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Query corner: Tax
January, 05th 2010

Our expert helps you understand the complexities of tax in this weekly column. Email to

I purchased a plot in my hometown 10 years ago. If I invest the sale proceeds of the same in a second flat in Mumbai, will the capital gains be exempted from tax? How is the notional income on the second home computed?


Yes, the capital gain would be exempt from tax under Section 54F if the sale proceeds are invested in a residential house and if you do not own more than one residential house at the time of purchase of such a house. If the newly-purchased house is actually rented out, then the rental will be added to taxable income. You can claim deduction on property taxes paid and for repairs & maintenance expenses calculated at 30% of (rental income minus property tax). You can also claim a deduction on interest, if any, on loan taken for purchase/repairs of such house.

However, if you are expecting to occupy the second house as well, you can claim either of the houses as self occupied. The other house would be considered as deemed to have been let out and this notional annual rent is added to your income. The amount of notional rent would be the amount of rent which you would reasonably expect to receive on letting out such property.

My NRI son wants to invest in some financial instruments in India. What will be his tax liability? He has no other income in India. Will return on investment in the form of capital gains, dividend and interest be totally taxable? Or does he have any basic exemption limit?

Sanjeev Sathe

An NRI would be eligible to claim basic exemption of Rs 160,000 in respect of interest income of the current financial year. The rest of the interest income would be taxed as per the slab rates. Alternatively, he may also opt to pay tax on interest income at a flat rate prescribed in Double Tax Avoidance Treaty, if any. In most treaties, such a flat rate is either 10% or 15%, and such option to use the treaty rate is exercised to reduce the amount of tax when the quantum of interest income is very high. In case there is no treaty with the country of residence, or the rate provided in treaty is high, he can opt to pay tax on his interest income at a flat rate of 20.6% under section 115E of the I-T Act, 1961.

Unlike a resident, an NRI is not eligible to claim basic exemption in respect of his short-term capital gains arising on sale of equity-oriented MFs and Indian shares on which STT is paid. Such short-term gains would be taxed at a flat rate of 15.45%. Similarly, an NRI is not eligible to claim basic exemption on taxable long-term capital gains. Dividends received from companies and MFs are exempt from tax. Finally, an NRI should check tax implications of his Indian income in the country of residence unless of course he is a resident of a Gulf country, which has no personal taxes. Most countries tax residents on their worldwide income.

My society has undertaken redevelopment of our dilapidated buildings. The developer has offered lumpsum corpus amount towards hardship compensation and rentals during the total period of construction. Hardship compensation will be paid in two instalments and rental hardship compensation in advance for first year and post-dated cheques for the second year. Hardship compensation is not liable to capital gains tax U/S 45 of I-T Act. However, the CAs consulted in this connection seem to be confused and are unable to give a clear direction.

AP Talpade

In my view, the hardship compensation can be considered as a capital receipt and accordingly would not be liable to tax.

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