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Taxation of Gifts & Arrears

Often we wish to invest for our children's education and marriage. This time we unfold the tax implication of making investments in the name of children. And also whether can one claim tax rebate for arrears invested in tax-saving schemes

1. Children's future
I have two children, aged 10 and 12. For the purpose of their higher education and marriage, I wish to keep some amount invested in their name by way of recurring deposits in banks, so that when they grow up they will be able to utilise the money for the above-mentioned purpose. I have been told that there is no gift tax on such transfers now. However, one of my friends told me that any interest received on these deposits shall be taxable in my hands. What should I do to fulfill my objective?
Atul Seth, Kolkata

Your friend has said the right thing. Any income from the funds transferred by a person to his minor child is taxable in his hands. So, any interest earned on recurring deposits will be clubbed with your income and is taxable in your hands. However, you can invest in those schemes where the income arising from the investment is exempt from tax. Some of the investment avenues, such as Public Provident Fund (PPF), RBI Relief Bonds and some schemes of Life Insurance Corporation (LIC), are exempt from tax. In the case of investment in PPFs and LIC schemes, not only is the income not taxable, but you are also entitled to a tax rebate under Section 88 of the Income Tax Act.

2. Taxation on salary arrears

I am working with a corporation. I have received arrears for the last three years. On account of additional income from arrears, my employer has not only deducted TDS at the maximum rate applicable but also a deduction of Rs 8,000 has been made in the name of provident fund. I have decided to revise my returns and claim rebate under Section 89 of the IT Act. Can I claim rebate on account of deduction of PF pertaining to the years for which I have received arrears?
P. Mullick, New Delhi

The IT Act provides relief to an employee if he receives arrears of salary pertaining to earlier years. The relief is in the form of re-computation of tax pertaining to earlier years on the basis of arrears of salary in those years. In this way, the tax for the year in which the arrears are received is re-calculated and the employee may get benefit of the tax slab in which he or she may fall.

However, as far as rebate under Section 88 for certain investments in PF, LIC, etc., is concerned, the IT Act clearly says that it shall be available only in the year of payment. Therefore, you cannot claim rebate on account of PF for previous years for which you have received arrears.