Refundable deposit is better than rental advance

QI purchased a 930 square feet flat in April 2012 in Hyderabad for ` 9.62 lakh. I paid ` 72,150 as registration charges through a demand draft. Now I am planning to sell the flat for ` 15 lakh. What would be the amount of capital gain and how should I invest such amount to get the benefit of tax saving? INDIRA PATANGAY

Via email

A) As the flat was purchased in April 2012 and is being sold after six years of acquisition, the gains arising out of the sale of property will be long term capital gains ( LTCG). On the sale of any long- term capital asset, indexation benefit will be available by applying the cost inflation index to the cost of acquisition of the property, which includes the registration expenses incurred at the time of purchase of property.

After applying the cost inflation index, the LTCG shall be computed as under:

10,34,150 x 272 ( Cost inflation index of FY 1718) divided by 200 ( Cost inflation index of FY 1213). This would be ` 14,06,444.

Therefore, the LTCG on sale of flat will be ` 93,556 (` 15,00,000` 14,06,444). This will be liable to be taxed at a flat rate of 20.6 per cent.

The capital gains tax can be avoided if the long- term capital gains are invested in Capital Gains Bonds specified under Section 54EC of the Income- Tax Act or purchase or construction of a residential house within the specified period.

In the case of individuals or Hindu Undivided Families, where the total income as reduced by long- term capital gain, is below the basic exemption limit, the long- term capital gain will be reduced to the extent of the short fall and the balance long- term capital gain, if any, will be subject to tax at flat rate of income- tax specified above.

QI have leased out an apartment in Mumbai on a long- term basis to a company from Hyderabad. Recently, I have requested them to give us four years of rent in advance. How- ever, they say that if they pay me the rent in advance for such period, they will be charged 33 per cent by the IT officials. Is this correct? Alternat- ively, can the rent be paid by them as loan? NAMRATA Via email

A) As per the provisions of Section 194( I), any person liable to deduct tax on any income by way of rent exceeding ` 1.8 lakh during the financial year shall, at the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier deduct income tax at the rate of 10 per cent for building, furniture etc., Hence, advance rent paid will attract provisions of Section 194( I). The rate of TDS applicable will be 10 per cent and not 33 per cent as mentioned by you in your query. It is suggested to accept refundable deposit instead of advance rent to avoid the TDS provisions being attracted.

( The writer is a chartered accountant. You can your send queries to info@ rathiandmalani. com)