No Restriction On Loan Taken Against FD

Updated: Aug 31 2003, 05:30am hrs
I am an NRI. My father has purchased an agricultural land on his name. He used my NRE account cheque (signed by him as he holds the PoA), to pay to the party concerned. We did not make any gift certificate at that time. When I started reading your book on NRIs, I realised that this deal does not seem right. Is this a legal deal If not, what should I need to do to make it legal. XYZ

Yes, NRIs are not allowed to purchase agricultural lands. However, in your case, as long as the land is bought in the name of your father, the deal is legal. For abundant precaution, follow the right procedure for gift.

All that is required is an offer by the donor and acceptance thereof by the donee in black and white. To safeguard against any hassles, the donee should request the donor for a gift and then the donor should remit the amount to the donee.

Alternatively, the donor can offer the gift. In either case, it is necessary for the donee to accept the gift in writing (maybe through a thank you note). Only then it would be considered as a gift in India.

I am having some agricultural land which is not a capital asset for the purpose of computing capital gains if sold now. I want to convert it into non-agriculture land and want to sell the plots in that lay out. My question is that whether that land becomes capital asset after conversion and will attract capital gains tax or not. Please clarify. Vinod Ramchandra Dhume,

Yes, you have acquired a capital asset, the cost of acquisition of which is nil. However, in my opinion, you are lucky. When you eventually sell this asset, there is no capital gains tax payable.

Supreme Court had observed in BC Srinivasa Shetty, 128ITR294 that no tax is chargeable on transfer of capital assets in respect of which there is no cost of acquisition. This decision is being negated steadily. FA87 amended Sec. 55 to bring goodwill under the ambit of capital gains tax. Accordingly, even where the goodwill is self-generated, the cost of acquisition and cost of improvement will be taken as nil and charged to tax on capital gains.

Later, FA94 brought tenancy rights, stage carriage permits and loom hours under the ambit of capital gains tax. FA97 engulfed further, the right to manufacture, produce or process any article or thing. Then, FA01 brought into the net, trademarks or brand names associated with a business.

Luckily, your case has not yet been brought under the axe of tax. I hope, I am right.

One suggestion. Sell the land in as-is-where-is condition. You may sell it in parts, but no cost of improvement. Do you get me Thanks for asking a query, which may be very useful to other readers. It took me quite some time in conducting a research to arrive at the answer. I pray, I have some more readers like you.

I had taken a housing loan of Rs 5 lakh in January 2002 for the purchase of our flat at the rate of interest @11.5 per cent. This rate of interest has now come down to 10 per cent and the tenure of the loan is 15 years.

I feel any interest paid on a loan adds to the cost of the property. In the present and near future scenario expected in the real estate market of Mumbai (particularly for old buildings above 25 to 30 years, even though they are very good), this should be avoided / minimised if one can afford it. As a businessman, I have a current account which has floating inflow and outflow of money. I am thinking of putting Rs Rs 6 lakh as a fixed deposit for 1 year or more @5.5-6 per cent interest offered by the bank.

Against this fixed deposit, my bank will

give me 90 per cent loan for which they will charge me 2 per cent over and above the interest rate paid by them on my fixed deposit with them. This would mean an extra cost of only 2 per cent to me (though I will be actually paying them 7.5-8 per cent interest), but my FD will be earning 5.5-6 per cent interest.

By taking this loan, I will repay my high interest loan, thus minimising the addition to the cost of my property as well as my financial liabilities. Could you please advise on:

a. If this is the right approach

b. Is there any restriction on the nature of the use of the loan I will take against FD

c. Whether I can write-off the entire interest (7.5/8 per cent) paid by me in my IT returns. I am fully aware that the rate of interest earned by me on my fixed deposit is taxable.

This would mean the net cost to me will be 2 per cent plus the tax payable on the interest earned by me on my fixed deposit. PK Jethi,

a. Sorry, I do not think it is a right approach. If you prepay the housing loan using your funds rather than buying a bank FD and taking a loan against it, you will save the entire 11 per cent.

b. There is no restriction on the bank loan taken against your own FD.

c. Yes, your reading is absolutely correct.

What I suggest is -

Since the rates have come down substantially, take a fresh housing loan from a bank or housing finance company to pay off the first loan. You will not lose the benefit you are currently enjoying on the interest and repayment of the loan. I would like you to take a loan even if you have enough funds to settle it. The tax concessions make it worth while to take a loan and invest your funds elsewhere.

However, premature settlement attracts a penalty. You will have to examine whether the interest saved makes it worthwhile to pay the penalty.

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