In the Budget (2007-08) analysis it has been reported that effective July 1, 2007 TDS will be deducted on 8% taxable RBI bonds. Will this provision also be applicable on existing bond holders or it is meant for the new buyers?

—Parth

This is applicable on interest on old bonds as well.

Budget 2007 provides to tax ESOPs as fringe benefits. However, it is not clear whether ESOPs granted prior to March 31, 2007 and applied prior to March 31, 2007, but actual shares allotted sometime in 1st week of April 2007 will be liable to FBT.

Specific case: I have been granted options in November 2005. Entitled to apply within five years beginning November 2006. However, applied on March 2, 2007. Cheque given to employer cleared in March 2007. Actual allotment likely to be in first week of April 2007. Kindly reply whether in the above case, FBT will have to be paid.

—Vashistha

Finance Bill 2007 seeks to tax ESOPs as fringe benefits. The fringe benefit value is defined as the FMV of the shares on the date of exercise of the option by the employee as reduced by the amount actually paid by or recovered from the employee in respect of such shares.

From the above, you will find that the tax is applicable as on the date of exercise of the option. The Income Tax Act does not define the term "exercise". However, as per the Sebi (employee stock option scheme and employee stock purchase scheme) guidelines, 1999, the term "exercise" means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOS.

It would follow from the above that you have exercised your option on March 2, 2007 when the law treating ESOP as FBT is not applicable. Hence, there would be no fringe benefit tax applicable since the exercise has taken place in FY 06-07.

I opted for dividend reinvestment plan on ELSS Mutual fund. My employer is not considering the units purchased for dividend amount for tax benefit. Please clarify with the section numbers, etc.

—SV Kharkar

The dividend is deemed to be reinvested. Sec 80C does not need the investment to be made from income chargeable to tax. There is no specific section which specifies that dividend reinvested in ELSS will be given Sec 80C benefit. However, the same is implied by pure logic and purpose. In other words had you received the dividend and then reinvested it, you would have got the benefit, this is not any different. The reinvested units also are locked in for 3 years. Your employer is not justified in denying you the benefit.

I have read your column where you had clarified about short-term capital gain (STCG) and long-term capital gain (LTCG) applicable for NRIs. The NRI asking the question is based in USA. I have been informed that NRIs based in the US are not allowed to participate in mutual funds issued by Indian AMC operating from India?

I shall be obliged if you can clarify this point. Is there any Indian government directive on this?

—Sarweshwar Dayal

There is no directive issued by the government of India or any of the regulatory bodies in India. Yes, it does appear that the SEC in the US has issued some such guidelines to residents in the US. In spite of this, if the NRI decides to invest in Indian MFs, some of the MFs accept the investments. Some others, especially some of those with foreign collaborators, reject.

—The authors may be contacted at wonderlandconsultants@yahoo.com