Monday, January 12, 2009
Apna Money
Tax Matters
Can I claim deduction from my home loan repayment though I am not staying there?


Can I claim deduction of interest and principal component from the repayment of housing loan taken to purchase an apartment in Mumbai? I am not residing there as the company has provided me with a furnished accommodation in the same city. I do not have any other property.
- Anand Sheik, e-mail

If a property could not be occupied throughout the previous year on account of employment, business or profession being carried on at any other place and if such property has not been let out and no benefit is derived from it, then income from such property shall be computed as if it is a self-occupied property. One can claim deduction of interest and principal from the repayment of housing loan against such property.


We are manufacturing, supplying and installing prestressed concrete pipes/high density polyethylene (HDPE) pipes on a turnkey basis under works contracts from the state government/zilla parishad, municipality or village panchayat. These contracts are for drinking water projects and not intended for commerce or industry.
-Chandrakand Muni, e-mail

As per the explanation to Section 65(105)(zzzza) of the Finance Act, 1994, a works contract is one in which transfer of goods involved attracts sales tax and such a contract is for carrying out specified activities mentioned under it.

Activity of installation of concrete pipes and ducts is covered under the first sub-category of work contract services. Under the category, there is no mention as to whether the end use should only be for commerce and industry. The category of commercial or industrial construction includes such end-use.

For engineering procurement and construction (EPC) contracts on a turnkey basis, the same logic applies as there is no mention of specific end-use. The definition clearly explains that the taxable service is the service provided or to be provided to any person by any other person for the execution of a works contract excluding works contracts for roads, airports, railways, transport terminals, bridges, tunnels, and dams. Therefore, manufacture, supply and installation of pipes undertaken as turnkey contract, whether for government or any other person, is covered under the works contract service.

Job work is undertaken by us to provide partition, false ceiling, flooring, and fixtures in offices and business establishments. The job is executed based on works contracts given by business process outsourcing (BPOs) and public and private sector companies. Value-added tax is levied by the state government.
-Namdev Chiplunkar, e-mail

Prior to 1 June 2007, fixing partitions and other fixtures for offices was covered under commercial or industrial construction service. The definition given under Section 65(25b) of the Finance Act, 1994, talks about completion and finishing services needed for building or civil structure. It also mentions several activities — plastering, painting, and wall covering — undertaken in new construction or as part of repair work of existing construction. As the activity of putting partition and false ceiling is in an existing building and it is not in the nature of repair or renovation, this is not covered here. By execution of such activity, there is no ‘finishing’ or ‘completion’ provided to the premises. It is to enhance functional utility of the space and improve aesthetics

This activity is also not covered under interior decorator service as it includes advice, consultancy or technical assistance and not actual provision of goods.

I had purchased a flat for Rs 4.50 lakh in December 2001. I sold it for Rs 7.75 lakh in November 2008. The profit is Rs 3.25 lakh. I am planning to keep the profit gained in a fixed deposit in a nationalised bank. I have paid Rs 56280 as society charges (Rs 670 x 84 months), Rs 8500 for no-objection certificate (NOC), Rs 2500 for new water connections, and Rs 10000 for miscellaneous charges. Hence, expenses of Rs 77280 were incurred by me on the flat during the tenure of my possession. How much capital gain tax do I have to pay? What are the ways to gain exemption? There was outstanding bank loan of Rs 296000, which is now cleared. I have paid Rs 275000 as interest against my loan amount of Rs 4 lakh during these seven years.
-Rajmohan Menon, e-mail

Interest paid on borrowed capital for purchasing a residential house property is available as deduction under Section 24(b) of the Income Tax Act, 1961. Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration under Section 48. Payment to co-operative society to get NOC, if necessary for transfer, is allowed under Section 48. [Damodar G Nagalia v Commissioner of Income Tax (CIT) [2007] 12 SOT 600]. Society charges and miscellaneous charges would not contribute towards the cost of asset. Whether new water connections comes under the ambit of cost of improvement is a debatable issue.

On the basis of the above explanations, your capital gain tax liability is calculated as follows:

Sale consideration : Rs 775000
Less: Expenditure under Section 48 : Rs 8,500
Net sale consideration : Rs 7,66,500
Less: Indexed cost of acquisition
450000 x 582/ 426 : Rs 614789
Long-term capital gain : Rs 151711
Long-term capital gains tax liability will be 151711x 20% : Rs 30343

You can claim deduction under Section 54EC of the Income Tax Act, 1961 by investing in Rural Electrification Bonds or bond issued by the National Highway Authority of India. An investment of Rs 151711 in such specified bonds with a lock-in period of three years will enable you to save the tax of Rs 30343 calculated above.

I sold a family property (land plus house in a co-operative housing society) in Chennai in November 2008. This was in my father’s name and was purchased by him in 1954. The purchase cost was around Rs 13000. He bought it with his own earning. We are three brothers and we shared the Rs 4.50-crore sales proceed equally among us. Two of my brothers are 65 year of age. I am 60 years. What will be the long-term capital gain tax? Do we have to pay separately? Are capital gain bonds available to invest? Can we invest our share in a bank fixed deposit of three years to save on capital gain tax? If we each invest Rs 50 lakh in bonds (maximum amount allowed), if we are unable to purchase any residential house, what will be the tax that we have to pay on the balance amount? Before which date is the tax to be paid?
-M V Balakrishna, e-mail

An asset acquired under a will or inheritance will not be treated as transfer under Section. 47(iii) of the Income Tax Act, 1961. For calculation of capital gain, you need to ascertain the fair market value as on 1 April 1981. In the absence of information, we assume it to be Rs 1 lakh as on 1 April 1981 and calculate the long-term capital gain.

Sale consideration Rs 45000000
Less: Indexed cost of acquisition
Rs 100000 x 582 / 100 Rs 582000
Less: Expenses like brokerage or which one directly related to sale of property Long-term capital gain Rs 44418000

The above calculated gain will be divided equally among the three brothers, where each brother’s share comes to Rs 14806000, assuming all of you have inherited it in your individual capacity. You can claim exemption under Section. 54, which provides exemption from capital gain arising from transfer of residential house.

As per the provisions of this section, only an individual or Hindu undivided family (HUF) can avail exemption. To claim exemption, the tax payer will have to purchase a residential house property (old or new) or construct a residential house property. The time limit is given below:

Time limit
Purchasing a new residential property It should be purchased within one year before or within two years after the date of transfer of the residential house property.
For constructing a new residential property The construction should be completed within threee years from the date of transfer of residential house property.

If the amount is not utilised for purchase/construction of the new property till the due date of submission of return of income, then it should be deposited in the capital gain deposit account scheme. The proof of deposit should be submitted along with the return of income.

You can also claim exemption under Section 54EC, which specifies investment in certain bonds as per the following conditions:

* The asset transferred should be long term. From assessment year (AY) 2006-07, the amount should be invested in bonds issued by the National Highway Authority of India and Rural Electricity Corporation and such bonds are redeemable after three years.

* The amount of exemption will be lower of the capital gain generated on transfer or the amount invested in such bonds.

* The investment made on or after 1 April 2007 in the bonds specified above cannot exceed Rs 50 lakh in any financial year.

The long-term capital gain will be reduced by exemptions claimed under Section 54 and under Section 54EC. The balance, if any, in each account can be further reduced by the unutilised basic exemption limit as per the individual slab rates. The balance, if any, will be taxed at a flat rate of 20%. For payment of taxes you can refer the due dates of payment of advance tax.

It is obligatory to pay advance tax in every case where advance tax is payable is Rs 5000 or more.

You can refer the following schedule of payment of advance tax

For non-corporate assessee
On or before September Up to 30% of advance
15 of the previous year taxpayable
On or before December Up to 60% of advance
15 of the previous year tax payable
On or before March 15 Up to 100% of advance
of the previous year tax payable.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may address their queries on direct taxation to:

T K Doctor, C/o Capital Market, 101, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai-400 071 E-mail: tax-matters@capitalmarket.com

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