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.
hi pankaj , if a father want to gift a flat to his daugther ( who is married ) , does he need to pay stamp duty , registration charges etc, or any other charges again???? , also does the cost of flat is taxable to his daughter or father?
@Yatin
In case of proper registered transfer, stamp duty and registration charges would be payable.
But in case of such settlement deed (from father to daughter), duty may be less in some states. Please confirm same from your local registration authority.
Cost of flat won’t be taxable in hands of neither daughter nor father.
Hi Pankaj,
A. I am planning to take home loan in June 12.
B. I also have another flat that I will sell out in Dec. 12.
Can I clear off the home loan taken for A using capital received from B?
Will this give me re-investment benefit so that I will save capital gain tax on B?
I am not sure whether re-investment is allowed to pay home loan that is taken 6 months before selling the property.
Thanks,
Mugdha
@Mugdha
There is no income tax benefit on paying home loan from long term gains.
However if there is a possession of new residential property purchase within one year before or two year after sale, tax benefit can be taken against that purchase.
HI Mr Pankaj,
I purchased one bhk flat in Airoli,Navimumbai..at the cost of 16.5 lakh in year 2007 which includes 1.5 lakh regn and other charges.10% of the flat amount paid to builder in cheque and 13 lakh loan taken from bank.
Now i want to sale at 32lakhs,from which i need to pay 11 lakh outstanding to bank..Rest amount i want take by cheques from purchasers loan a/c..
My question is what will be tax to be paid if i received amounts by cheques..
What is the best way to avoid tax..How tax to be paid??whether its necessary to invest in property to save tax??If so then what will time limit??or If amount deposited in Fixed deposit a/c then how TDS can be saved??Or is there any other safe guideline to invest money without TDS deduction…PLz let me know????Thanks..
@Manoj
As you are selling flat, you would earn long term gains on it.
Income tax is payable at 20% on long term gains.
As per figures provided by you, you would have gains of around 6-7 lakh by indexation method.
To save income tax on this, either you can purchase another residential house property u/s 54 or invest into capital gain bonds u/s 54EC.
Possession for new property must be received within two years from sale.
Investment into capital gain bonds must be done within six months from sale.
Dear Punkaj hi !!!!!! My client has the plain land. He gave it to builder for construction. He received consideration 28 flats which are at progressive stage. this stage he disposed 3 flats out of 28 flats. The consideration he is getting in installment. Because the Flats are not completed stage. Now the question is Can he claim 54F. Second He has formed a private limited company and relinguished all his Individual rights. say 25 remaining flats. Will he need to pay capital gain tax.. Should he wait till the sale of Flats by the Private company. Kindly reply Punkaj Batra
Dear Mr. Pankaj
I had purchased a flat in year 1994 for Rs.5 lacs and now this year it was sold for Rs.51 lacs.
Kindly inform me how much will be long term capital gain and its tax.
Also, will I have to invest or purchase of the total sale consideration or only LTCG.
Can I use the amount for a short period and then purchase the property.
Regards,
Mukesh Gupta
Dear Mr. Pankaj
Kindly clarify following more points :
1. Whether we can deduct expenses like maintainence charges, repairing,etc. from LTCG, and if so how much. Whether invoices are required for proof.
2. Whether out of the LTCG, we can gift some amount to my wife or children, and claim the benefits.If so, how much and whether gift tax will be levied.
With regards,
Mukesh Gupta
@Mukesh
1. Only constructional cost can be added to indexed cost. Such cost should be incurred on structure changes like addition of a new floor or re-construction etc.
2. Income tax on long term gains cannot be saved by gifting amount to anybody.
Dear Mr. Pankaj
Can I add expenses paid for maintainence charges to the society for the last 18 years and also for the expenses done for repairing walls, rooms and ceiling.
With regards,
Mukesh Gupta
@Mukesh
Maintenance charges paid to society and other routine expenses cannot be added to property cost.
Dear Mr. Pankaj
I have sold my property this May. Till when I can buy any property.
Also, in the said property, there is lot repairing to be done. Can I add this expenses in the cost of the property for availing LTCG.
With regards
Mukesh Gupta
@Mukesh
You would need to get possession of new property before May 2014.
Cost of repairing cannot be added to cost of property. It can only be added if there is a substantial structural change like addition of new floor or reconstruction.
@Mukesh
Purchase Year = 1994-95, Purchase Cost = 500000, Cost Inflation Index (CII) for purchase year = 259
Sale Year = 2011-12, Selling price = 5100000, CII for sale year = 785
Indexed Purchase price = 500000 x (785/259) = 1515444
Long term capital gain = 5100000 – 1515444 = 3584556
Income tax on capital gain = 3584556 x 20% = 716911.2
In order to save income tax, you need to invest only capital gains part (36 lakh) u/s 54.
If possession for new property is not taken before last date of income tax return filing date (31st July, 2012 if property was sold in FY 2011-12), amount should be invested into capital gain scheme account. Before this, you can keep/use amount anywhere.
Dear Mr. Pankaj
If I buy a new property for Rs.36 lacs or invest in Bond,the is the balance amount of Rs.15 is tax free and can be use thed for any other purpose.
With regards,
Mukesh Gupta
@Mukesh
You need to invest only capital gains amount to save tax fully. Rest of the amount is tax free and can be used anywhere.
Hi, I purchased a flat at Sep 2006 with a total cost of Rs 8 lacs and with a bank loan 6.68 lacs. Again i obtained a plot at Nov 2009 and constructed a house and it completed on Jun 2010 for which i have obtained 18.58 Lac loan.
Now i am planning to sell my flat for Rs 19 Lacs which was purchased at June 2006. I know it would be LTCG. is there any way to get exemption from LTCG tax if i payout the House Loan for the second property from the income got from the sale of the flat (First property).
Thanks a lot in advance.
@Nagaraj
There is no income tax benefit on paying home loan from long term gain amount.
Dear Mr Pankaj,
Thanks for the reply.
The market value of the flat is Rs 20 lacs and sale deed value is Rs 10 lacs (guide line value of the land + flat value). Is that enough to pay the income tax or invest in LTCG schemes for sale deed value of Rs 10 lacs.
Thanks,
Nagaraj.
@Nagaraj
You would have to pay income tax on LTCG with computation based on registered sale deed value and government rates, whichever is higher.
Dear Mr. Pankaj,
Thanks for the reply again.
Have one more clarification. I have 2nd property with ground floor alone, if i get the amount by sale of 1st property and construct another floor on the second property. Will there be any LTCG exemption and also could it be done within 3 years.
Thanks,
Nagaraj.
@Nagaraj
Spending amount on additional floor on existing house can be claimed for LTCG exemption.
Dear Mr. Pankaj,
Thanks for the reply.
In that case
1. What is the time period i need to complete the construction on existing house.
2. In the meanwhile can i keep the amount in my SB A/c.
Please suggest.
Thanks,
Nagaraj.
@Nagaraj
1. Construction should complete within three years from sale.
2. In the meantime amount should be kept in capital gain scheme account and spend towards construction should be paid from this account.
Many thanks for all the clarifications.
Dear Mr. Pankaj
I am confused to arrive the purchase cost of the flat. Please help.
I purchased a flat during sep 2006 with the following transactions,
1. Registered Sale Deed of land for undivided share of 278 sqft – Rs. 138000
2. Builder Agreement to construct 711 sqft of super structure – Rs. 573000
3. Other charges like Electicity Deposit, Common charges – Rs. 89000
Total Cost – Rs. 800000. The possession date is Oct 2006 (the flat was 90% complete during Sep 2006). I availed bank loan of Rs. 668000 and this amount direcly paid to the builder.
1. How to arrive the purchase cost of the flat?
2. If i sold the property during FY 2011-12 with the registered sale deed value that includes undivided share of land + building for Rs. 1044600. What is the long term capital gain figure and the tax payable now.
PS:- The CII for the FY 2006-2007 is 519 and FY 2011-2012 is 785
@Nagaraj M
Cost incurred in 1st and 2nd points would be considered as cost of flat. Electricity connection, Society charges, Club membership etc cannot be included in the flat cost.
See below computation for long term gains. Its actually coming out as loss and not a gain, so no income tax is payable.
Purchase Year = 2006-07, Purchase Cost = 711000, Cost Inflation Index (CII) for purchase year = 519
Sale Year = 2011-12, Selling price = 1044600, CII for sale year = 785
Indexed Purchase price = 711000 x (785/519) = 1075405
Long term capital gain = 1044600 – 1075405 = -30805
Dear sir,
I had sold my flat during 2012 Its actually coming out as loss and not a gain, so no income tax is payable.
Purchase Year = 2006-07, Purchase Cost = 711000, Cost Inflation Index (CII) for purchase year = 519
Sale Year = 2012-13, Selling price = 1044600, CII for sale year = 852
Indexed Purchase price = 711000 x (852/519) = 1167190
Long term capital gain = 1044600 – 1167190 = -122590
My doubts:-
1. It should be shown in IT return in AY 2013-2014. Is it compulsory to show in IT return eventhough there is no LTCG.
2. If missed in the IT return can i submit revised IT return and what is the maximum allowable time to submit the revised return.
Thanks,
Nagaraj.
@Nagaraj
1. It would be better if you show this transaction in ITR. You can show it as a capital loss and it would be carried forward. In future if you have gains, this loss can be set off against the gain to lower income tax.
2. You should revise return before 31st March 2014.
hi Pankaj.I have three properties in my name. I am planning to sell one of them ,if I invest capital gains within 2 yrs do i get the benefit of LTCG.
secondly what is taken as the date for LTCG calculations-date of agreement with builder,date of registration or date of possession .
@Neera
If you are selling residential house property then you can take tax benefit u/s 54 by investing into another residential house property.
Date of possession/transfer is used for LTCG computations.
Hi Pankaj –
I booked a plot in greater noida last year, and have sold the same this year with ~2L profit.
I had paid only 5L of the total value (~30L) of the plot, and it was never registered.
What is the kind of tax liability on this?
Thanks,
@Ramesh
Whole gains (2L) would be added to your taxable income and taxed as per your slab rates (max 30%).
I am planning to buy second hand property (Say Property ‘A’) by taking loan from nationalized bank in June 2012. I am considering to add my father name as part of the registration. The reason behind considering to add my father name is, He own a commercial space in different region and he is planning to sell that in another six months time (Say Dec 2012).
Can he avoid paying tax on long term capital gain by repaying the entire loan amount we have taken on buying Property ‘A’?
@Viswa
Your father can get tax benefit u/s 54F as he is investing capital gain amount into a residential house property.
There are some conditions for this:
1. Your father should not be owning more than one residential house propertied in his name at the time of selling commercial property.
2. Possession for property A should be taken within one year before sale of commercial property or within two years after sale.
If your father’s contribution in property A is more than sale consideration of commercial space, there won’t be any income tax on capital gains.
Dear Sir,
Do I need to file income tax returns, if my only income was from the sale of a house (LTCG), and I bought another qualifying asset (house, or long term bonds) with the profit within the stipulated amount of time? I’m an NRI.
@Harry
You would need to file income tax return mandatorily if you had earned long term gains from sale of house.
Pankaj,
What if I had no LTCG after indexation? Do I still need to file returns mandatorily? For purposes of indexation, do I consider the number when the contract for home purchase was signed with the builder (better for me), or when I took possession (2 years later)?
For purposes of computing (lowering) cost basis, can I include any maintenance done for selling the house? What about realtor fees?
@Harry
If there is no gains, income tax return filing won’t be mandatory for NRI.
For LTCG computation, date of possession would be considered.
Maintenance cost on house cannot be added to house cost. Fees paid to broker can be considered.
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