Query 1]
After serving LIC as agent for 15 years, LIC gives one time gratuity up to Rs. 2 lakhs to its agents based on their business. I have also received Rs. 1,58,000/- this year. Whether it is taxable or not? [Shankerlal Fatnani- srf.fatnani@yahoo.co.in]
Opinion:
Gratuity normally means a gift or present or a gratuitous payment made by an employer to his employee for services rendered to him. After the enactment of the Payment of Gratuity Act-1972, it is no more a gratuitous payment but a claim that emanates under the terms and conditions of employment. Tax treatment of gratuity is different for different categories of employee & is governed by Section 10(10) of the Income Tax Act-1961. Under section 10(10), Gratuity is exempt in the case of Government employee whereas it is fully or partially exempt or taxable in the case of other categories of employees, depending upon whether the payment is covered by the Payment of Gratuity Act-1972 or not.
An important issue raised by you is the tax treatment of Gratuity amount paid by LIC to its agents. A bare perusal of section 10(10) shows that the condition precedent for the exemption enumerated under section 10(10) is that the gratuity payment should spring out of the relationship of an employer and an employee between the payer and the payee. There must exists relationship of employee and employer between the agent & the LIC so as to fall within the four wall of section 10(10).
Question that now emerges is whether LIC agents could be considered as an employee for the purpose of taxability of gratuity? From the terms and conditions of the employment of the agent by LIC, there appears no relationship of employer and employee between the LIC and its agents. LIC under the agreement has no right of control in respect of the manner in which they work as an agent. The LIC is not the master of the agents because it does not have the right to direct under the above agreement what, when and how a work is to be done like an employer have over his employee. A relationship between the agents and the LIC is that of an agent & the principal.
Since there is no relationship of master and servant between the LIC and its agents, the benefit of section 10(10) in respect of the gratuity amount paid by the LIC to the agents in terms of the LIC (Agents) Regulations would not be available to the agents. Resultantly, gratuity amount received by the LIC agents from the LIC would not be exempt but it would be taxable. The same views has been affirmed by the Delhi Income Tax Appellate Tribunal in the case of Income-Tax Officer vs D.N. Dhingra on 23rd April, 1982 [2 ITD 458 (Delhi).
Query 2]
Father had purchased a flat at the cost of Rs. 230,000/- in the year 1998. He expired in the year- 2014. The property is so naturally inherited to his legal heirs, 6 in number (4 sons and 2 daughters), after his death. They have sold this property in the year 2016 for Rs. 48 lacs. So everybody has received Rs. 8 Lacs. I would like to know whether the amount is taxable? If yes, how much amount each has to pay capital gain tax. Can this tax be saved by investing this amount in some funds? If so, in which fund? I would appreciate if you reply my query at the earliest.
Opinion:
- Sale of the inherited property by the legal heir would also be subject to Capital gain tax. There is no immunity against such transaction from levy of capital gain tax. In absence of all the relevant information like date of purchase & Sale, Stamp duty valuation, transfer expense, improvement expense incurred etc, exact amount of Long Term Capital Gain (LTCG) could not be worked out.
- Tax saving Options against profit arising from sale of House property:
An Individual/HUF can save LTCG tax from sale of house property by claiming an exemption u/s 54, 54EC or U/s 54GB, as under:
i) Exemption Under Section 54:
For exemption u/s 54, taxpayer have to invests the amount of LTCG for purchase or construction of another residential house property within a prescribed time period. The prescribed time periods are as under:
a] For purchase:
One year before or two years from the date of transfer.
b] For Constructions:
Three years from the date of transfer.
ii) Exemption Under Section 54EC:
To save tax u/s 54EC, taxpayers have to invest the amount of LTCG in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India ( NHAI) within a period of 6 months from the date of transfer.
iii) Exemption Under Section 54GB:
Section 54GB offers tax benefit for investment in the business & is available only against the transfer of house property that took place in between 01.04.2012 to 31.03.2017. Other stipulations of section 54GB are as under:
a] For exemption, taxpayer have to utilize the net sale considerations for subscription in the equity shares of a newly incorporated company on or after April 1st of the financial year in which residential property is transferred but on or before the due date of submission of return of income. [Investment in the already running business of the taxpayer would not be eligible for exemption. The new company incorporated during the relevant period only is eligible for exemption].
b] The company should be engaged in the business of manufacture of any articles or thing & should qualify as SME (i.e., investment in plant and machinery is more than Rs. 25 Lacs but not more than Rs. 10 Crore).
c] The taxpayer (i.e., transferor of residential property) should have more than 50% share capital (or voting right) after subscription in the shares of the company.
d] The company should utilize the proceeds for purchase of new plant & machinery within a prescribed time. [Office appliances, vehicles etc are not considered as plant & machinery for the purpose of exemption].
e] There is a restriction of 5 years against transfer of shares as well new assets.
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