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:
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 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 bought residential flat in 2006 for 39L (incl stamp duty & regn) in Navi Mumbai. Now (in Nov 2010) I am wanting to sell the said flat in 80L and buy a commercial office space (also in Navi Mumbai) by putting this and some more money. What will be my capital gain tax implications on this transaction or how can I save this tax
@Pradeep
Since you have kept the house for more than three year, its long term capital gain.
To save income tax on this capital gain, you can invest the gain amount in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Income tax on long term capital gains is 20% with indexation.
Lets say purchase price = X, purchase year = P, sale price = Y, sale year = Q
Cost Inflation Index (CII) for year P = R, Cost Inflation Index (CII) for year Q = S
Indexed purchase price, Z = X * (S/R)
Capital Gain, C1 = Y-Z
Tax with indexation = C1*20%
As you are interested in buying commercial property after selling residential, You won't be able to save income tax on capital gains.
Thanks Pankaj.. What happens if ones selling price and buying price is kept the same even after 3 yrs. Even in such case LTCG tax is levied..if so how much..
thanks again
@Pradeep
If there is no gain, there will be no income tax. As per last reply, you have compute capital gain and income tax.
@Pankaj
If there is no gain there is no income tax. Will Capital gain tax will be levied due to indexation etc reasons even though property is sold at same price as buying over 3 yrs back
@Pradeep
Cost Inflation Index for a year is mostly more than what was there for preceding years (Only case it will be less when there is negative inflation, which never happens practically).
So capital gains can not be positive if you sell at same price at a later date.
Hi Pankaj,
Thanks for the info you provided
One question though it is a repeat, can I consider my stamp duty and registration cost as part of my flat cost which I sold? If so where can I get a confirmation details (some tax site)
Can I also show the stamp duty and registration fee I am paying for the new flat purchaing as cost and deduct from the capital gain?
Thanks
@Gurunath
Yes, you can consider stamp duty and registration cost as a part of acquisition cost for both flats being sold and bought.
Here is the relevant link : http://www.incometaxbangalore.org/faq/cgains.htm (See Question 3)
Thanks Pankaj for your quick responce.
Appreciate your timely help
Hi Pankaj,
I have one more question. I understood that you can claim tax benefit if you own only one house excluding the new asset.
I have two flats one on my name one on Joint with my wife. I sold the flat which jointly owned with my wife and now purchasing a new flat again jointly. Can I get the capital gain tax benefit in this transaction?
If not, what are the other ways to reduce tax liability. Can I show this transaction under my wife's return and claim the tax benefit? Since it is a joint property.
Or can we share the profit and avail the tax benefit by my wife and pay tax in my share?
Please advice with your knowledge
Thanks in advance.
@Gurunath
Yes you both can get capital gain tax benefit.
Capital gain arising due to this transaction will be divided among the joint owners in same ratio as ownership.
If both of you again invest in another residential property for more or equal to the individual capital gains, it will be tax free.
Thanks Pankaj,
But not clear about the section 54F applicability if I own two flats (other than the new one acquiring).
I have two flats one on my name one on Joint with my wife. I sold the flat which jointly owned with my wife and now purchasing a new flat again jointly. Can I get the capital gain tax benefit in this transaction?
My tax excemption is based on 54 or 54F. Confused on 54F section which says
54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) 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 to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply where-
(a) the assessee-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".
Thanks in advance.
@Gurunath
Section 54 applies to your case since you are selling a residential property and again buying another from capital gain of property sale.
Section 54F applies to cases where capital gain does not arise from previous residential property sale but from other assets like shares, a plot of land, commercial assets, commercial house property, jewellery etc.
Section 54 does not have any rider condition but 54F has conditions attached.
Hi pankaj,
I purchased a shop in 2004 for 9 lac. in a joint name i sold in 2010 in 40 lac. now i wanted to buy new resi. flat of Rs. 35 lac. in joint name and payment of outstanding loan of my old resi. flat in a joint name of Rs. 5 lac. So that, can I save LONG TERM CAPITAL GAIN
@Anil Kumar
Your case falls under section 54F, as you sold a commercial space and buying a residential one.
To save income tax on this capital gain, you can invest the gain amount in buying a residential house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
But there are below conditions to it, If any of the case valid then this section cannot be applied for tax saving:
(i) Assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.
Pankaj.I was about to finish one deal then thought let me reconfirm.When I buy another house within the stipulated time for 3 years is it a condition that I need to utilize the sales proceeds of property sold or can I buy the new house even by taking a loan/mortgage and utlising the sale proceeds.In other words am I right so long as new residential house is purchased or constructed how it is financed is immaterial.
@Rekha
I am not able to find any relevant section in income tax act which does not allow that.
But to be on safer side, I would request you to consult a CA, before doing it.
I meant by taking a loan and not utlising the sale proceeds
hi pankaj,
I sold my comm. property for 45 lacs and this 45 lacs shall be used for buying a ready to move flat.. Now in my name only this flat. Further can I purchase one more another flat through finance, installment can be met out from the rent of previous flat. I am residing with my husbands flat
@Anil Kumar
If you purchase another residential house within one year or construct another house within 3 years, then the capital gain will become taxable.
Hi Pankaj,
I want to sell my apartment which is still under construction. I purchased this apartment 1 year back. If I buy another apartment which is much more texpensive han the apartment which I am selling, will I still be required to pay tax on the capital gain incurred?
@Animesh
As you have not kept the property even for 3 years, it comes under short term capital gains and it will be fully taxable and will be added to your income.
I inherited a house in delhi form my mother...she purchased the house in 1972 for Rs. 58,000...i inherited in 1984...In 1990 i construct one more floor with Rs. 1,75,000..i sold the terrace right above that floor in 1990...now i had two floor in the House...i sell one of them in Jul 2010 for 80,000,00...and purchase on plot in noida for Rs. 70,000,00 AND CONSTURCT THE HOUSE WITH Rs.5,00,000...Now i have one floor in old house and one house in noida..How i will calculate my capital gain for this FY and will i am eligible for capital gain..as i own one and purchased a new one
@Omesh
In case of inherited property, acquistion cost is same as the cost to the previous owner (your father), which is 58,000.
A. Cost inflation index of 1981 =100
B. Cost inflation index of 1990 =182
C. Cost inflation index of 2010 =711
D. Acquistion Cost in 1972=58000
E. Fair market value in 1981 (Lets say)=100000
F. Cost of the improvement in 1990 =175000
G. Indexed cost of the acquistion in 2010 = (C/A)x E = 711000
H. Indexed cost of the improvement in 2010 = (C/B)x F = 683654
I. Total indexed Cost in 2010=(G+H) = 1394654
J. Acquisition/Improvement Cost of one floor in 2010 = (I/2) = 697327
K. Selling cost = 8000000
L. Capital Gain = (K-L) = 7302673
So, as you are buying a new house which costs more than capital gains, there won't be any income tax.
Even if you already own another house, there won't be any income tax from capital gains under section 54.
Also, please consult a tax professional/CA in this case before taking a decision. This is as per my knowledge and there might be some difference in actuals.