LTCG taxed at 20.8%

Q■ My mother had transferred her house in Bengaluru to her children — two sons and three daughters — through a settlement deed in October 2017. I got 20 per cent share in it. The plot was gifted to her in 1993 by my grandfather and she constructed the house in 2005. We, the joint holders of the property, have sold the house in June 2018. From the sale proceeds, I got ` 1.5 crore as my share.

As the property has come through a settlement deed, I derive the benefit of the 25 year old possession. So is it enough if I pay only 10 per cent tax on the uninvested portion of the sale proceeds? If I invest around ` 1 crore in purchase of a house property and around ` 40 lakhs in capital gains bond, do I need to pay only 10 per cent income tax on the balance? GANGA PRASAD Via mail

A) As per the provisions of the Income Tax Act, if the assessee has acquired an asset by gift, will or inheritance, then the cost to the previous owner will be adopted as the cost of acquisition. Where the capital asset became the property of the assessee before April 1, 2001, he has the option of substituting the fair market value ( FMV) as on April 1, 2001, in place of the original cost. Hence, you can adopt the fair market value on the date specified above as the cost of acquisition of the house property.

You will also be eligible to take the benefit of cost inflation index applicable for financial year 2001- 02 with a base of 100 and the cost inflation index for FY 2018- 19 i. e. 280 . Therefore, the cost of acquisition of the property proposed to be sold will be increased by 2.8 times of the FMV adopted as on April 1, 2001. The indexed cost of acquisition calculated after applying the cost inflation index will be deducted from the net sale consideration received on the sale of property and the balance remaining shall be taxable under the head “Capital Gains” as long term capital gain ( LTCG) at the rate of 20.8 per cent ( and not 10 per cent).

The tax on LTCG can be reduced/ avoided by investing in specified capital gain bonds under section 54EC within 6 months from the sale of property, subject to a ceiling of ` 50 lakh during any financial year. The amount in capital gain bonds has to be invested for a period of 5 years ( earlier 3 years). Further, you also have the option of investing the LTCG in a residential house subject to fulfillment of certain conditions laid down under section 54. Both the options can be availed together. The balance LTCG will be taxable at the rate of 20.8 per cent.

The net sale proceeds have to be invested in purchase or construction of residential house within two years or three years respectively, from the date of sale. The unutilised amount may be deposited before the due date of furnishing the return of income, i. e. July 31, 2019, in any bank under “Capital Gains Account Scheme”. If this is done, the amount invested will be deemed to have been utilised for purchase or construction of the new asset. The amount invested in scheme may be withdrawn for the purpose of purchase or construction of the new asset within the specified time.

( The writer is a Hyderabad- based CA. Queries can

be sent to info@ rathiandmalani. com)