For long-term gains on property, tax rate is 20% with indexation of cost

I would to know if, for the sale of property, can long-term capital gains tax be calculated at the rate of 10% without indexation? Can it be considered as tax-payable if it is less than 20% with indexation?

?Pinakin

The long-term capital gains tax rate of 10% without indexation is only applicable for listed shares and mutual fund units. For long-term gains on property, the tax rate is 20% with indexation of cost.

I have purchased a house, which was under construction in March ’05. The first installment of EMI I paid was in February ’05. The construction was completed and I have received the occupation certificate for the house in June’07. If I sell the house in June ’08 what would be the nature of tax I would have to pay.

?Parashram

Even though you have been paying EMIs since 2005, the house is completed and ready for possession only in FY07-08. Therefore, the period of holding would be considered from June 2007 and not from February 2005. Since the house has been held for less than three years prior to the date of sale, the gains would be short-term in nature. You will have to pay short-term capital gains tax.

I have some questions regarding PPF rules.

1) With regard to opening an account in the name of children, whether the term ‘children’ is inclusive of ‘Minor children’,

2) Would like to confirm whether the RBI Notification GSR 291(E) dated 13-5-05 has discontinued opening of accounts on behalf of “Association of persons” (AOPs), and

3) Whether contributions to the existing PPF accounts in the name of HUF could be made till maturity of the account.

?Shankar Patil

1. Contributions by the assessee to PPF accounts of the spouse and children, major or minor, married or otherwise, male or female, dependent or not, are eligible for the rebate. As a matter of fact, a parent may contribute even in the name of a married daughter and still claim rebate. Such contributions are construed as a gift. At its maturity, if the account is closed and the funds are reinvested, clubbing provisions becomes applicable in the case of spouse and minor children. If the child is major at that stage, there is no clubbing.

As per Notification GSR 908(E) dt 6.12.00, the ceiling on the aggregate contributions to accounts of self and all the minor children of whom the individual is a guardian is Rs 70,000.

2. Notification GSR 291(E) dt 13.5.05 has discontinued opening of the accounts on behalf of HUF, AOP, or BOI. Such accounts opened by mistake after 13.5.05 shall be treated as void ab initio. As and when (and if) the error comes to light, the account shall be closed and the amount refunded to the depositor without any interest.

3. The existing accounts can continue up to their maturity without the privilege of post-maturity continuation.

I put Rs 10,000 in my PF account every month, which compounds at 8%. My friends tell me that banks and post offices pay more than a PF account. I am attracted to PF because of the power of compounding, over the long term. In your opinion, am I doing the right thing?

?Nilkanth

Your friends are wrong. Banks and post offices do pay more, but the interest is taxable, whereas in PF or PPF, the interest is tax free. So on a post-tax basis, PF or PPF is a very good fixed income investment. Yes, you are doing the right thing.

I am a software professional. Over a period of time, my company has given me stock options that I haven’t yet redeemed. However, I am confused with the terms such as vesting, exercise price, etc. I just need to know if I sell the options am I liable to pay tax and if so how much.

?R. S. Shroff

An option is a right but not an obligation to purchase the share of the company at a given exercise price. You have to exercise your option to buy shares, till then you don’t own the shares. Vesting is gaining control over the shares or being eligible to exercise the option.

For example, many companies allot options to its employees but the vesting schedule is evenly spread over say four years. This means each year you are eligible to exercise 25% of the value of the options that are allotted to you. After having been vested with the options, they belong to you even if you leave the company. And by corollary, you will lose the unvested options.

As far as taxation is concerned, Fringe Benefit Tax (FBT) will be payable by your employer upon your exercising the options. The difference between the price as on the date of vesting and the exercise price would be the FBT liability.

This tax may be recovered from you by your employer. After you exercise your options and hold the shares for over one year, you pay long-term capital gains, else the gains would be short-term.

The difference between the sale price and the price on the date of vesting would be the gain, short term or long term as the case may be. Many employees are given the facility of a cashless exercise, where the difference between the sale and exercise price is given to them at the end of the exercise period. In the case of a cashless exercise, the gains are always short-term capital gains.

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