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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Dear Pankaj,
My father (never filed IT return, as he is contract worker) had purchased property at Sanpada in 1999 for 2.5L & sold it now in 2012 at 19L (Government value is 13.5L as per stamp duty paper). Cost after indexation will be @ 5L now. & hence net gain=19L-5L =14L. (I hope I did right).
Now My brother has purchased flat at Pune, in which Father is co-owner. In order to divert money earned from sold flat. New flat cost is 17L (=Agreement value, while actual price is 33L!),for which brother has taken Home loan of 11.5L.
Questions are: whether LTCG applicable to father?
How much? considering 14L earned are paid against 17L for new flat, (as Home loan is also liability?)?
If yes, how to save tax?
If capital gain bonds are purchased for this, is these bonds are tax free on redemption? what's lock in period required?
@Daulat
If property sold by your father is a not a residential property, then he would need to invest whole sale consideration amount (19L) to save income tax fully u/s 54F.
If sold property is a residential one, your father would have to invest only gains part to save tax fully u/s 54.
In case capital gains bonds are purchased, there is three years lock-in. Principal amount on redemption is tax free, but interest is taxable as per normal slab rates.
Dear Pankaj
Thanks for reply,
How much capital gain from sanpada flat (14L) will be offset-ed by the purchase of flat pune (cost 17L), as described above, my father is not single owner but co-owner & brother is 1st owner & having loan of Rs. 11.5L on new flat.
Kindly Advice
@Daulat
It depends on how much your father contributes to cost of new flat. If he contributes 14L (which should be paid to seller), then he can save full income tax on long term gains.
If he pays 8.5L out of 17L, he would have to pay 20% income tax on remaining unused 5.5L capital gains.
Can you elaborate on where and how to open LCGT account.
Also could you explain after 3 years of lock in period of Bonds – Section 54EC, what happens to principal amount. Is it taxable? It is clear that interest is taxable.
Do I need to again invest money in residential , if I redeem it from the these bonds.
If above is the case then it makes sense to invest the amount obtained by selling residential property in other residential property.
regards De
@De
You can open capital gain scheme account into a nationalized bank.
On maturity principal amount under capital gain bonds is tax free. No need to invest this money again anywhere to save income tax.
Interest would be added to taxable income.
Hello Mr Batra,
If we keep the money in LCGT account after selling residential property and then we have to use this money in buying the property within 2 years( for flats) and 3 year if we are constructing the house for getting tax benefits.
My question is if we invest the money in the residential project which would take more than 2 years to complete the project(as most of the multistory building takes 3-4 years to complete and take possession) would this make our whole proceeds from selling earlier property taxable?
Your answer would help me in identifying residential property to invest in.
regards, De
@De
If possession for new property is not received even after end of two years from date of sale (from which LTCG arise), then income tax benefit won't be applicable u/s 54/54F.
Hello Pankaj,
I have a basic query,
If I sell a property in X amount (TAXABLE) and purchase the residential property in X with in same financial year (say 2012-13). This would safegard me on the tax liability as all the proceeds are reinvested in new residential property.
Now for some reasons, I sell the new residential property in next financial(say 2013-14) year at Y amount. My question is whether My tax liability for that financial year(2013-14) would be on (Y-X)? Or In such case could you explain how taxation would apply.
@De
If property being sold in X amount is an residential house property, then under section 54, there would not be any tax liability even if only gains are invested into new property and not full sale amount.
In case new house (for which tax exemption is taken) is sold within three years, exemption would be reverted and you will have to pay income tax on capital gain on earlier house sale + there would be short term capital gain tax on new house sale.
Income tax now on sale for Y amount: (Y-X) would be added to your taxable income and would be taxed as per slab rates plus Capital gain on old property sale (with indexation method) would be taxable @ 20% rate.
Hello Pankaj,
We have kept the proceeds from sale(In May -12) the LTCG account but if we want to purchase 54EC bonds for next three years. Can we buy it now In Jan 2013?.
There is rule of 54EC bonds to invest within 6 months of sale.
Is it possible to still any possibility buy a bond? Is there any penalty levied if we do more than 6 months but in same financial year? Please guide on this how should we proceed.
regards, De
@De
As six months have already passed from sale date, you are not eligible for section 54EC exemption now.
Dear Mr. Pankaj
If we open a capital gain scheme account in a Bank, then how much is the interest we will get and for how long we have to kept.
Is it better than capital gain bond.
With regards,
Mukesh Gupta
@Mukesh
CGAS have similar interest rates like saving bank accounts.
Check more details here: http://www.bankofindia.com/capitalgain.aspx and http://www.bankofbaroda.com/pfs/capitalscheme.asp
Please don't confuse yourself with capital gain scheme account and capital gain bonds.
Capital gain bonds are for getting income tax exemption from long term gains u/s 54EC. Whereas CGAS is an account where gain amount needs to be kept mandatorily until reinvestment into another residential property is done.
Investment into capital gain bonds needs to be done within six months of sale.
If residential property is not purchased before last date of income tax return filing (31st July) and person still wants to get tax benefit u/s 54/54F by investing into property in next 2/3 years, he has to invest into capital gain scheme account.
Hi pankaj,
If I invest amount into CGAS for three years and do not invest it in property after three years. Does the whole matured amount from CGAS is taxable?
It is observed that CAGS has more interest rate than Capital gain bonds. So I was thinking why to take bonds if I lock the amount into CGAS without getting it taxed. In CGAS i have flexibilities to withdraw if I change mind to purchase property in two years.
Please suggest
regards, De
@De
If you don't buy/construct residential house property, you would need to pay income tax on capital gains.
Whole amount from CGAS won't be taxable, only long term gains part would be taxable.
Please note that CGAS is not a tax saving method, its just an account to keep money in the mean time while you look for a property or waiting for its possession.
Dear Mr. Pankaj
Thanks for your reply. I want to know suppose I don't want to invest in Bond, and want to buy a residential property, but will wait for some time.
So, upto what time I have to open CGAS. I had sold the residential property this May.
Till then can I use the capital gain amount for some other work, like invest in shares, etc.
With regards,
Mukesh Gupta
@Mukesh
As you have sold property in May, you need to open CGAS before 31st July 2013. In case you get possession of new property before that, there won't be any need for same.
Before 31st July, 2013 you can use the amount anywhere.
Dear Mr. Pankaj,
As per your messages, I have time upto 31st July, 2013 for buying residential property or capital bond or to open CGAS and till then I can use Rs.36 lacs (Capital gain amount) anywhere.
One more clarificaton, suppose I buy a residential property,alongwith furniture and fixtures, then will the said purchase price will eligible for capital gain exemption or we will have to exempt furniture and fixture from purchase price.
With regards,
Mukesh Gupta
@Mukesh
1. You can only invest into capital gain bonds within six months of sale u/s 54EC.
2. If you want to avail tax benefit u/s 54, you need to invest into capital gain scheme account before last date of income tax return filing, if possession is not taken for new property by then.
3. If furniture, fixtures etc are part of cost and included in cost on registered deed, it can be included in purchase price.
dear panka,
If Mr.A has 2 flats and 2 shops on his name. he sales 1 shop and deposits the amount in capital gain scheme - 10 lakh (to save tax). Is Mr.A eligible to pay any tax if he buy new property at rs 10 lakh.
@Sam
As Mr A already have more than one residential properties in his name at the time of sale of shop, he is not eligible for tax benefit u/s 54F.
He can only save income tax by investing into capital gain bonds u/s 54EC.
Hi pankaj,
I am selling my old flat, Although I have 7 lakh home loan remaining for the same flat, if i repay this 7 lakh towards my home loan for closing my home loan from the cost which i get from sale of same flat , can i show these 7 lakh as investment to have exception in my Long term capital gain towards sale of same flat?
@Yatin
There won't be any tax benefit available on repaying home loan from long term gains.
Hi pankaj, thanks for your replies...
Pls let me know following things:
1.while calculating index cost, should we consider date of aggrement of old home purchase or date of possesion of old home?
2.To save LTCG , If I buy a underconstruction property then i should get procession of that property within 3 years or i should do aggrement within 3 years.
@Yatin
1. Date of possession would be considered for long term gains computation.
2. In you buy a under construction property, you should get possession within two years from sale.
Hi Pankaj,
My mother and grand father are buying a residential flat to save LTCG which both earned after selling another jointly earned flat this year.
My grand father's share in the new flat would be around 40%.
As he is in an old age, we would like to keep an option of property transfer at the end of three years.
Is there any option to execute property transfer in case of any unexpected event with any of the owners (before three years locking period)?
Also, my grand father has six sons so would this option be open to challenge by his sons.
Please advise.
Thanks
Rohit
@Rohit
Your grand father can execute a registered will to mention property owner after his death. Once he is no more, property can be transfered to other person's name through settlement deed even before three years.
Hi Pankaj,
Thanks for your response.
If such a will is executed, can any of my grand father's sons challenge it or would this require an acceptance from them before execution?
Thanks
Rohit
@Rohit
If property is not inherited by Grandfather and he bought it himself, then will should not be challenged.
Hi,
Are there any tax saving bonds available in market to invest to save long term capital gain tax?
Regards
RG
@RG
You can invest into capital gain bonds u/s 54EC.
Read more here: http://www.nhai.org/bonds1.html and http://www.recindia.nic.in/54ec.html