/s 80 of Income Tax Ac, 1961. However, some ELSS are also closed ended in nature which available for subscription only for once like TATA Tax Advantage – 1.

How does investing in ELSS benefit an investor?

Investing in ELSS provides an investor with twin benefit of tax saving and scope of good returns. 

The incorporation of Section 80C in the Income Tax Act, 1961 has proved to be a boon for the investor. Now an investor can claim deduction u/s 80C by investing in ELSS. By investing in this scheme an investor can save tax up to Rs.33600.

ELSS requires the investor to lock in his money for 3 years. This is necessary because of the fact that in long run the scope of negative returns from equities reduces tremendously. Over periods of time equities have outperformed the other asset classes.

Is there any tax implication while making an investment in shares? Are investors in shares entitled to any tax benefits?

There is no tax implication while making an investment in shares. There are tax benefits to investing in some pre-approved companies as mentioned in the third point below. The tax implication arises only at the time of sale of shares as under:

• If certain eligible equity shares are purchased on or after March 1, 2003 but before March 1, 2004 and are transferred after 12 months, then the gain on the sale of such shares will be entitled for exemption under Section 10(36) of the Income Tax Act, 1961 by eligible equity shares. This applies to any equity shares, which form part of the BSE 500 index of the Mumbai Stock Exchange, the transaction of purchase and sale of which have been entered into through a recognised stock exchange in India and any equity shares, allotted through a public issue on or after March 1, 2003 and listed in a recognised stock exchange in India before March 1, 2004 and the transaction of such shares, if entered into through a recognised stock exchange in India.
  
  
• After October 1, 2004, any equity share, which has been sold through a recognised stock exchange and on which STT (Securities Transaction Tax) has been paid would be entitled to exemption from Long Term Capital Gains under Section 10 (38) of the Act. Similarly, in case of Short Term Capital Gain of such shares, the gains shall be taxed only at 10%, plus surcharge and education cess.
  
  
• Under Section 80C, any subscription to equity shares or debentures forming part of any eligible issue of capital, approved by the Court or an application made by a public company or subscription to such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled.

What is the tax implication of a bonus/rights issue on equity shares?

Under Section 55(2)(AA), bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue. 

The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment. 

Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'nil' according to Section 55(2) (AA) (ii). The sale price of such transferred rights will be taken as capital gain. 

The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement. 

In case of the transfer of such rights, the cost of acquisition is the aggregate of the amount of purchase price, paid to the transferor to acquire the right entitlement and the amount, paid by him to the company for subscribing to such right offer of share. 

The period of holding in the hands of the transferee will be from the date of allotment of such shares.

What is the tax implication on "split shares"? Is the cost of acquisition halved or is it taken as nil? What about the period of holding?

The split shares represent the sub-divided shares of a lot of shares. The cost of such shares gets proportionately divided and the period of holding also continues to be the same as that of the original lot.

What is the capital gains liability arising on sale of shares i.e. long-term/short-term?

In case of equity or preference shares in a company, if the shares are held for more than 12 months immediately prior to its transfer then it is known as long term capital asset and on transfer of long term capital asset, long term capital arises. Long term capital gains arising on transfer of equity shares will not be chargeable to tax from assessment year 2005-06 if such transaction is covered by securities transaction tax under section 10(38).

If an investor has multiple demat accounts, does he calculate capital gains on the first-in-first-out (FIFO) basis on each demat account separately or just once across all demat accounts?

In case of multiple demat accounts, the capital gains on sale of shares has to be computed on the basis of the FIFO with reference to the particular account from where the shares are sold. The FIFO method was introduced to bypass the process of determining the cost on one to one basis with the particular DP.

Can short-term capital gains be set-off by investing in capital gains bonds?

No, Short term capital gains cannot be set off by investing in capital gains bonds under Section 54EC. This benefit is only in respect of long-term capital gain. 

For how long can capital loss (short-term or long-term) be carried forward by investors?

A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred. 

A short-term capital loss can be set off against any capital gain (long-term and short-term). However a long-term capital loss can be set off only against a long-term capital gain.

What is the STT (Securities Transaction Tax) and how does it work? Are investments made prior to the STT regime eligible for the long-term capital gains tax waiver or is this facility available only to post - STT investments?

The Securities Transaction Tax has been introduced by Chapter VII of the Finance Act (No.2) Act, 2004. It provides for a levy of a transaction tax on the value of certain transactions. These transactions include the purchase and sale of equity shares in a company, purchase and sale of units of an equity growth fund, sale of a unit of an equity growth fund to the mutual fund and sale of a derivative. The transaction tax will be payable on all transactions that have taken effect from October 1, 2004.

Surcharge: Nil, Education cess: Nil 
Note: STT is not applicable in case of Government securities, bonds, debentures, units of mutual fund other than equity oriented mutual fund and in such cases, tax treatment of short - term and long - term capital gains shall be as per normal provisions of law.

Effect of levy of the Securities Transaction Tax

1. Long-term capital gain, arising to an investor from the sale of these specified securities, shall be exempt from tax under section 10(38).
2. Correspondingly, long-term capital loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse.
3. Short-term capital gain, arising to an investor (incl. FII) from the sale of such securities, shall be charged at 10%, plus surcharge and education cess under section 111A.
4. This exemption of long-term capital gain is available to all assesses, including FIIs.
5. This exemption is available only to those assesses, who hold these specified securities as capital assets (investments) and not as stock-in-trade.
6. Correspondingly, at the year-end, the stock cannot be valued at cost or market value; whichever is lower, as it is not stock-in-trade. No deduction in the value of investments would be permissible.
7. Securities Transaction Tax will be applicable only with effect from October 1, 2004. For the earlier period, i. e. from April 1, 2004 to September 30, 2004, the earlier law will be operative.
8. The exemption of long-term capital gain is available only to transactions in relation to the specified securities. Exemption will not be available to transactions, not specifically mentioned in the list above.
9. The exemption would be available even in respect of specified securities, purchased prior to the introduction of Securities Transaction Tax but sold after the operative date.
10. The exemption is available to all shares. The earlier exemption, under section 10(36), was restricted to shares, listed in BSE 500, which were purchased after March 1, 2004 but before April 1, 2004 and sold, after being held for more than twelve months.
11. The exemption is available to all specified securities, sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange, will not be covered.
12. The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange.
13. The exemption is not available to other securities, which are not specified, e.g. preference shares, bonds, debenture, etc.
14. The exemption is not available to transactions where Securities Transaction Tax has not been paid.
15. Securities Transaction Tax, paid for the purchase and for the sale of the specified securities, will not be available as a deduction. No deduction for the Securities Transaction Tax is incurred for purchase or sale of the specified securities.
16. Since long-term capital gain would now be exempt from tax, Section 14A would come into play. This means that no expense shall be allowed to be claimed as a deduction in respect of income, which is exempt. For example, expenses like interest, rent, salaries, wages, electricity, telephone, water, etc. and other administrative expense will not be allowed, as a deduction since the income earned is exempt.
17. Rebate, under Section 88E, is available in respect of Securities Transaction Tax from Assessment year 2005-06.

Is the dividend income, received from investments in shares, taxable?
Dividend, received from investment in shares, is not taxable in the hands of the recipient. The company, distributing the dividend, is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient.

Do investments in shares have any Wealth Tax implications?
Investments in shares do not have any Wealth Tax implications.

Do investments in shares have any Gift Tax implications?
Investments in shares do not have any Gift Tax implications. Investment in shares in the name of some other person other than the investors has Income-tax (gift) implications with effect from Financial Year 2004. These shares will now be treated as income.

Are investments made by NRIs/foreigners subject to the same tax implications as applicable to resident Indian?
NRIs are subject to lower rates of taxation. They have an option, either to choose the lower rate of tax on the capital gains or to choose the normal rate of tax if they want the cost to be indexed. 

What are the tax benefits available to an individual in respect of premium paid on life insurance policies?

Rebate under Section 88 is available in respect of life insurance premium only up to Assessment Year 2005-06. From the Assessment Year 2006-07, life insurance premium paid by an individual qualifies for a deduction under Section 80C of Income Tax Act, 1961. An individual can claim deduction on premium paid for a maximum of Rs 100,000 in each financial year. Deduction under Section 80C is a deduction from gross total income. Amount deductible under Section 80C is equal to

• a. 100% of the "qualifying investment", which includes life insurance premium, or
• b. Rs 100,000, whichever is lower.

What are the tax benefits available under pension plans?

The tax benefits for premium paid per annum in case of pension plans are eligible for a maximum benefit of Rs 100,000 under Section 80CCC. The said Section 80CCC limit also falls under the overall Section 80C limit of Rs 100,000. In other words, the deduction aggregate, under Section 80C, 80CCC and 80CCD cannot exceed Rs 100,000.

Are maturity proceeds on life insurance and pension policies taxable?

The maturity proceeds of life insurance policies are not taxable. However, under pension plans, upto one-third of the maturity amount can be withdrawn in cash and the same is treated as tax-free. An annuity has to be purchased with the remaining two-third amount. Pension receipts from the same will be treated as income in the hands of the assessee and taxed accordingly. 

Can tax benefits be claimed if the premium is paid by an individual on his/her spouse's policy?

Tax rebate under Section 88 can be claimed if the premium is paid by an individual on his/her spouse's policy but up to Assessment Year 2005-06. From the Assessment Year 2006-07 life insurance premium paid by an individual on his/her spouse's policy qualifies for a deduction under Section 80C of Income Tax Act, 1961. 

If a person discontinues paying premium on his life insurance or a pension policy, does he get tax benefits?

If a person stops paying premium amounts on his/her life insurance policy, it amounts to discontinuation of the policy. Hence, he is not entitled to claim any tax benefits.

If a tax-payer discontinues the life insurance policy before premiums have been paid for a period of 2 years from the commencement of the policy, no tax deduction is allowed in respect of any premium paid on that policy in the year in which the policy is terminated.

Further, the amount of tax deduction, allowed for the premium paid in the preceding year, is also treated as the tax payable for the year in which the policy is terminated. 

If a person, participating in a Unit Linked Insurance Plan (ULIP), terminates his policy, can he claim any tax benefits on the same?

If a person participates in a Unit Linked Insurance Plan (ULIP) and then terminates his participation, he will not be entitled to claim any tax benefits.

What are the deductions available in respect of a medical insurance premium?

The premium paid for medical insurance qualifies for rebate under Section 80D as follows-

• Insurance premium paid or Rs 10,000 whichever is lower.
• The aforesaid limit is Rs 15,000, where the individual or his spouse or dependant parents or any member of the family (for whom such premium is being paid) is a senior citizen (i.e. one who is resident in India and who is at least 65 yrs of age at any time during the previous year).

Can individuals claim tax benefits for donations to charities? Are all donations made eligible for tax benefits?

Yes, individuals can claim tax benefits on eligible donations to charities. Deductions are available under Section 80G to any taxpayer i.e. individual - resident and non-resident, firm, HUF, company. 

But, all donations are not eligible for deductions. Tax deductions can be claimed only on specific donations i.e. those made to prescribed funds and institutions.

What are the benefits available for deductions, in terms of percentage of the amount donated?

The tax benefits on donations are available under Section 80G of the Income Tax Act and have been segregated as follows:

• Those eligible for 100% deduction on the donation amount,
• Those eligible for 50% deduction on the donation amount,
• Those eligible for 100% or 50% deduction on the donation amount, subject to maximum of the 10% of the gross total income.

Is there an upper limit on the amount for purpose of claiming tax benefits?

No, there is no upper limit on the amount of donation. However in some cases there is a cap on the eligible amount i.e. a maximum of 10% of the gross total income.

The limit is to be applied to the adjusted gross total income. The 'adjusted gross total income' for this purpose is the gross total income (i.e. the sub total of income under various heads) reduced by the following:

• Amount deductible under Sections 80CCC to 80U (but not Section 80Gl)
• Exempt income
• Long-term capital gains
• Income referred to in Sections 115A, 115AB, 115AC, 115AD and 115D, relating to non-residents and foreign companies.

Should any documents be maintained by the donors for the purpose of claiming tax benefits?

Yes, the donor is required to maintain a proper receipt as evidence of the payment of donation.

Can an individual claim benefits for donations made, if he doesn't hold the necessary documentary evidence?

In order to claim the benefit for donations made, it is necessary to furnish, along with the return of income, the proof of payment made towards the donation to the eligible institution or fund. Tax benefits cannot be claimed without aforementioned documents. 

Can NRIs claim tax benefits for donations made to charities?

Yes, NRIs are also entitled to claim tax benefits against donations, subject to the donations being made to eligible institutions and funds.

What tax benefits can one avail on a home loan?

Tax benefits can be claimed on both the principal and interest components of the home loan as per the Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy or build a house, under Section 24(b).

(A) Interest on borrowed capital is deductible as follows:

1. If the following conditions are satisfied, interest on borrowed capital is deductible upto Rs 150,000. 
   
   
   • Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
     
     
   • The acquisition/construction should be completed within 3 years from the end of the financial year in which capital was borrowed. 
     
     
   • The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction.
     
     
2. If the conditions stated above are not satisfied, then the interest on borrowed capital is deductible up to Rs 30,000. However, the following conditions have to be fulfilled: 
   
   
   • Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property.
     
     
   • Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property.
     
   • If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed.

(B) In addition to the above, principal repayment of the  loan/capital borrowed is eligible for a deduction of upto Rs 100,000 under Section 80C from assessment year 2006-07.

A person avails deductions allowed under Section 24 in respect of his self-occupied house property and he takes an additional loan for extension/addition to the same house; can he claim benefits from the interest deduction on the additional loan taken?

The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000. Hence if the person's deductions on the existing loan are less than Rs 150,000, then he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year.

If a person avails deductions, allowed under Section 24 in respect of his self-occupied house property and he takes an additional loan for extension/addition to the same house, can he claim benefits from the interest deduction on the additional loan taken?

The maximum deduction permissible in a financial year for the original loan (if any) plus for any additional loans taken is Rs 150,000. Hence, if the person's deductions on the existing loan are less than Rs 150,000, he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year. 

If a person fails to make EMI payments on his home loan, can he claim tax benefits on the interest payable, under Section 24 and deduction under Section 80C of the Income Tax Act?

Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits for the same. 

If a home loan is taken by the father and the loan has been sanctioned on the basis of the son's salary, can the son claim the tax rebate and deduction in respect of the interest payments?

According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. Hence, in this case only the father will be eligible for the tax rebate.

If a fresh loan is taken to repay an existing loan, which was taken for constructing a house, can the interest on the fresh loan be claimed as a deduction?

Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject to the stated upper limit. 

Does interest on loan taken for repairs, renewals or reconstruction also qualify for the deduction of Rs 150,000?

Yes, the interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000. 

Can a husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan?

Yes, in this case, the husband and wife (being tax-payers with independent sources of income) can get tax deduction benefits with respect to the same housing loan 

In the above case, in what proportion will the tax benefits be shared?

To the extent of the amount of loan taken in their own respective name. 

What are the tax implications if a person buys a house with a loan and sells it (a) within the same year, (b) after three years? Further, what is the impact on benefits related to interest and capital repayment?

If a person buys a house and sells it within the same year/after 3 years, and if any profit is made, then a capital gains tax liability arises on the same. 

Let us take an example to better understand the same. For example, if you purchase a house for Rs 500,000 by taking a loan and you sell it in the same year for Rs 700,000, then you make a profit of Rs 200,000. On this profit, you will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen. 

The long-term capital gains will be exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house property as specified under Section 54. 

Under what circumstances can the tax benefit for taking a home loan towards purchase of a property be denied?

If it is proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

The NRI's are permitted to repatriate rupee funds/assets from India as under:

1. All types of current income in the nature of Interest, Dividends, Pension, Rent, Mutual Fund distribution is permitted for repatriation.
   
   
2. NRIs are allowed to repatriate the rupee funds as under: 
   
   
   • to meet expenses in connection with education of their children
     
     
   • to meet the medical expenses abroad of the account holder or his family members.
     
     
   • The sale proceeds of property held for more than 10 years.
     
     
   • Any legacy, Bequest, Inheritance by the NRI.
     
     The remittance on above account is subject to an overall limit of US$ 1 million per year.
     
     
3. The sale proceeds of the immovable property acquired by the NRI in foreign exchange is allowed to be repatriated up to the value of Purchase consideration paid in Foreign Exchange. 
   
   
4. Any other balances or assets held can be repatriated by obtaining special permission of the Reserve Bank India on the ground of hardship etc. and subject to conditions as specified in the permission.
   
   
5. NRI / PIO may remit an amount, not exceeding US $ 1million per calendar year, out of the balance held in NRO accounts.

PROCEDURE FOR REPATRIATION

The NRI should make an application to Authorised dealer for repatriation. The Authorised Dealer on satisfying itself with reference to the particulars/documents submitted by the concerned NRI, allow the repatriation of the same.

VIKALPA

Exemption certificate for tax deducted at source

The profit on sale of capital asset, shares, bonds, units of UTI and mutual funds, immovable property etc is taxed as under: 

The capital gains are segregated into long-term capital gains and short- term capital gains in following manner:

NRI is required to compute Capital Gains as under

NRI can compare capital Gains under (B) & (C) and select the method where tax is least.

For Long Term Capital Gains

--Under A, Tax rate is 10% or 20% if indexation benefit is claimed 
Under B and C rate of tax is 10% 

For Short-Term Capital Gains, the rate of tax is 30% under A, B and C

As per amendment in the Finance Act, 2004, Capital Gains arising from equity shares and equity-oriented mutual fund units sold on recognised stock exchange in India is taxable as under:

NOTE: All the above rates shall be further increased by surcharge of 10% if income exceeds Rs 1,000,000 and further by 2% by way of education.

CAPITAL GAINS TAX EXEMPTIONS ON REINVESTMENT

NRIs are entitled to claim exemption from tax if they reinvest long-term capital gains/net sale consideration into following assets.

What tax benefits are available to those who invest in mutual funds? Please mention the tax benefits on equity-oriented and debt-oriented funds separately.

Dividends declared by debt-oriented mutual funds (i.e. mutual funds with less than 65% of assets in equities), are tax-free in the hands of the investor. However, a dividend distribution tax of 14.03% (including surcharge) is to be paid by the mutual fund on the dividends declared. Long-term debt funds, government securities funds (gsec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds. 

Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds. Diversified equity funds, sector funds, balanced funds (with more than 65% of net assets in equities) are examples of equity-oriented funds. 

Amount invested in tax-saving funds (ELSS) would be eligible for deduction under Section 80C, however the aggregate amount deductible under the said section cannot exceed Rs 100,000. 

How are equity-oriented funds defined?

A mutual fund must have at least 65% of its net assets in equities/stocks to qualify as an equity-oriented mutual fund

Do equity/balanced funds have to maintain a daily, minimum 65% equity allocation?

Not really, the equity allocation is calculated based on the weekly average net assets in equities. If this average is below 65%, the fund stands to forfeit its equity-oriented status.

Do balanced funds qualify as equity-oriented funds?

If balanced funds maintain a minimum (average) 65% equity allocation, they do qualify as equity-oriented funds.

Is a capital gain on sale/transfer of units of mutual fund liable to tax? If yes, at what rate?

Section 2(42A): 
Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset.

Section 10(38): 
Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year 2005-06.

Short term capital gains on equity-oriented funds is chargeable to tax @10% (plus education cess, applicable surcharge). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income. 

Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less.

Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor.

Section 112: 
Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:

• Resident Individual & HUF - 20% plus surcharge, education cess.
• Partnership Firms & Indian Companies - 20% plus surcharge.
• Foreign Companies - 20% (no surcharge)

Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the Central Government.

"Units" are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess) without the cost inflation index benefit or 20% (plus applicable surcharge) with the cost inflation index benefit, whichever is beneficial.

Under Section 115AB of the Income Tax Act, 1961, long term capital gains in respect of units, purchased in foreign currency by an overseas financial, held for a period of more than 12 months, will be chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes under section 115AB, in respect of corporate bodies.

Is it possible to offset the capital loss on a mutual fund investment after a dividend declaration?

This is a practice that is popularly referred to as 'dividend stripping'. The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and 9 months after the dividend declaration. If you haven't adhered to this guideline then you cannot offset the capital loss arising from a dividend declaration.

What is the tax implication of a bonus/rights issue on mutual fund units?

Under Section 55(2) (AA), bonus on mutual fund units has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of mutual fund units. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.

The cost of acquisition of the rights issue on mutual fund units is the amount actually paid for acquiring such right, according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment.

Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'Nil' according to Section 55(2) (AA) (ii). Sale price of such transferred rights will be taken as capital gain.

The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement.

What are the tax benefits for the foreign investors?

Section 115E: Under Section 115E of the Act, capital gains, chargeable on transfer of long-term capital assets of an Non-Resident Indians (NRIs) are subject to following rates of tax:

Subject to surcharge and education cess.

Section 10(23D): Under provisions of section 10(23D) of the Act, any income received by the Mutual Fund is exempt from tax.

Section 115R: Under Section 115R, the Income distributed to a unit holder of a Mutual Fund shall be charged to following rates of tax to be payable by the Mutual Fund.

However, the above distribution tax will be exempted for an open-ended Equity-Oriented Funds (funds, investing more than 50% in equity or equity related instruments)

Is wealth tax applicable to mutual fund investments?

No. Units, held under the Scheme of the Fund, are not treated as assets within the meaning of Section 2(EA) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.

Is gift tax applicable to mutual funds investments?

No. Units of the mutual fund may be given as a gift and no gift tax will be payable, either by the donor or the donee.

How can I avoid payment of capital gains on mutual fund investments?

The capital gain, which is not exempt from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale.

Specified asset means any bond redeemable after 3 years:

• Issued on or after April 1, 2000 by NABARD (National Bank for Agriculture and Rural Development or NHA (National Highways Authority of India
• Issued on or after April 1, 2001 by the Rural Electrification Corporation Ltd.
• Issued on or after April 1, 2002 by the National Housing Bank or by the Small Industries Development Bank of India.

Such capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim exemption from capital gains.