Recently I got bonus shares from Reliance in the ratio of 1:1. As a result the stock exchange quote for these shares were reduced to one half on the transaction day i.e. from Rs. 2,250 it came down to Rs. 1,125. This means that there is no actual benefit to the bonus allotment. Now if I sell these shares including the bonus shares, need I pay any capital gains tax? My understanding is that I need not pay any tax:

a. I held the original shares for more than 10 years;

b. Even if bonus shares are held for just two months by now and I have not paid any cost directly, I need not pay tax because these shares have been allotted at an indirect cost by reducing half of the share price on the transaction day when these were actually allotted to me.

Bonus shares if are really allotted free of cost, then after one year if these are sold, no tax is leviable even after deducting their zero cost of acquisition from the sale proceeds. Please confirm.

? J K Kanojia

You will have to compute the long-term gain on the original shares by subtracting their indexed cost from the current market price at which you have sold these shares. You have also earned short-term capital gains on the sale of bonus shares. Since the cost of acquisition of the bonus shares is nil, the entire sale proceeds of the bonus shares will be construed to be your short-term gains.

Yes, this is very unkind to the investors but this is how the law is. It is slated to be more unkind because the lawmakers are contemplating to introduce some dissuading measures for bonus stripping on the same lines as the existing measures in place for dividend stripping.

I need your help on the issue of applicability of income tax on the payment of gratuity. My problem faced by me is mentioned below:-

I had worked in a PSU adhering to the Payment of Gratuity Act, 1972 from 22-10-2001 to 01-09-2007 & then I quit my job by resigning on 01-09-2007. Now I have applied for the payment of gratuity entitled to me as per rules. The concerned department calculated the gratuity as per details below:-

Last Pay drawn = Rs 24677

Gratuity payment = (24677/26)*15*6 = Rs 85410 approximately

Now the accounts officer told me that the payment of gratuity is taxable so 30% tax will be deducted from the above amount during the payment. Apparently since I have resigned and not superannuated it is taxable. Please clarify whether this is right and also throw light on the applicable section of the Income Tax Act.

?Ravinder Singh

A : The position of taxability of gratuity is as under:

Sec 10(10i) ? Any death-cum-retirement gratuity received under the pension rules (or any similar scheme) by employees of central or state government, any local authority or defence and civil services is wholly exempt.

Sec. 10 (10ii) ?Gratuity received under the Payment of Gratuity Act, 1972 is exempt up to a limit of gratuity paid at the rate of 15 days (last drawn) salary per year of completed service or part thereof in excess of six months or Rs. 3,50,000 whichever is less, provided the employee has been in continuous service for five years.

Sec. 10(10iii) ?In the case of employees of other statutory corporations and employees in the private sector to whom the Payment of Gratuity Act is not applicable, gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, the exempt amount would be the least of the following :

* Actual amount of gratuity.

* Half month?s salary for number of years of service calculated on the basis of average salary for the last 10 months.

* Rs. 3,50,000.

You are covered by Sec. 10(10ii) and therefore, since the gratuity received by you is less than Rs. 3.50 lakh, the amount of gratuity received by you is exempt.

The condition ?on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment? is applicable to employees of organisations to whom Payment of Gratuity Act, 1972 is not applicable.

I am a teacher in a Chembur school. I am physically handicapped person having 45% disability certificate from Hajiali hospital. My question is can I get deduction u/s 80U?

? Kale

The disability is classified into two parts as defined under the Persons with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1996. A person with disability means a person suffering from not less than 40% of any disability as certified by a medical authority; disability of 80% or more is severe disability. The deduction allowed will be Rs. 50,000 for non-severe and Rs. 1,00,,000 for severe disability.

The authors may be contacted at wonderlandconsultants@yahoo.com