I had purchased a residential house in 2005, whose agreement for sale was made on June 15, 2005. The possession was taken in December 2006. I am currently residing at this house. Now I wish to sell this house to purchase another residential house, and while doing this I would like to avail of the benefit of the clause about long term capital gain.My query is, for the purpose of qualifying for long term capital gain, the three year term is calculated from the date of agreement of a property or from the date of possession? Kindly do let me know.

?Ankit Dubey

The three-year term would be calculated from the date of possession and not from the date of agreement for sale.

Consequently, if you wish to avail of the long-term capital gains tax benefit, you will have to sell the house only after December 2009.

1) Can you confirm whether money gifted to our retired parents (both senior citizens) is exempted U/S 56 of Income Tax Act, 1961, because tax treatment for such cases varies from company to company?

2) Please also confirm if Security Transaction Tax (STT) paid by me on purchase of shares is eligible for tax exemption u/s 88E.

?S Julka

Money gifted to parents is tax-free for both donor and receiver as per Sec 56. This cannot change from company to company as this is the law. However, we hope you aren?t confusing it with the gift being tax deductible. The gift is not tax deductible. In fact, it has to be (will be) made out of your after tax income. It is the transaction of gift that is tax-free and has no tax incidence.

STT is not eligible for tax exemption but is tax deductible from the tax on profits from your securities transaction. But for this you will have to classify yourself as a trader in securities and hence be taxed at slab rates applicable — this means long term tax exemption and short term tax at 10% will not be available.

I returned back to India in mid-October after working abroad for over 9-10 years. I used to visit India every year for roughly 40-50 days. Kindly confirm the following :

1. No tax will be levied on my income abroad for FY 2007-2008 (i.e. for the period from April 1, 2007 to March 31, 2008) as for FY 2007-2008 my residential status should be NRI?

2. My residential status will be Not Ordinarily Resident for next two financial years?

3. Now, all my NRO fixed deposits will be converted/re-designated to domestic deposits and tax on interest earnings on these will depend on total interest earned (and other income if any). The TDS will be at 10.2% instead of at 30.9% on the interest income from these domestic deposits (converted/re-designated from NRO FDs)?

4. While converting/re-designating these NRO Deposits to Domestic deposits, there will be no change in terms of these Deposits with respect to corresponding NRO Deposits ie the maturity date & interest rate will stay as it is?

5. NRE/FCNR deposits will also continue to earn interest, as was contracted, till maturity. Alternatively, these deposits can be converted to RFCs till maturity.

Tax treatment on interest earning is not clear in both situations (i.e. converting/not-converting NRE/FCNRs to RFCs). Also, it is not clear if tax will be exempted on the interest earning on these FCNRS/NRE deposits/RFC deposits till these mature or only as long as I am Not Ordinarily Resident i.e. next two years? Also, are RFCs allowed till maturity of deposits or only till status stays Not Ordinarily Resident?

?Viju

There is a transitional status of RNOR between being an NRI and becoming a full-fledged resident after returning to India permanently.

Resident but not Ordinarily Resident (RNOR) is a person who satisfies one of the following conditions:

a) He has been a non-resident in India in nine out of the ten previous years preceding that year, or

b) Has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

An RNOR is not required pay tax in India on his forex income.

From the facts given, it appears that you would retain your status of an NRI for FY 07-08 and you would be an RNOR for the next two years. If that be the case:

1. No tax in India will be levied on your forex income earned abroad for FY 07-08 and the next two years.

2. With effect from April 1, 2008 your NRO will suffer TDS at 10.3% (not 10.2%) if the total interest earned from a branch of a bank is over Rs 10,000.

3. On receipt of this information, the bank will redesignate the NRE/FCNR accounts as ?Resident? accounts?.

These can be run up to their maturity but the interest on NRE becomes taxable from the date of the return whereas the FCNR interest is tax-free as long as the holder remains an NRI or becomes an RNOR. Alternatively, both the accounts can be converted into RFC without any penalty but the interest even on RFC is tax-free only for RNORs. The corpus in RFC is freely repatriable.

Whether RFC is tax-free or not, withholding tax will be applied at the rates applicable to resident deposits.

The NRE SB and NRO SB accounts will be redesignated as ordinary SB accounts.

4. RFC deposits can be renewed any time, even after you become a full-fledged resident.

The authors may be contacted at wonderlandconsultants@yahoo.com