Is insurance claim taxable?

S. C. Vasudeva

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Q.We are a partnership concern and are carrying on business as a small scale industry. The main business is that of brass forging. The firm had been allotted a plot in an industrial area for setting up a small scale industry. On account of a fire due to short circuit, forging machines had been completely destroyed. The same were not repairable and new machines were acquired after getting an insurance claim from the insurance company. What is the position of the insurance money received from the insurance company? Is it taxable? — Rajiv Shukla

A.In one of the decisions, the Supreme Court had held that insurance claim received on account of destruction of a shed is not chargeable to tax as the destruction does not amount to a transfer of an asset. Thereafter Section 45(1A) of the Income Tax Act 1961 (the Act) has been inserted in the Act and in case the following two conditions are satisfied, any profit or gain arising from the receipt of such insurance amount shall be chargeable to income tax under the head 'capital gain'. The conditions required to be satisfied are:

• The compensation is received because of damage or destruction of any asset. 
• The damage or destruction is a result of four categories of circumstances, viz, (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war). 

If the aforesaid two conditions are satisfied, then Section 45(1A) of the Act would be attracted and such insurance amount would be treated as full value of consideration received or accruing as a result of transfer of the capital asset for the purpose of computing capital gain under Section 48 of the Act. Therefore, in case the depreciated value of block Plant and Machinery as on the date of fire was X and insurance amount received was X  plus the excess amount would be chargeable to tax under head capital gain.

Do we need to pay tax on reverse mortgage payments?

Q.What is reverse mortgage? Can you please explain main features of the scheme? What are the tax implications of the amount received under this scheme? — N.C. Jain

A.Reverse mortgage is a scheme which enables senior citizens to mortgage a residential house with a financial institution so as to derive a tax-free regular income. It is an arrangement whereby a mortgager, mortgages his house and takes a loan against the same. It enables senior citizens to avoid selling the real estate property in their lifetime. This concept is relatively new in India but quite popular in developed countries. As indicated above, it enables senior citizens to mortgage their property and ensure a regular income by living in their own home without having to part with the same during their lifetime. The idea behind such a scheme is to make the immovable property more liquid and generate returns out of such an asset for the funds being used by the owner during his life time. 

The Finance Act 2008 has now clarified the position with regard to the reverse mortgage which was not clear earlier with regard to the taxability of the amount so received. According to the present legal position, in case the mortgager mortgages his house and takes a loan against the same, which can be either a lump sum or in the form of installments, the payment so received under the reverse mortgage scheme whether in installments or as a lump sum will not be taxable. The capital gain will arise and chargeable to tax if and when the house is eventually sold by the mortgagee to recover the loan. 

Can I save tax on long-term capital gain?

Q.I sold a residential plot in December 2014, for Rs 50 lakh. The long-term capital gain is around Rs 20 lakh. Total amount is lying the saving bank account till date.  I intend to invest this amount in a flat in my name which is under-construction and likely to be completed by December 2015. My queries are as under:

• Should I deposit the amount in Capital Gain Saving Scheme before 31.8.2015?
• I have one more residential plot and two flats are under-construction.  Can I save the LTCG tax? — Lal Chand

A.Your queries are replied here under: 

(i) Section 54F of the Act which deals with the exemption from the leviability of capital gains tax provides that in case of long-term capital gain arises on the transfer of a capital asset other than a residential house, the net consideration be deposited in a bank under capital gain scheme account for utilisation of the said amount for the construction/purchase of a residential house within the specified period. However, this deposit is required to be made in case the amount of net consideration is not utilised for purchase or construction of a residential house before the date of filing the return of income in respect of the year in which the amount of capital gain has arisen.

(ii) An assessee is not entitled to claim exemption from the leviability of tax on capital gain under this Section in case he constructs a new residential house within a period of three years after the date of sale of the residential plot which in this case was sold in December 2014.  The flats under construction will get covered under the above restrictive clause and you may not be able to claim the exemption under the aforesaid Section.

Can I claim benefit under IT Act provisions?

Q.My questions relate to proviso Sec. 112(1) & Sec. 112(2) for working out tax liability on long-term capital gain. 

• The facts are that total Gross Income of assessee for Assessment Year 2015-2016 consists of income from other sources (interest from bank and post office) and LTCG on sale of immovable property. 
• After deduction of cost of acquisition worked out by indexation under second proviso to Section 48 from full value of consideration, capital gain arises which attracts tax @ 20 per cent.
• Section 112(2) provides that where gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VIA shall be allowed as if the gross total income as so reduced were the gross total income of the assessee. 
• The total income of the assessee as reduced by long-term capital gain and after deduction under section 80C (Chapter VIA) falls short of maximum amount (which is Rs 3,00,000 as the assessee is a senior citizen) not chargeable to tax. 
• My question is whether above referred shortfall can be adjusted against long-term capital gain under proviso to Sec. 112(1) when assessee has claimed deduction under 2nd proviso to Sec. 48 by adopting indexation for working out the cost of acquisition. 
• Where is the provisions/column in return Form ITR-2 for claiming tax relief under proviso to Section 112(1). — Bimal Kumar

A.Your queries are replied hereunder: (i) You would be entitled to claim the benefit allowable under Section 112(2) of the Income Tax Act 1961 (the Act). Therefore, in case your total income including long-term capital gain does not exceed Rs 3,00,000 for the assessment year 2015-16, you will not be liable to pay tax on such a total income including long term capital gain. 

(ii) The proviso to Section 112 refers to the capital gain arising on the transfer of listed securities which is not exempt from tax under Section 10(38) of the Act. Such long-term capital gain being taxable, the benefit under Section 112(2) should be available in respect of the long-term capital gain referred to in the first proviso to Section 112(1) of the Act. The relevant computations are to be given in ITR-2 in Schedule CG - column B3 - This column of the schedule deals with capital gain where proviso to Section 112(1) is applicable.

Should I declare income from second house

Q.I had purchased a flat for self use in 2006. I have bought another residential flat in March 2010. Both are self-occupied. The amount in respect of the second flat has been paid out of my personal savings. Is it necessary for me to disclose any income from there in my tax return? — Anil Kumar

A.As per the provisions of the Act, in case two or more properties are self-occupied by an assessee, one of them is deemed to be let out as per the choice of the assessee. The house which is considered to be self-occupied will have a nil income. The house which is deemed to have been let out will have an income, the gross amount of which is to be determined on a notional basis i.e. the municipal valuation or the fair rent whichever of the two is higher. The fair rent would be again limited to the standard rent in accordance with the provisions of the Rent Control Act, if any, applicable to the state in which you have purchased the residential flat which is deemed to have been let out. The income from the residential flat which is deemed to be let out, will have to be declared in your tax return.