Photo: iStock
Photo: iStock

Fixed deposit interest can be offered to tax in the year of accrual or in the year of receipt

You can claim a tax deduction from taxable income under section 80C, if you invest in a fixed term deposit of 5 years in scheduled banks

I had invested in some equity mutual funds in 2015-16. I have held them for more than a year. From the new financial year (2018-19), I am told that if I sell the units, I will have to pay capital gains tax. Could you please tell me what the new tax rules are?

—Senthil

As you have held the units of the equity-oriented mutual funds for more than 12 months, they shall classify as long-term capital assets. Consequently, the gains will be classified as long-term capital gains (LTCG). Under the amended capital gains tax provisions, LTCG from the sale of units of equity mutual funds would no longer be exempt from tax. Instead, tax will be payable on any such LTCG (to the extent it exceeds Rs1 lakh), beginning 1 April 2018.

Further, indexation benefits that were applicable earlier to consider the impact of inflation on the cost of acquisition would also not be available.

Tax is payable at 10% (excluding applicable surcharge and cess) on LTCG. When computing this, the highest listed price (the net asset value or NAV in this case) of the units as on 31 January 2018 (i.e., which is the fair market value or FMV) can be considered as the cost of acquisition if it is higher than the actual cost of acquisition. However, such FMV cannot exceed the gross sale consideration received upon sale.

I have two houses and wish to sell both. The two older properties are fully paid up, and I am the sole owner. I want to use the proceeds to buy a bigger house in my name. If the gains from the older properties are used to buy only one house, will I still get tax benefit on reinvested capital gains?

—Shelly Bhaskar

You will have to pay tax on capital gains arising from the sale of the two houses you own currently. The gains are computed as the difference between the net sale proceeds and the cost of acquisition and improvement. If the house was held for at least 24 months before the sale, you can claim indexation of the costs of acquisition or improvement. The gains will then be taxable as long-term capital gains (LTCG). If not, the gains will be taxable (without indexation benefit) as short-term capital gains (STCG).

Where the resultant gain can be termed LTCG, you can avail an exemption from capital gain tax by reinvesting capital gains of one or both the current houses in a new residential property in India, within 1 year prior or 2 years after the sale date of the current houses (if the property is acquired) or within 3 years (if the house is constructed), subject to other conditions laid down in section 54 of the Income-tax Act, 1961.

There are judicial precedents where the claim for tax exemption has been permitted where the gains arising from more than one house property has been reinvested in buying a single new property.

I have just started working and want to save about Rs500-1,000 every month in a fixed deposit. Will the amount on maturity be taxed?

—Kshitij

The interest you earn from a fixed deposit is taxable in your hands without any deduction (we have presumed that you are not a senior citizen). You can either offer this to tax in the year of accrual (each year when interest keeps accruing) or in the year of receipt (i.e. maturity) depending on the method of accounting you adopt. You can claim a tax deduction from taxable income under section 80C in the year of investment, if you invest in a fixed term deposit of 5 years in scheduled banks.

What tax benefits are available for medical expenses of senior citizens? Are prescribed medicines included?

—Aluka Purohit

The health insurance premium paid to cover medical expenses of a senior citizen or parent who is a senior citizen (aged between 60 and 79 years) can be claimed, capped to Rs30,000 per financial year, under section 80D of the Income-tax Act, 1961. Actual medical expenses incurred (capped to Rs30,000 per financial year) can be claimed only in respect of a very senior citizen parent (80 years and above) and only if there is no health insurance cover obtained for the person. Both these limits have been increased to Rs50,000 per financial year from FY 2018-19.

In addition, a tax deduction of up to Rs60,000 can be claimed for treatment of specified ailments (for example, neurological or hematological disorders and cancer) of a senior citizen or dependant parent who is a senior citizen. In case of a very senior citizen, this deduction can be availed to a maximum amount of Rs80,000. Any expense recovered from an insurer is not eligible for deduction. Both these limits have been increased to Rs1,00,000 per financial year from FY19.

I have borrowed Rs3 lakh for trading in the share market. Will this be treated as income and will I have to file tax return for it?

—Alok Kumar Singh

A loan received which is repayable to the lender would not constitute as income in the hands of the borrower even if the lender is the father of the borrower. You will need to report any profit you earn from the share trading as business income/capital gains depending on various factors such as amount and volume of trades. You will also need to file a tax return if your gross taxable income (from this and all other sources) for the fiscal year exceeds the taxable threshold (which is Rs2,50,000 for FY 2017-18) or if you qualify as a resident and ordinary resident and have any foreign assets.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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