While we receive several queries from our readers on topics ranging from taxation and pension to insurance and stocks, we are unable to feature them all. In an attempt to provide a more comprehensive forum, we are introducing a revamped Query Corner, where we shall try to accommodate and address as many of your financial concerns as possible. Continue to write in.
How can one invest in a gold exchange-traded fund (ETF)? What is the tax treatment for profits made from such investments?
— Vinay Acharya
Gold ETFs can be bought and sold like any other share or security on the stock market through a broker. You need to have a demat account in a bank or a depository partner, and a trading account with the broker. One benefit of gold ETF is the lower tax rate it attracts compared with that for physical gold. If gold ETFs are sold within one year of purchase, the profits are added to the income and taxed at normal rates. But if the holding period exceeds one year, the profits are treated as long-term gains and taxed at a flat rate of 10% or 20% after indexation benefit. In comparison, physical gold has to be held for at least three years for the profits to qualify as long-term capital gains. Incidentally, there is no tax on gains made from the sale of jewellery bought for personal use.
My company has provided the option of voluntary retirement for its employees. Are there any tax exemptions available to employees on the compensation received by them?
— Rajesh Chauhan
Voluntary retirement is covered under the Golden Handshake Scheme of the Income Tax Act. If your company has initiated this plan, it must follow the voluntary retirement scheme guidelines laid down under Rule 2BA. As per these, only the employees who have completed 10 years of service or are above the age of 40 years are eligible for this scheme. Also, the amount payable to the employees is not more than three months' salary for each completed year of service, or the salary at the time of voluntary retirement multiplied by the number of months of service left before the retiring age.
As per Section 10(10C) of the Income Tax Act, the compensation received on voluntary retirement is exempt from income tax up to a maximum of Rs 5 lakh.
I purchased a plot of land in 1979 for Rs 10,000 and sold it for Rs 5 lakh last year. The stamp valuation authority has assessed the value of the plot at Rs 6 lakh. The cost of plot as on 1 April 1981 was Rs 15,000. What will be my capital gain?
— Rajesh Thakur
For calculating capital gains, the value of the plot assessed by the stamp valuation authority is taken into account as it is higher than the sale value. The cost of the plot as on 1 April 1981 will be taken and indexed at the cost inflation index of the respective year. This will be calculated as Rs15,000 x 582/100=Rs 87,300. The capital gains will be Rs 6 lakh-Rs 87,300=Rs 5,12,700.
You can avail of tax benefit under Section 54F if you use the sale proceeds to construct a house within three years or buy a house within two years from the date of selling the plot.
The income from bank deposits has tax deducted at source (TDS). Does one have to pay additional tax on this income?
— Shobha Charan
The TDS is just an interim deduction of 10% or so. If the individual's income falls in a higher bracket, he will have to pay more tax. The interest earned on bank balances, fixed deposits and other securities is fully taxable. If the investor's income is below the exemption limit, he can submit Form 15G or Form 15H (for senior citizens) to avoid TDS. Also, the tax on the interest from bonds or fixed deposits is to be paid every year even though the investor may get this income only on maturity of the security.
I own a flat in Mumbai, for which I am paying a home loan EMI. I have let out this flat and am staying in a rented house in Mumbai as it is close to my workplace. I am entitled to a house rent allowance (HRA) from my employer. Can I avail of income-tax deduction on both?
— Deepak Pai
Yes, you can claim deduction for both the rent paid as well as the EMI. The HRA and home loan provisions are two different issues as far as the Income Tax Act is concerned and one does not influence the other. If you are getting HRA from your employer, you are eligible to claim deduction with respect to the rent paid by submitting rent receipts to your employer. The fact that you own a flat, either in the city that you work in or anywhere else, will in no way influence the HRA deduction that you are entitled to as long as you are living in a rented accommodation.
Also, as you have rented your flat, you can claim the entire amount of interest paid on the home loan as deduction from the rent received by you. The principal component repaid is eligible for deduction under Section 80C of the Income Tax Act.
Mutual Fund portfolio
I invest Rs 4,000 a month in three mutual funds through SIPs. Two of them are ELSS funds and the third is an infrastructure fund. Should I continue investing in these funds?
— Arpita Basu
You have chosen the right mode of investing in equities. Mutual funds diversify the risk of investing in stocks, while SIPs neutralise the impact of volatility by averaging out the cost of purchase. The SBI Magnum Taxgain 93 fund has been a long-term outperformer (see table). We suggest you continue investing in it, even increase the SIP to Rs 1,500 a month from the current Rs 1,000.
However, the Birla Sun Life Tax Relief fund has not done too well. You could stop the monthly SIP or reduce it to Rs 500 from 1,000. The Reliance Diversified Power fund is a sectoral scheme and carries more risk than a diversified equity fund. It has done exceedingly well in the past three years. Even in the past one year it has managed to contain its losses well below the category average. Continue investing in it if you are comfortable with the risk.