In one of your Q&As you stated that a PPF account after maturity can be extended for any number of block periods – there is no limit on how many times you can extend the account. My banker has stated that only two extensions are permitted and therefore I will have to withdraw the amount on April 1, 2010. However, I am interested in continuing with the PPF account with a yearly contribution. Please let me know the notification/circular allowing extension of the block period without any time limit so that I may show the same to my banker. Your early response will be greatly appreciated.

?MP Gajaria

The note under Sec 9(3) of the PPF Scheme, 1968 states, “A subscriber may at his option (to be exercised before the expiry of the first year of every extended block period) avail of this facility for a further block of 5 years on expiry of 20 years or on expiry of 25 years and so on, from the end of the year in which the initial subscription was made.”

Unfortunately, many of the accounts offices miss the words, ‘and so on.’, and therefore feel that the account is required to be closed on expiry of 25 years.

I have three grand children – age 16 years, 8 years and 3 years. Can I open a PPF a/c in their name? If yes, then how much contribution can I make in each a/c. I do not mind investing Rs 70,000 in each a/c from my capital. I do not wish to claim any tax deduction for that investment since I am also contributing Rs 70,000 in my own PPF a/c. The amount of Rs 2,10,000 contributed by me to my grand children PPF a/c has no impact on my income except my capital will go down by that amount. Will this transfer of Rs 70,000 be considered as gift from me to them and will they come under gift tax? Lastly, can I make a direct payment to their respective PPF a/c or do I have to first open a bank a/c in their name, deposit the amount [Rs 70,000] in their a/c and then write a cheque from their bank a/c.

?Sanat Kapadia

Yes, you can open an account in their names but there is an insurmountable difficulty.

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.

What if an individual who is not a guardian, say the grandfather, contributes to the account of the child? The contributions can flow from any source, but the clubbing with the parent is applicable. Under such circumstances, neither the grandfather nor the parent can claim the benefit of Sec. 80C.

This contribution in excess of Rs 70,000 will be returned to the parent without interest whenever (and if) it comes to the notice of the accounting office.

Otherwise the parents can continue to contribute to the PPF of children without claiming the deduction u/s 80C.

Such contributions will be treated as gifts but since the gifts are received from a relative, no income tax is attracted. The interest will get clubbed in the hands of the natural guardian, but since it is tax-free, the clubbing provision loses its teeth.

I stay in Bangalore in a rented house. I claim HRA for the same. I have constructed a house in Harihar, and taken a loan for the same. My parents stay in that house. Now can I claim a tax exemption on the loan and also get HRA benefit?

? Ramesh Babu

Yes, you can. The provisions relating to HRA and home loan interest deduction are independent of each other. HRA deduction is available as long as you pay rent, regardless of whether you own any property, whether in the same town/city or not. Similarly, as long as you pay interest on the housing loan, the interest is deductible, even if you stay in a rented house.

I inherited my father’s 40-year-old house on his death in the year 2006-07 and sold it in the year 2008-09. My questions (for the purpose of calculating LTCG) are:1. Whether the benefit of cost indexation shall be available to me on the basis of the fair market value of the house on 1.4.1981 and from that date? 2. Or whether the same shall be available to me from the year 2006-07 and on the basis of fair market value prevailing that year (2006-07)?

?Amrita

For computing long-term capital gains arising out of the subsequent sale by the donee or the legatee, the cost of the property is the cost incurred by the donor when he originally acquired it, or if the property was acquired by the donor prior to 1.4.81, the Fair Market Value as on 1.4.81 as assessed by an official chartered valuer, whichever is higher. Explanation ‘iii’ to Sec 48, defines ‘indexed cost of acquisition to mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later’.

This means that in the case of an inherited or gifted property, the cost of acquisition is the cost to the original holder (or FMV as on 1.4.81) but the date of acquisition for indexing should be taken as the date of the inheritance or the gift. However, the character of long or short term depends upon the date of acquisition of the original holder. In case this original holder has also acquired the property by way of gift or inheritance then it will be the date of the very first holder who purchased or constructed the property.

This may end up in some strange results. For instance, if and when you sell the property, it will be treated as sale of a long-term capital asset, irrespective of your holding period but the ratio for computation of indexed cost will be the CII of FY in which you have sold the property and the FY in which you became its owner.

The authors may be contacted at wonderlandconsultants@yahoo.com