Query 1]

I have long term Capital gain of Rs. 5 Lacs by sale of only house in my name. Presently, I have annual income of Rs. 70,000/- from fixed deposits and don’t have any other source of income. Since income up to Rs. 2.20 Lacs is not taxable (being not a senior citizen and considering Rs 2,000/- tax relief for 10% tax bracket). I want to know whether Rs. 1.50 Lacs (i.e., Rs. 2.20 Lacs- Rs. 0.70 Lacs) can be set off/adjusted towards capital gain? Whether capital gain tax will be applicable on remaining amount of Rs. 3.50 Lacs?

Further if the reply to the above is affirmative, whether on deposit of Rs 1.00 Lacs in fixed deposit in bank for period above 5 years, whether exemption under sec 88 of Rs 1.00 Lacs can be availed so that I need to pay capital gain tax on Rs 2.50 Lacs only on investment in the bonds, the said amount.  I will be grateful if you suggest me on the above or any other tips. Since I have limited source of income, I want to deposit money in bank deposit which fetches 10% interest rather than investing it in bonds which offers 6% interest. Please advice. [Sudhir-shwe_engg2007@rediffmail.com]

Opinion:

1. Readers may note that that the basic exemption limits for the Financial Year 2013-14 (A.Y. 2014-15) for non senior citizen individual is Rs. 2 Lacs only (and not Rs. 2.20 Lacs).
2. The Finance Act-2013 has not increased the basic exemption limit for non-senior citizen. However, a tax rebate under section 87A is provided to individual resident tax payer whose income doesn’t exceed Rs. 5 Lacs. The rebate shall be equal to the amount of income tax payable on the total income or Rs. 2,000/- whichever is lower.
3. The unutilized basic exemption limit can be adjusted against the Long Term Capital Gain (LTCG). In your case, the unutilized basic exemption limit would be Rs. 1.30 Lacs and not Rs. 1.50 Lacs considering the fact that the basic exemption limit during the FY 2013-14 is Rs. 2 Lacs & not Rs. 2.20 Lacs.
4. Against LTCG, no deduction towards LIC/PPF/NSC/5 Years Bank FD etc U/s 80C (up to Rs. 1 Lacs) is allowable. However, as a tax planning tool, you can invest the amount of Rs. 70,000/- in the tax saving instruments u/s 80C. As a result of such investment in the tax saving instrument specified u/s 80C, your total income would be reduced to zero. The entire amount of basic exemption limit can be set off against the LTCG. This will make your taxable LTCG at Rs. 3 Lacs.
5. If the amount of LTCG is invested in NHAI/REC, the exemption is available but admittedly this bonds offers lower rate of returns vis a vis other alternatives. The most important dilemma with every tax payer in such a situation is:
   a] Whether to pay the tax and invest the amount in the alternative investment option or
   b] Even though the lower returns are offered, invest the amount in NHAI/REC Bonds to save LTCG tax..

In your specific case, both the choices are broadly worked out in the spread sheet hereunder to enable you to take an informed decision.

a] If Invested in Bank FDR:
If you wish to invest the amount in Bank FDR (which will be offering you higher returns of around 10% p.a.), you would be first required to pay the tax of Rs. 59,800/- on LTCG of Rs. 3 Lacs considering the LTCG tax rate @ 20%, Education cess @ 3%, and tax rebate u/s 87A of Rs. 2,000/-. Effectively, you would be left with Rs. 2,40,200/- for investment in bank FDR. The fund value at the end of 3 years would be Rs. 3,19,706/- as under:

Interest offered	10.00%	10.00%	10.00%
YEAR	I	II	III	TOTAL
Value of the Fund at the beginning of the year [a]	240200	264220	290642
Interest Income   [b]	24020	26422	29064	79506
Tax on Interest Income  [c]	0	0	0	0
Interest after Tax  [d] = [b-c]	24020	26422	29064	79506
Value of the Fund at the end of the Year [[e] = [a+d]	264220	290642	319706	319706

b] If Invested in NHAI/REC Bonds:
If the LTCG is invested in NHAI/REC Bonds, entire amount of Rs. 3 Lacs could be invested. The fund value at the end of 3 years would be Rs. 3,57,305/-

Interest offered	6.00%	6.00%	6.00%
YEAR	I	II	III	TOTAL
Value of the Fund at the beginning of the year [a]	300000	318000	337080
Interest Income  [b]	18000	19080	20225	57305
Tax on Interest Income  [c]	0	0	0	0
Interest after Tax   [d] = [b-c]	18000	19080	20225	57305
Value of the Fund at the Year End          [e] = [a+d]	318000	337080	357305	357305

6. With above figures in the spreadsheet, you may realize that though the bonds are offering lower rate of returns, still value of investment would be a better option.

Query 2]

I am a central Govt. employee and purchased a Flat at Kolkata at the cost of Rs. 32 Lacs through home loan from LICHFL. I am paying EMI of Rs. 30,608/- and getting tax benefit of the interest of my loan up to max. Rs. 1,50,000/-since last two years. This year, in September, Registration of my flat is going to be completed. Towards registration, I have paid Rs. 3.50 Lacs as stamp duty & other charges as per West Bengal Govt. rules. My question is whether I can get any tax benefit for this amount this year beyond max interest amount of Rs. 1.50 Lacs which I am availing every year? [AKH, Jabalpur- hazraamiya@yahoo.co.in]

Opinion:

1. Amount paid towards stamp duty and registration for purchase of house is eligible for deduction u/s 80C of the Income Tax Act-1961. The maximum amount of deduction admissible u/s 80C is Rs. 1 Lacs. It may be noted that the investment in LIC/ PFF/ NSC etc is also covered in section 80C. The total deduction u/s 80C cannot exceed Rs. 1 Lacs. This deduction is in addition to deduction available u/s 24(b) towards interest on borrowed capital.
2. Readers may note that the interest paid during the period the house property is under construction is not deductible in the year of interest payment. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the house is constructed/ acquired. For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on March 31^st immediately prior to the date of completion of construction /acquisition. It may further be noted that Interest on borrowed capital is restricted to Rs. 30,000/- if house construction is not completed within a period of 3 years from the end of the financial year in which it is borrowed.
3. In your specific case, you need to assess whether the interest is a pre-construction period interest or not. If the house property was completed two years ago only, then it would not be termed as a pre-construction period interest.

Query 3]

I am selling a house property with my mother after my father’s death in September-2010. After selling, we would like to invest the money coming from that property to purchase a shop. Is it possible to get exemption from long term capital gain tax as we are using the money generated from sale of residential property to purchase a shop i.e, for commercial use? [makarand_bhale@rediffmail.com]

Opinion:

The easiest option to save LTCG arising from sale of house property is by utilizing the amount of LTCG amount for
a] purchase /construction of another residential house property or
b] investment in NHAI/REC Bonds.

No exemption is available if the Long term capital Gain is invested for purchase of a shop or a commercial property.

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