NABARD Capital Gains bonds will be available for NRIs - welcome news

QUESTION: What is the outcome of your comment regarding the restriction placed for NRIs as regards reinvestment in capital gains bonds to avail the benefit of Section 54EC.

ANSWER: There is good news from NABARD sources. It is understood that the restriction is now removed for NABARD non-resident Capital Gains bonds for non-resident Indians (NRIs), if they are Indian citizens. Necessary publicity materials are on issue.

It is also understood that NRI Capital Gains Bonds will be issued in minimum denomination of Rs. 10,000 without any ceiling limit. Interest for the present issues will be 9.75 per cent per annum payable on February 1 every year.

In the case of non-resident Indian citizens the redemption of proceeds and payment of interest can only be in Indian rupees and will be non-repatriable. However, the bond certificates can be sent to non-residents' foreign address with proceeds and interest credited to named bank account directly. Tax deduction will however be at 33 per cent including surcharge for non-resident holders. The benefit of non-deduction on declaration of nil liability in Form 15H is, however, available, where it is filed.

NRIs with capital gains would feel relieved that NABARD has acted promptly at the instance of its officers at Chennai to remove the hurdle for the non-resident Indians (Indian citizens) against availing a legitimate relief under Sec. 54EC on a reader's representation aired in these columns. Tax Forum acknowledges and lauds such prompt response from our public bodies.

Taxation of terminal benefits

Q: I am an employee of State Government and retired. I am going to get the retirement benefits like general provident fund, gratuity, commutation of pension, encashment of accumulated earned leave (240 days), group insurance scheme, and family benefit fund. Kindly let me know the taxable items and the non- taxable items. Since I am getting a large amount, please let me know, how best the money be invested to minimise tax on the income on the invested money.

A: GPF: The assumption that the amount from general provident fund can or has to be withdrawn as a sort of retirement benefit is incorrect. It can be continued under the terms of the fund. When a subscriber is entitled to withdraw the same, he can do so without attracting any tax liability.

Gratuity: Gratuity is exempt for Government employees under Sec. 10(10) of the Act. For those governed by Payment of Gratuity Act, 1972, the amount payable under that Act will be the limit for exemption. For others it is subject to the formula provided under Sec. 10(10)(iii) of the Act, subject to a present ceiling of Rs. 3.5 lakhs in respect of retirement on or after September 24, 1997.

Commuted Pension: Commutation of pension is exempt under Sec. 10(10A) for retirees from Government service. For others it will be subject to the ceiling of an amount computed with reference to one-third of the pension and one-half of such pension where the employee is not entitled to any gratuity subject to the age of the recipient, state of his health, rate of interest and officially recognised tables of mortality. Incidentally commutation is now 40 per cent for Central Government employees without any enhancement for other employees.

Leave encashment: In respect of leave encashment on retirement, the exemption is under Sec. 10(10AA) of the Act. For government servants, it is totally exempt. For others, it is subject to the extent of ten months salary calculated at average pay for the last ten months before retirement and the over-all limit as applicable to government servants. The maximum limit for retirees on or after July 1, 1997 is Rs. 2.40 lakhs.

Benefit Fund: As for the amount received from family benefit fund, no definite answer can be given, unless more details of the funds are available.

As for reducing liability, investments out of chargeable in avenues listed under Sec. 88 up to specified limits under Sec. 88, will earn tax rebate at 20 per cent and those, the income from which deduction is permissible, will merit deduction under Sec. 80-L subject to limits will earn deduction. Questions relating to same are answered in the these columns from time to time.

Non-citizens are also liable on Indian income

Q: My niece who has fixed deposits, shares and immovable property has decided to settle down abroad and is likely to acquire foreign citizenship. She would like to make a gift/sale of her assets to her grand-children, who are also non-residents. What is the liability in case she is only an NRI or on her ceasing to be an Indian citizen. Are there any restraint on such sale under Indian law?

A: Income from property situated in India is Indian income. Such income is taxable irrespective of the residential or citizenship status of the owner of such assets. Any owner of such asset is liable for capital gains in case of transfer of such assets for consideration. Gifts, however, are not taxable after October 1, 1998. However the right to transfer the proceeds out of India are governed by regulations under Foreign Exchange Management Act, which allows repatriation of such funds subject to conditions imposed thereunder. Meanwhile the proceeds are expected to be credited to non-resident ordinary account. Property income as well as interest income from such account will be taxable.

Tax rebate for investment out of past income

Q: I have received arrears of salary for 1998-99 in 2000-2001. If I am able to invest such arrear amount under permissible investments eligible for tax rebate under Sec. 88, I can avoid extra tax liability, so that I do not have to seek spread over benefit under Sec. 89(1). But I am advised by the disbursing officer that there is a requirement that I would be eligible for tax rebate only if the investment is made out of my current income. Is such advice correct?

A: Where arrears of salary are received in the current year, such arrears form part of the current income. Merely because spread over benefit is given so as to enable the income to be treated as the income of earlier years, it does not mean that it becomes past income. Hence, even in the view taken by the reader's adviser as to the requirement of investment from current income, his inference that relief is barred, where such investment is made out of arrears, is incorrect.

It is true that investment should be made out of `income chargeable to tax'. Since money has no colour, it is incorrect to assume that the same cash or cheque, which is received as income of the year is required to be deposited in tax rebated investment. The condition has been considered necessary so as to deny the benefit for investment made out of non-taxable income like agricultural income and not to deny benefit, where the assessee makes investment out of savings during the year. Such a view has been taken in a number of cases. In Ravi Kumar Mehra v CIT (1988) 172 ITR 108 (P&H), it was held that payment of life insurance premia out of money drawn from deposit in a company was not to be denied the benefit under analogous provision under Sec. 80C, though such deposit was made in a preceding year, because the assessee had enough savings during the year. Similar view was also taken in CIT v N. Benugopal Choudhury (1991) 187 ITR 614 (Ori).

In a recent decision, the Kerala High Court in CIT v Jobie K. John (2000) 245 ITR 258 has pointed out that as long as there are available savings during the year, the assessee is eligible for relief though the immediate source of eligible investment is drawings from past savings following its earlier decision in CIT v Abraham George (2000) 242 ITR 171 (Ker.).

Actually there is board's circular No. 3P dated October 11, 1965, in the context of analogous relief under the then Sec. 87 operative up to AY 1964-65, similarly requiring investments to be made out of income chargeable to tax in the following words:

``34. The tax rebate under Sec. 87 and also the deduction under Sec. 80A in respect of the qualifying amount of payments for life insurance premiums, etc. is subject to the condition that such payments should have been made by the assessee `out of his income chargeable to tax'. However, this provision does not imply that the assessee should be required to link or identify the payments, specifically, with the funds representing his income chargeable to tax by way of showing that the payments have been debited to a particular account in his books in which the receipts from various sources of his income liable to tax have been accounted for, or that the payments have been made from a bank account in which he was crediting such receipts.

The above mentioned provision is only meant to ensure that the benefit of Sec. 98 or Sec. 80A is not availed of in cases where it is clear that the payments cannot be attributed, directly or indirectly, to the assessee's income chargeable to tax, such as where an employee has withdrawn money from his provident fund account for the purpose of paying life insurance premium or where the premiums in respect of the life insurance policy of the assessee have been paid ex gratia by his parents, or other benefactors out of their funds, and not by the assessee himself. In all other types of cases, where the payments are directly or indirectly attributable to the assessee's income chargeable to tax, he will be entitled to the benefits of the provisions of Sec. 98 or, as the case may be Sec. 80A." (emphasis supplied).

While the above passage is clear that there need be no immediate linking of current income, it would also clearly indicate that it should not arise out of tax exempt receipts.

There is the other extreme view that even without any savings during the year, the assessee would be eligible for relief by merely rotating the savings without having any surplus of income over his expenditure. According to such view, if the condition of savings had been contemplated, there is a lacuna in not making it explicit. One should imagine that such a condition is implied, but absence of clarity on the provision compounded by the circular, which does not necessitate real savings would mean that such a view cannot be ruled out.

S. Rajaratnam

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