Query: I own stock options of Infosys granted to me two years ago with a vestment schedule of 10%, 20%, 30% and 40% at the end of first, second, third and fourth year, respectively, from the grant date. Now I plan to take a home loan. I also plan to convert my options into shares as and when vestment date is reached and hold the shares for a year to avoid the short-term capital gains tax. Can I use the sale proceeds from these shares and repay my home loan and save on the long-term capital gains of 10%?
Ajay Kumar Bohra

If you exercise the stock option and sell the shares after one year, long-term capital gain shall arise and it will be taxable at the rate of 10% without indexation. Such tax can be saved if you buy a residential house property within one year before or two years after the sale of such shares or complete the construction of a house property within three years from the date of sale of such shares. The exemption under section 54F of the Income Tax Act (IT Act) shall be :

Cost of the new house x ( Capital gains on the sale of shares)/(Net sales consideration of shares)

The only condition to be satisfied is that you should not own more than one house other than the new residential house on the date of transfer of such shares and you should not purchase, within a period of two years from such date or construct within three years from such date, any new residential house other than the one purchased or constructed to avail the exemption.

If sale proceeds are utilised to repay the loan, then also exemption under Section 54F is available provided you buy the house within one year before or two years after the date of sale of shares.

Query: I had an accident in May 2002. Since I could not bear the treatment cost, friends and family helped me out. I am handicapped now and a case is pending in the court for compensation claim. Before the accident, my salary was Rs 87,000 per annum, how will the donations by the people who took care of my medical expenses be shown in my books, as all of them can't show them in their books? How will the compensation which I will receive be treated in my books? Is it taxable? (My treatment expense was Rs 6,00,000.) Also, I've not filed my return for the year 2002 -2003. Is filing it necessary?
Brijesh Daga

Tax rebate is not available fro insurance in excess of 20% of the sum assured.

Compensation received for loss of limbs is not income and is not taxable. So the compensation you get from the court for the accident is not taxable.

The sum your friends and relatives gave you for treatment can be shown as cash gifts from them. It has no upper limit and will not be taxable in your hands. Take a letter from the donors saying that they are giving gifts to you.

Under the IT Act, one cannot accept loans above Rs 20,000 from a person, else it will be penalised up to the amount of loan taken. You can show loans received from friends and relatives up to Rs 20,000 from each person. You can also say that you used some cash from your savings for medical expenses. The Income Tax return for 2003 can be filed up to 31 March 2005..

Query: I pay the premia for my life insurance policies on time and get the regular tax rebate. My insurance agent told me that the premium I am paying will qualify for tax rebate and the amount I shall be receiving on maturity of policy is tax-free. Now, I am told that Budget 2003 has changed this law. Is it true?
Ruchir Asnani

Any premium paid on life insurance policies will be eligible for tax rebate under Section 88 of the IT Act. Budget 2003 provides that no tax rebate under Section 88 shall be available regarding insurance premium paid which is more than 20% of the 'actual capital sum assured'. In computing 'actual capital sum assured', no account shall be taken of:

(i) The value of any premia agreed to be returned, or,
(ii) Any benefit by way of bonus or otherwise over and above the sum actually assured, which is to

be or may be received under the policy by any person.

So what has to be seen in computing the limit of 20% is only the capital sum assured, i.e., the
principal sum assured according to the insurance policy. The intention of the amendment is to disallow tax rebates on single-premium insurance policies. The memorandum explaining the Finance Bill says that 'insurance policies with high premiums and minimum risk are similar to deposits or bonds, so no tax rebate should be available on such high premiums'. To illustrate, consider the single-premium Bima Nivesh triple-cover policy from the Life Insurance Corporation (LIC). For those in the age group 18-50 years, the premium for a sum assured of Rs 1.5 lakh for a policy with a 10-year period is Rs 1,42,488 and the amount received at the end of the term is Rs 2,68,627. Since the premium of Rs 1,42,488 exceeds 20% of actual capital sum assured (i.e., 20% of Rs 1.5 lakh = Rs 30,000), the premium will not qualify for tax rebate under Section 88.

Take another situation. Suppose you have taken an LIC policy of capital sum assured of Rs 1 lakh on which the annual premium is Rs 6,000. You have not paid premiums for the last three years and in the current year you pay a premium of Rs 24,000 for four years at one go. Now, does the premium of Rs 24,000 qualify for tax rebate under Section 88? Yes, because what the government wants to disallow is tax rebates on single premium policies.

According to Section 10(10D) of the IT Act, any sum received under a life insurance policy, including the sum allocated as bonus on such policy, shall be exempt. But the Finance Act 2003 says no exemption shall be allowed for any sum received under an insurance policy issued on or after 1 April 2003 for which premium payable for any of the years during the policy term exceeds 20% of the actual capital sum assured. However, even on such policies, tax exemption will continue on any sum received on the death of the person. So the legal position is:

(i) Any sum received under life insurance policy other than referred to in (ii) shall be exempt.
(ii) Any sum received under single-premium insurance policy issued on or after 1 April 2003 shall be taxable. However, such sum a shall not be taxable if it is received on the death of the assessee.
(iii) Any sum received under a single-premium insurance policy issued before 1 April 2003 shall be exempt.

Query: What will be the tax treatment for deep discount bonds (i) in case of sale of such bonds and (ii) in case of maturity of such bonds?
Rajesh Kumar

If deep discount bonds are issued before 15 February 2002:

(i) On transfer of bonds before maturity, the difference between the sale price and the acquisition price would be taxed as income from capital gains if the bonds are held as investments and as business income where bonds are held as stock-in-trade.
(ii) On realisation at maturity, the difference between redemption price and subscription price will be treated as interest income assessable under the IT Act. It will be taxed as 'income from other sources' if the bonds are held as investments and as business income if they are held as stock-in-trade. No capital gains shall arise on final redemption.

For deep discount bonds issued on or after 15 February 2002, Circular 2/2002 shall apply and tax treatment will be as follows:

General Treatment
Every person holding a deep discount bond will make a market valuation of the bond as on 31 March each year (also called valuation date).

The difference between the market valuations on two successive valuation dates will represent the accretion to the value of the bond during the fiscal and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets).

If the bond is acquired during the year by an intermediate purchaser (a person who has acquired the bond by purchase during the term of the bond and not as original subscription), the difference between the market value as on the valuation date and the cost for which he acquired the bond will be taxed as interest income or business income as the case may be, and no capital gains will arise as there would be no transfer of the bond on the valuation date.

Transfer Before Maturity
Where the bond is transferred at any time before maturity, the difference between the sale price and the cost of the bond will be taxable as capital gains in the hands of an investor or as business income in the hands of a trader. To compute such gains, the cost of the bond will be taken to be the aggregate of the cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor up to the date of transfer.

Since the income chargeable in this case is only the accretion to the value of the bond over a specific period, for the purposes of computing capital gains, the period of holding in such cases will be reckoned from the date of purchase/ subscription or the last valuation date in respect of which the transferor has offered income to tax, whichever is later. Since such period would always be less than one year, the capital gains will be chargeable to tax as short-term capital gains.

Redemption
If the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date preceding the maturity date will be taxed as interest income in the case of investors or business income in the case of traders. If the bond is redeemed by an intermediate purchaser, the difference between the redemption price and the cost of the bond to such a purchaser will be taxable as interest or business income, as the case may be. For this, the cost of the bond will mean the aggregate of the cost at which the bonds were acquired and the income arising from the bond which has already been offered to tax by the person redeeming the bond.

Vinod Gupta is a practising chartered accountant and a tax expert. Send your queries to tax@bworldmail.com. General issues from the queries are taken up in the column