We are in discussion with a builder to demolish the existing house & reconstruct flats on the same plot with an understanding that he gives us 2 flats in the building, one in my name and the other in my father’s name, plus some cash to my father. The possession of the Flats is likely give by the builder within 15 months from the date of agreement. However, to ascertain the economic viability vis-à-vis the tax liability of the project, please guide me on the following points:
- How to calculate the capital gain tax? We are at a very preliminary stage of discussions and yet to determine the cost of the existing property that the Builder may give as also the cost of Flats that he may charge us from.
- Will the exemption u/s 54 (LTCG) be available to both of us by way of investment in Flats, if so, to what extent?
I am in service and a regular Income Tax payer. Will I be subject to any additional tax liability (as the property is own by my father)?
- Will there be any other tax liability under Income Tax Act or any other taxation authority to either of us?
- Any advice you may like to give on anything I may have missed.
It may be further note that
My father is age 85years and I am 52.
What should be the right time to execute. The agreement with the builder to address the issue of gain accruing and the investment made in one financial year only? [Dilip Athlayemail@example.com]
- It carries sense to have a proactive approach as far as tax planning is concerne. We are very please to see the same in your query. After the document are signed & sealed, assessee is left with very little option but to bear the consequences.
- To be precise, your father is the owner of a house property which he will be transferring to the builder. Against the property so propose to be transfer, the sale consideration will be in the form of 2 Flats plus some amount in cash.
- What your father is transferring is a residential house property (& not plot or Vacant land) & the fact should be so mentioned in the document, as a result of which your father can claim an exemption u/s 54. If the property transfer is any property other than residential house property. Then exemption is not available u/s 54, even though exemption could be claim u/s 54F. In normal course, in the situation like one mentioned in your query. Having an exemption u/s 54 is better than an exemption u/s 54F.
- As a tax planning measure, both the flats to be re-purchased, your father should advisably have first name & both the flats should ideally be attached to each other so as to be capable of being used as a one unit. This will ensure unquestionable capital gain exemption on purchase of two flats. Your name could be incorporate in the flat document as a co-owner for administrative or future perspective. It would be better if you avoid any financial involvement in the transactions from your end so as to infer that your father is the absolute owner of the house property & your name is incorporated therein for the name sake only.
- At any point of time in the transactions, any income or profit is not accruing or arisng in your hands & so even the distinct possibility of tax liability in your hand does not arise.
- The important question: Timing of the transactions. Ideally, the transactions are do initial part of the financial year. Earlier the better. So that your father gets maximum time period to comply with the exemption provision of the Income Tax Act.
- The tough task that remains, How to compute the capital gain in such cases. It requires various supplementary details like the year/cost of acquisition & additions, the Stamp duty Valuation of the house property which is proposed to be given to the Builder/ Developer, the Market value of the 2 Flats your father will be getting, the amount of cash your father is getting, etc. Further, the year of taxability & the amount of capital gain would be dependent on the drafting of the agreement with the builder & the terms, conditions and stipulations incorporated therein.
- However, if the cash receive by your father is less than the cost of acquisition & improvement (after Indexation), there will not be any capital gain tax liability on him as he will be eligible for an exemption u/s 54 of the Income Tax Act-1961.
To enable you & our various readers, to take a proper safeguard in claiming an exemption u/s 54, we are highlighting few striking stipulations u/s 54 as under: –
a) The capital gain should arise from the transfer of long-term. Capital assets being buildings or lands appurtenant thereto, being a residential house.
b) The transferor must be an individual or the Hindu Undivided Family.
c) The transfer or must purchase. A residential house within a period of one year before or two years after the date of transfer; or, in the alternative. The assessee must construct. A residential house within a period of three years from the date of the transfer of the original house.
d) The amount invested in the purchase or construction of new residential house should either be equal to or more than the gain, or where it is less than the amount of capital gain, the shortfall would be taxable as LTCG.