Buying and Selling of Property, Plots, Flats, Land, Independent Houses, Floors or any other form of residential property is a frequent activity in present scenario. Especially with so much activity in the real estate sector, it has been considered to have given good returns. The attractive home loan schemes have made it even more lucrative. However, the transactions are often subject to complicated income tax structure. Here is one case that may solve some of your queries.
When you are about to sell a piece of land for a profit, it is quite likely that Capital Gains Tax would be imposed in the form of Long Term Capital Gain (LTCG). This remains a concern for a lot of people that how can they possibly avoid Capital Gains Tax arising out of the Long Term Capital Gain. In the present article we are discussing an example case.
In the present case the example assessee, an individual, is in the process of transferring a long term capital asset not amounting to a residential house and the proceeds are to be utilised to buy a capital asset amounting to residential house.
The treatment of capital gain on the transfer of capital asset not amounting to residential property is under consideration. Section 54F of the Income tax Act 1961 deals with the current situation.
Where the assessee is an individual, and capital gain arises from the transfer of any long term capital asset (not being a residential house) which in the present case is a piece of land (not amounting to agricultural land) and the assessee has within a period of one year before or after the date on which the transfer of the original asset has taken place, has purchased a residential house (new asset) or has constructed a residential house within three years; the capital gain shall be dealt as per the following conditions:
- If the cost of the new asset is more than the net consideration received in respect of the original asset, the whole of such capital gain shall not be charged to capital gain tax as per section 45 of the Income Tax Act.
- If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears the cost of the new capital asset shall not be charged to capital gain tax as per section 45 of the Income Tax Act.
However, the capital gains exemption enumerated in (a) & (b) above is subject to the some conditions. The benefits as discussed shall not be available if:
- If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.
- If the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset
- If the assessee constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If you have further queries on the subject of tax related queries, the experts in the panel would be happy to help you with sound tax advice.
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I think common man will stop investing in Property/Equity market for long term (even short term), People will keep their money either in the form of Gold or cash in banks. If they invest in property, they will accept cash in transaction, more black money. Its impact will be on almost all businesses related to Property/Equity Market. India is accepting western style of economy. And Western world is trying to adopt Indian style of economy. In last recession it has been proved that our legacy style of economy is very stable/robust/sustainable. I don’t know why our economist are trying to create a bubble, which will burst after 6-7 years. Be ready for another recession after Direct Tax Code.
Following is a brief summary for your better understanding.
Property type – Flat in a Building located at Mumbai
Originally the flat was on my grandfather’s name on monthly tenancy basis since 1976.
The Owner of property as well as building was ABC.
Rent receipts are available from 1990 onwards.
During 1992, it was transferred in the name of my grand mother.
During 1995, it was transferred in the joint name of my grandmother and father.
During March’1998, it was transferred in single name of my father.
During April’1998, it was transferred in my name exclusively.
During May’2001, the entire property was sold by ABC to the new owner XYZ.
Hence I became a tenant of new owner XYZ and the rent receipts are preserved with me from 2001 till May2005.
During October’2005, the project for redevelopment of old building by demolishing the old one was started. Accordingly during October 2005, I entered into an agreement to sale with XYZ for surrendering the tenency rights in old premises and became owner of the new block in the new building for a consideration of Rs. 4.50Lacs. The last rent paid by me was about Rs. 110/- per month.
The actual market price in 2005 for my flat could have been somewhere about 12 Lacs, however builder charged me only Rs. 4.5 Lacs for surrendering Tenancy rights.
There was a delay in building and finally the construction was completed and possession letter was issued to me during March’2008. The last payment to builder was made in 2008.
And now, in Oct’2009, I have sold the flat for about 12Lacs.
Specific Query –
1. How to calculate Cost of initial acquisition in this particular case, considering heriditary property & surrendering of tenancy rights?
2. Is it a long term or short term CG?
@Kay
Yours is a complex case and I don’t have much knowledge regarding same. Please consult any tax professional or CA.
@Pankaj, Thanks. While i agree that this is a complex case, but this is typically a case of most of old residents of Mumbai. You wud find hundreds of similar cases like this.
Taking your advise, i wud consult CA however knowing your expertise, I wud appreciate if you could give some logical reasoning or your judgement on this case.
Thanks in advance. Kay
@Kay
I don’t have any formal education of taxation and finance and It would be unfare for me to provide my judgment.
@Pankaj,
I sold a property(land) and might roll the proceedings into a house within a year after the sale of land. House will cost more than the proceedings from sale of the land. In this case is LTCG due @ sale of land? Is there a way to avoid LTCG and roll the proceedings into the house? What if the house is purchased in 2 – 3 years (ie not within the first year after sale of land)? Any comments??
@Investor
As you are investing the amount back into a house property, this should not attract any long term capital gains.
It can be invested into house property within 2 years of sale, but for mean time, gains has to be invested into a capital gains account.