Invest capital gains in house property to avoid paying tax

the three brothers? Inder Sethi

Via email

As the residential house sold by you was constructed about 100 years ago, you have the option of substituting the cost of the house with the fair market value (FMV) of the house as on April 1, 1981. So the indexed cost of inflation works out to 8.52 times of the FMV as on April 1, 1981. The difference between the net sale consideration and the indexed cost of acquisition computed above will be the longterm capital gain (LTCG) on the sold property. The LTCG computed above may be divided by three to arrive at LTCG for each one of you.

The tax liability on the LTCG can be avoided if you use it for the purchase of a residential house within a period of one year before or two years after the sale of original asset or towards the construction of a residential house within a period of three years.

If the capital gain is not used for the acquisition of the new asset before the due date of furnishing the return of income, it should be deposited in an account in a specified bank or institution under the Capital Gains Accounts Scheme.

The other option of avoiding or reducing the capital gain tax liability is by investing in specified capital gain bonds under Section 54EC of the Income-Tax Act.

(Kamal Rathi is a Hyderabad-based CA and can be contacted at kamalrathi.ca@gmail.com)