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Of loans, tax and higher education

Of loans, tax and higher education
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First Published: Mon, May 12 2008. 12 18 AM IST

(Illustration: Jayachandran / Mint.)
(Illustration: Jayachandran / Mint.)
Updated: Mon, May 12 2008. 12 18 AM IST
Tax queries
I want to take an education loan to do an MBA. Will the repayment of the loan qualify for income-tax deduction?
—GAURAV MAHAJAN
(Illustration: Jayachandran / Mint.)
Repayment of interest on an education loan for higher studies qualifies for deduction under section 80E of the Income-tax Act. Higher education means full-time studies for any graduate or postgraduate course in medicine, engineering or management, or any postgraduate course in applied sciences or pure sciences, including mathematics and statistics. No deduction is allowed for repayment of the principal amount. The entire amount of interest, without any limit, is allowed as deduction, provided it is paid out of the taxable income of the assessee. Further, the period of deduction cannot exceed eight assessment years, commencing from the year in which the first repayment is made.
What tax deductions can I get for repayment of a home loan?
—BALJEET
Primarily, you can get two types of deductions for a home loan, one on repayment of the principal amount of the loan, and the other on the interest on the loan. Whether you reside in your house or give it out on rent, the repayment of the principal amount of loan will qualify for deduction under section 80C. The maximum amount of deduction available for repayment of the principal amount is Rs1 lakh. Under section 24(b), up to Rs1.5 lakh can be claimed as deduction under the head “Income from House Property” for the interest component of a loan in case of a self-occupied house. However, the full amount of interest can be claimed as deduction in case the house is given on rent.
I am retired. My sole source of income is interest paid by my bank. How much will I have to pay in taxes and charges if I earn a profit from stock market investments?
—AMAR SINGH
The amount of taxes you’ll pay will depend on your total income and age. If you have completed 65 years, you will be considered a senior citizen under the Income-tax Act, and from this financial year (2008-09), you will be required to pay income tax only if your net income from all sources exceeds Rs2.25 lakh. Your income consists of bank interest, which is chargeable under the head “Income from Other Sources”. The income from share sale and purchase will be taxed under the head “Capital Gains”. If shares or mutual funds are sold within a year of their purchase, the gains thereof, called short-term gains, are taxed at a flat rate of 10% plus 3% education cess. This rate has been hiked to 15% plus 3% education cess with effect from financial year 2008-09. However, long-term capital gains—from sale of shares or mutual funds more than one year after their purchase—are exempt from tax. To claim this exemption, the sale transaction should be entered through a recognized stock exchange in India and the securities transaction tax paid on the transactions.
I am in government service and pay taxes. My spouse, a housewife, has a demat account and no source of income. I have put Rs50,000 in her account and her short-term capital gains (STCG) are Rs5,000. The Rs10,000 she earned from a job two years ago is in another savings account. How much tax does my wife have to pay? Would I have to pay gift tax? Can money earned by me be managed by my wife? How much tax will she have to pay if she loses her STCG this financial year and suffers a net loss?
—MASHER KHAN
No gift tax is applicable if someone gifts any amount to his wife. Though there is no monetary ceiling on gifts from one’s husband, the investments made through this gifted money continue to be taxable in the hands of the husband and are clubbed with his income in all cases where the wife is a housewife with no source of income of her own. Income is taxable in the hands of the person who earns it irrespective of who manages it. So, even if your wife manages your investment, you shall still be liable to pay tax. You are not liable to pay any STCG tax if you suffer an equivalent amount of short-term loss. Also, short-term loss can be set off against both long-term and short-term gains, but long-term loss can be set off only against long-term gain. Further, capital loss cannot be set off against income earned under any other head. So, in case a capital loss is not fully set off in the financial year in which it occurred, it can be carried forward to be set off against future gains. The loss can be carried forward for a maximum of eight assessment years immediately succeeding the year for which the loss was first computed.
Mutual fund queries
How should one evaluate MFs?
—KUMAR GAURAV
Broadly, the two things you should look at in a mutual fund (MF) are risk and return. For returns, look at the past performance. The longer the better. Try to find out its consistency over a period of time. Although past returns are not a guarantee for future performance, it gives you an idea of how the fund is likely to perform. Look at the fund’s risk levels. For instance, you can go through the monthly factsheets which give you a low-down on the fund’s performance against its benchmark. Check for simple things such as portfolio concentration as funds that are invested in too few scrips can be volatile.
In a bear phase, which funds are the best to remain invested in if one has an investment horizon of three years from now and one wants to invest through SIPs?
—SANJAY
No one really knows for sure if we have entered a bear phase. Though the Sensex has corrected by about 27% from its peak level in January, the long-term India growth story is still on track. For your systematic investment plan (SIP) requirements, pick two to four equity schemes from among diversified, large-cap, mid-cap and thematic categories.
Should I start an SIP in a high-NAV scheme such as the PrincipalPersonal Tax Saver?
—GAURAV MAHAJAN
Avoid Principal Personal Tax Saver and go for Principal Tax Savings (PTS) instead. PTS is an aggressively-managed equity-linked saving scheme (ELSS) that also offers section 80C benefits, up to an investment of Rs1 lakh. PTS takes aggressive exposure to small-cap scrips. Yet, it has managed its risks well and consistently given top quartile returns. Further, the level of your fund’s net asset value (NAV) doesn’t really matter. It is a myth that a lower-NAV fund is better than one with a higher NAV. Your fund has a higher NAV simply because it has been in existence for long. Lastly, note that each instalment of your SIP will get locked in the scheme for three years.
(Send your questions and comments to moneymatters@livemint.com)
(The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.)
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First Published: Mon, May 12 2008. 12 18 AM IST