Low­er­ing tax li­a­bil­ity on prop­erty sale

The amount to be paid as tax on cap­i­tal gains de­pends on the pe­riod for which the prop­erty is held by the tax­payer

HT Estates - - HTESTATES -

Over the last few years, bu y i n g a n d s e l l i n g prop­erty has be­come a rou­tine af­fair for most in­di­vid­ual tax­pay­ers. While cap­i­tal ap­pre­ci­a­tion is the main at­trac­tion for most, some sim­ply park their extra funds in the real es­tate mar­ket. Al­though sale of prop­erty yields hand­some re­turns, it may also re­sult in a sub­stan­tial tax out­flow since the profit earned on sale of prop­erty is tax­able as cap­i­tal gains.

The amount to be paid as tax on cap­i­tal gains de­pends on the pe­riod for which the prop­erty is held by the tax­payer. Tax­pay­ers can avail cer­tain ben­e­fits under the law if the cap­i­tal as­set is held for a pe­riod of more than 36 months. This would en­able the cap­i­tal as­set to be cat­e­gorised as long term cap­i­tal as­set and gen­er­ally the long term cap­i­tal gains (LTCG) are tax­able at a con­ces­sional rate of 20%.

Fur­ther, while cal­cu­lat­ing the value of LTCG, the cost of ac­qui­si­tion (in­clud­ing the cost of im­prove­ment) is to be ad­justed for in­fla­tion, gen­er­ally known has in­dex­a­tion of cost of ac­qui­si­tion. Ev­ery year the rev­enue au­thor­i­ties no­tify the cost in­fla­tion in­dex (CII) for that par­tic­u­lar year.

Let’s un­der­stand this with an ex­am­ple. A per­son sells his house prop­erty for ₹ 2 crore in the fi­nan­cial year 2014- 15, which was pur­chased by him in the year 2006-2007 for ₹ 90 lakh. Fur­ther, he in­curred ₹ 2 lakh for mak­ing cer­tain im­prove­ments to the said prop­erty in year 20082009. Given th­ese facts, the long term cap­i­tal gains on sale of prop­erty shall be com­puted in the fol­low­ing man­ner (See box).

Var­i­ous ex­emp­tions have been pro­vided under the law to min­imise the tax li­a­bil­ity after the value of long-term cap­i­tal gains is ar­rived at:

In­vest­ment i n an­other res­i­den­tial house prop­erty: The tax­payer may claim spe­cific ex­emp­tion(s) de­pend­ing upon the na­ture of the prop­erty sold. For claim­ing th­ese ex­emp­tion(s), the tax­payer should pur­chase a new res­i­den­tial house prop­erty (‘new prop­erty’) within one year be­fore or two years after or should con­struct a new prop­erty within three years in In­dia from the date of sale of prop­erty.

Sale of res­i­den­tial house prop­erty: The in­di­vid­ual tax­payer may claim ex­emp­tion of LTCG aris­ing on sale of a res­i­den­tial house prop­erty, up to the cap­i­tal gain amount utilided to pur­chase or con­struct an­other res­i­den­tial house.

In case, the new prop­erty is sold within a pe­riod of three years from the date of its ac­qui­si­tion, then while com­put­ing the cap­i­tal gains on such a sale, the cost of ac­qui­si­tion of new house prop­erty shall be re­duced by the amount of cap­i­tal gains claimedaimed ear­lier as ex­empt.

Sale of land: The in­di­vid­u­alvid­ual tax­payer may claim ex­emp­tionption of LTCG aris­ing on salee of a land (other than a res­i­den­tialen­tial house prop­erty), up to thee sale pro­ceeds utilised to pur­chasease or con­struct an­other res­i­den­tialen­tial house. How­ever, this ex­emp­tion­mp­tion would not be avail­able if the tax­payer owns more thann one res­i­den­tial house prop­er­tyty on the date of sale of land.

In case, the new prop­erty is sold within a pe­riod of three years from the date of its ac­qui­si­tion, thehe amount of cap­i­tal gain­sns claimed as ex­empt shall be deemed to be LTCG of thehe year in which such a salele took place.

T he t ax­payer s houldld de posit any unutilisedd amount be­fore the fil­ing of tax re­turn, under the cap­i­tal gains ac­count­ing scheme in a des­ig­nated cap­i­tal gains bank ac­count.

In­vest­ment in the spec­i­fied bonds: LTCG can be claimed as ex­empt from t ax if cap­i­tal gain is in­vested in spec­i­fied bonds (i.e. NHAI and RECL bonds), within six months from the date of sale of prop­erty, up to ₹ 50 lakh.

Long term cap­i­tal gains

How­ever, if the above bonds are trans­ferred or con­verted into money within a pe­riod of three years of its ac­qui­si­tion, the amount of cap­i­tal gains claimed as ex­empt, shall be deemed to be LTCG of the year in which the bonds are trans­ferred or con­verted into money.

It is im­por­tant for tax­pay­ers to be aware of the afore­said ben­e­fi­cial pro­vi­sions in or­der

1,890,885

to take the max­i­mum ben­e­fit le­git­i­mately. The aware­ness of the above pro­vi­sions can help tax­pay­ers plan and ex­e­cute such trans­ac­tions wisely.

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