Invest in REC, NHAI bonds to avoid capital gain tax
I purchased a flat in Chennai in July 1997 for Rs 7 lakh. I have sold it in January 2010 for Rs 20 lakh. I want to avail invest in capital gain bonds to get exemption from capital gains tax. So how much money I need to invest and for how many years? What are the institutions in which I can invest?
S.Kannan
Via email
Since you have held the flat for more than 36 months, it will be considered as the sale of long-term capital asset. You will be eligible to claim the benefit of indexation — which takes into the effect of inflation in the period.
The indexed cost of acquisition of the flat purchased for Rs 7 lakh during the financial year 1998 after applying the cost inflation index works out to Rs 13,36,556.
In order to avoid tax liability, the long term capital gain of Rs 6,63,444 (actual sale price minus indexed worth of the flat) needs to be invested in either the purchase or construction of a residential house or in capital gains bonds of Rural Electrification Corporation or National Highway Authority of India for a period of three years.
The amount you have got needs to be invested within a period of six months from the date of transfer or sale of the asset.
I am a central government employee. I have recently submitted my income tax calculation to my DDO. While calculating the HRA exemption, I have deducted 10 per cent of the salary (ten per cent of basic pay plus grade pay) from the rent paid (rental receipts duly produced) and claimed the rest as exempted.
However, my DDO is adding dearness allowance to the basic pay plus grade pay for the calculation of 10 per cent of the salary. DDO is of the opinion that though DA is not considered while calculating pension, DA is considered while arriving at the gratuity to be paid to the employee at the time of retirement and hence DA is to be considered as salary. Please clarify whether DDO is correct?
Satya Sai Kumar
Via email
Your DDO is absolutely right in his assessment to include DA (dearness allowance) as part of salary while calculating the HRA exemption. As per Rule 2(h) of Part A of the fourth schedule, salary includes dearness allowance, but excludes all other allowances and perquisites. Further, according to Section 2(S) of the Payment of Gratuity Act, 1992, the term "wages", includes all emoluments which are earned by an employee while on duty or on leave.
It also includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.
Hence it is clear from the above definitions that salary includes dearness allowance both for the purpose of calculating the exemption for house rent allowance as well as gratuity.
(Kamal Rathi is a chartered accountant, representing Rathi & Malani, a Hy-derabad-based accounting firm. Readers can mail their queries on income tax to kamalrathi.ca@gmail.com)
Kamal Rathi
Post new comment