Interest from co-operative societies: whether eligible for Sec. 80L deduction?

QUESTION: I am a member of an Employees Co-operative Credit Society in which deposits have been made both by way of compulsory monthly recurring deposits (as per bye-laws) and fixed deposits. I am also a member of Co-operative Group Housing Society from which I had borrowed for purchase of a flat. In this society also apart from paying the monthly equated loan instalments, there is compulsory thrift deposit (monthly) for which the society pays interest. The interest received on deposits with such societies is not covered under Sec. 80L as such societies are not co-operative banks. I recall that a few decades ago, interest/dividends from such co-operative societies were also covered for exemption under Sec. 80L (or identical provision then), but some how this had been omitted later either inadvertently or otherwise. Advise.

ANSWER: As pointed out by the reader, Sec. 80L(1)(vi) gives deduction for ``interest on deposits with a banking company to which Banking Regulation Act, 1949 applies including any bank or banking institution referred to in Sec. 51 of that Act, or a co- operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank)". Sec. 80L(1)(via) would include interest on deposits with any such bank ``not being a banking company or a co-operative society referred to in clause (vi) for being a bank established by or under any law by Parliament, as may be approved by the Central Government for the purpose of this clause". Sec. 80L(1) (via) would appear to be redundant but apparently it is intended to cover institutions such as IBDI which was notified in No. GSR 86(E) dated February 29, 1984.

Sec. 80L(1)(viii) would, however, permit deduction of interest on deposits with a co-operative society not being a co-operative society referred to in clause (vi) made by a member of the society. This clause will mean interest received by a member from a co-operative society should be exempt. Reference to Sec. 80L(1)(vi) would appear to be confusing. The intention is obviously to avoid redundancy, since interest from co-operative banks and societies engaged in business of banking is already covered under Sec. 80L(1)(vi).

Hence in readers' case, whether the deposit is described as recurring deposit or thrift deposit, or whether it is treated as compulsory or otherwise, interest will be treated as eligible for deduction under Sec. 80L(1)(viii) of the Act up to Rs. 12,000 along with similar other deductions. Extra amount of Rs. 3,000 is available only for interest on Government securities.

Since dividend and income from units of mutual funds, which were earlier covered by Sec. 80L and now altogether exempt under section 10, the berth released by these item would now be available for other items.

Gratuity arrears: eligibility for exemption

Q: I retired in August, 1997, when the ceiling for gratuity was Rs. 1 lakh. But due to revision I have received further amount as gratuity arrears recently which has been subject to tax deduction at source. This deduction does not appear to be correct. Advise.

A: Sec. 10(10) exempts gratuity paid by Government and payments received under Payment of Gratuity Act, 1972 subject to a ceiling provided under that Act. Payment of Gratuity Act, 1972 was amended with retrospective effect from September 24, 1997 raising the limit to Rs. 3.5 lakhs. It is probable that though the gratuity has been enhanced due to liberalisation, the reader having retired in August, 1997 is not eligible for the benefit of enhanced ceiling because he had retired prior to September 24, 1997 assuming that the Payment of Gratuity Act applies to him. If he is not governed by the Payment of Gratuity Act, the limit prescribed under Sec. 10(10)(iii) for other gratuities would have application. The limit even for other gratuities has also been enhanced to Rs. 3.5 lakhs for retirement only on or after September 24, 1997. It is, therefore, possible that the tax deduction is right, but the extent of deduction available under pre-amendment law is required to be understood with reference to the terms of agreement, the manner of computation of eligible amount and the prevailing ceiling.

Standard deduction for pension: limits

Q: In an answer to a question in the Tax Forum you have said that pension should be treated as salary under Sec. 17(1) and hence pension too is entitled to standard deduction. My employer purchased group Annuity from LIC for their retired employees. LIC sends Form 16A on TDS. IT assessing officers refuse to allow standard deduction on annuities paid in lieu of pension. Kindly clarify?

A: Sec. 15 would understand salary as any amount received from an employer or a former employer or on behalf of an employer or a former employer. The same test should apply for pension as well, because salary includes pension. The arrangement, if reasonably understood should be treated as one for which LIC makes the payment on behalf of the employer by virtue of a contract known as Group Annuity Scheme. But then the assessing officer may have a reasonable doubt as to whether the amount could not be understood as one arising out of annuity contract and not one paid by the LIC on behalf of the employer. It is in this view that standard deduction is obviously refused by the assessing officer. The proper course in such cases is for LIC to take up the matter with Government, so that a fair treatment is available to the beneficiaries of such schemes, which are intended to better protect the employee than one by direct payment from the employer, apart from easing the employer the burden of administering such schemes.

Daily allowance: what is saved is taxable

Q: I am a professional in service, drawing daily allowance of Rs. 500 a day either from employer or customer. I am able to save a significant amount out of such daily allowance. Will such savings be liable to tax?

A: Daily allowance is exempt from tax under Sec. 10(14) as a tour allowance meant for reimbursement of expenses necessarily and exclusively incurred in the performance of duties of an office or employment of profit. But this exemption is subject to the limits in Sec. 10(14) itself by granting the exemption ``to the extent to which such expenses are actually incurred for the purpose". While marginal savings may pass muster, any significant savings out of the same banked by him and used for explaining his investment or personal expenditure later would certainly mean that it is taxable part of daily allowance. Non-disclosure of such amount as income in these circumstances may well mean understatement of income with all its consequences.

If the reader were in a profession and not in employment, such allowance may well be part of his professional receipts, while actual expenses incurred on journey and stay out of his headquarters would be deductible from his professional income, so that even in such case, the amount saved will be taxable income.

S. Rajaratnam

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