TAX COLOUM

I am holding rural agricultural land as a capital asset in my books of accounts. I have decided to sell this rural agricultural land by converting it into small plots and selling these plots for profit. Whether I will still enjoy exemption from Tax? [EasyDNNnews:PaidContentStart]

Section 2(22) of the Income Tax Act, 1961, excludes rural agricultural land from the definition of a capital asset. It does not exclude rural agricultural land held as stock-in-trade. Once you decide to make small plots of the land and then sell them, it amounts to business activity and rural agricultural land becomes stock-in-trade in your books. Even after the sale of plots, it will remain agricultural land, but profit earned on the sale of plots will not be considered capital gains but will be considered business income. Therefore, profit on the sale of plots would not enjoy exemption under Section 2(22) of the Income Tax Act, 1961, since the land in your books becomes stock-intrade.

On the death of my mother, I inherited gold jewellery comprising a chain, ring and bangles. I have sold these items for ₹40 lakh and, with the same amount, I have purchased one gold earring and ring. Whether there is any tax implication?

Any asset or amount received through inheritance is not taxable in the hands of the recipient individual if supported by a legally authorised will. Therefore, there is no tax implication on receipt of your mother's jewellery. However, a tax implication arises in your case since you have sold this gold jewellery for ₹40 lakh. You are liable to pay long-term capital gains tax on ₹40 lakh less the cost of jewellery in the hands of your mother at 12.5 per cent plus applicable surcharge. If the jewellery was purchased by your mother prior to April 1, 2001, then the fair market value as on April 1, 2001, will become your cost. The subsequent purchase of a gold earring and ring cannot be considered an inherited asset, as the same was purchased by you in your name out of the sale proceeds of ₹40 lakh.

You could have avoided capital gains tax if, instead of selling the gold jewellery, you had requested the jeweller to convert the existing jewellery into a new gold earring and ring. You could have avoided capital gains tax as mere conversion or remaking of jewellery from the same gold does not amount to transfer. However, since you have sold jewellery inherited from your mother, you are liable to pay long-term capital gains tax.

What is a family trust? Whether it enjoys tax exemption and how does it work?

A family trust is normally created by individuals to protect assets for the benefit of family members. A family trust does not enjoy tax exemption and is subject to tax rates applicable to individuals or at the maximum marginal rate. Thus, the creation of a family trust does not give you any income tax benefit. Individuals create family trusts by transferring certain individual assets to the family trust so that the assets enjoy continuity and protection from any individual's liability. It is a different entity under the Income Tax Act, represented by individual trustees, and the transfer of assets by individuals to the family trust, where beneficiaries are relatives of the individuals, has no tax implication in the hands of the trust on receipt of the assets. Thereafter, if the assets earn any income, the same will be taxed in the hands of the family trust and not in the hands of the individuals. The assets become the property of the family trust and, as such, receive protection. A family trust is a more effective tool for family succession planning and is widely used these days. It is very easy to form and maintain.

I am an individual and have earned agricultural income of ₹5 lakh. I am not a farmer. Whether I can claim exemption in tax computation?

To earn agricultural income, you need not be a farmer, but you have to establish how the agricultural income was earned by you. You need to establish whether you have grown agricultural products on land owned by you or taken on lease from some other farmer. In many states, to own agricultural land or to take agricultural land on lease, you need to be a farmer. To claim exemption for agricultural income, you need to establish that the income was earned from selling agricultural products cultivated or grown by you on land either belonging to you or taken on lease. If you have taken agricultural products from a farmer and then sold them in the open market, this income cannot be considered agricultural income. It is considered business income, which is subject to tax at a normal rate. Therefore, to establish that you have earned agricultural income, you have to prove that you have carried out activities on land that is agricultural land and sold the agricultural products in the open market.

We would be happy to address your tax-related queries. Kindly share them with us at editorial@dsij.in

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