Personal Finance

Tax on interest income

T. Banusekar | Updated on February 12, 2011 Published on February 12, 2011

I had opened a post office recurring deposit account in the name of my minor daughter. Now I had closed the account and received the deposit money along with interest. My daughter has become major at the time of closure of the recurring deposit account. Will the entire cumulative interest be taxable in her hands as her income?

Ramesh

The interest income from the deposit will be chargeable on cash basis or on mercantile basis. This interest will be chargeable under the head income from other sources and as stated earlier, on one of these methods which is the method of accounting regularly employed by the assessee. In your case, the assessability in the hands of your daughter or in your hands will depend upon the accounting method employed by you and your daughter. If the cash system of accounting is followed, the entire income by way of interest will be chargeable only at the time when the interest is received. Since in your case it has been received after your daughter attained majority, the entire interest will be chargeable to tax only in her hands. If on the other hand the mercantile system of accounting is followed, the interest will have to be accounted in the respective years and the years in which you daughter was a minor, the interest income will have to be clubbed in the hands of the parent and the interest relating to the period after she attained majority will be taxed in her hands.

I am working in Ethiopia on contract basis. My payment is made in US Dollars i.e. transferred to my account in India. As per the Ethiopian Law, tax is deducted at 35per cent of the payments made to me every month. Do I have to pay any additional taxes in India on the income earned in Ethiopia?

Ram Kumar

The taxability in India of the income will depend on your residential status.

An individual is resident in India if he satisfies any one of the following conditions:

He is in India for 182 days or more in the previous year.

He is in India for 60 days (182 days if he leaves India to take up employment outside India if he is a citizen of India or being outside India comes to India on visit if he is a citizen of India or a person of Indian origin) or more in the previous year and for 365 days or more in the four years preceding the previous year.

He is resident but not ordinarily resident if he satisfies any of the following conditions: He is non resident in 9 out of the 10 years preceding the previous year. He is in India for 729 days or less in the 7 years preceding the previous year. If an individual is resident but is not resident but not ordinarily resident, then he would be resident and ordinarily resident. An individual who is not a resident would be a non-resident.

If in accordance with this section you are a non resident or a resident but not ordinarily resident, the income earned in Ethiopia will not be taxable in India. If on the other hand you are a resident and ordinarily resident in India, the income earned in Ethiopia will be chargeable to tax in India.

I own a house property which was purchased by me in the year 1976 for a sum of Rs 50,000/-. The present value of the house is around Rs 1 crore . As I have no interest in acquiring another property, I wish to gift the house to my two sons. If my two sons sell the property and utilise the sale proceeds to purchase property in their names, will they get any exemption from paying taxes on the long term capital gains that would arise on the sale of house property gifted by me to them. It may be noted that my two sons are employed and are tax payers.

A. Ramanathan

Your sons can claim exemption on the long term capital gains earned by them from the transfer of the house property gifted by you if they choose to reinvest either in a house property or in bonds under sections 54 and 54 EC, respectively. Section 54 and 54 EC provides an exemption on reinvestment which is as follows: Under section 54, an exemption is available on transfer of one residential house and on reinvestment in another residential house. This exemption is available subject to satisfying the following conditions: The assessee is an individual or HUF. The gain arises from the transfer of a residential house being a long term capital asset. The income from such asset is chargeable to tax under the head income from house property. The exemption would be available to the following extent:

If the amount invested is more than or equal to the capital gain, the whole of the capital gain. If the amount invested is less than the capital gain then to the extent invested. The exemption u/s.54 EC is available subject to satisfying the following conditions: The asset transferred is a long term capital asset. The investment is in bonds of the National Highway Authority of India or Rural Electrification Corporation which are redeemable after a period of 3 years. If the exemption should be claimed under section 54 EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset. The exemption would be available to the following extent: If the amount invested is more than or equal to the capital gain, the whole of the capital gain. If the amount invested is less than the capital gain then to the extent invested. You may also note that the investment for the purpose of claim of exemption u/s.54 EC cannot exceed Rs 50 lakh in a financial year.

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