“INCOME TAX BENEFIT ON LOAN TAKEN FOR CONSTRUCTION OF FIRST FLOOR ON THE HOUSE OWNED BY MY MOTHER”

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Query 1]

I had purchased an agricultural land of 0.37 HR at Mouja-Nagbhid, District-Chandrapur at the cost of Rs. 1,57,700/-(inclusive of Stamp duty, Registration fees etc)in F.Y. 2004-05 (Dated: 22-03-2005). Now I sold the said land for Rs. 8,03,000/- on 20-12-2014 FY 2013-14; Government rates being the same.  Though Nagbhid is a Tahsil place, its local body is Grampanchyat and the said land falls in the periphery of 1 Km of Gaothan. In the ready reckoner, the rates for this land survey no. are given in Sq. Mtr instead of HR. My queries are

  1. Whether this transaction will be treate as purchase/sale of agricultural land and income thereon will be exempt from IT?
  2. If not, how much is the amount of capital gain?
  3. What would be tax saving option if the agricultural land situated in a place, adjacent to city limits, is transferred?

My other income is in 20% bracket. [Raju Mahajan, Warora- rhmwarora@yahoo.co.in]

Opinion:

Tax Liability on Agricultural Land Sold on or After 01.04.2013:

  1. In normal course, any income from transfer of agricultural land, which is being used for agricultural purpose, shall be tax free if the agricultural land is not situated in any area within the distance (measured aerially) of not more than:
    a] 2 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
    b] 6 kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
    c] 8 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
  2. If the agricultural land is situated within the radius of 2 kms/ 6 kms / 8 kms of Municipality as mentioned above, then depending upon the period of holding, the profit arising on sale of agricultural land will be taxable as Long Term or Short Term Capital Gain. It’s the distance from municipality (& not Grampanchayat /Gaothan etc) that would be relevant while determining the taxability of agricultural land.
  3. In your specific case, as agricultural land is not situated in the area mentioned in (1) above, so profit arising on sale of agricultural land would not be taxable as Long term Capital Gain for the simple reason that agricultural land is not a capital asset.
  4. The long term capital gain arising to an Individual on transfer of agricultural land situated within the distance mentioned in (1) above is taxable @ 20%. However, LTCG tax on transfer of such agricultural land could be saved by claiming an exemption u/s 54B, 54EC or u/s 54F as under:
    i) Exemption Under Section 54B:
    The main stipulations incorporated in section 54B are as under: –
    a) Capital gain arises on transfer of Agricultural Land.
    b) The Agricultural Land is used by the tax payer or his parents for agricultural purpose for a period of two years immediately preceding the date of transfer.
    c) The taxpayer has purchased another agricultural land within a period of two years from the date of transfer.
    ii) Exemption Under Section 54EC:
    To save tax u/s 54EC, One can invest the amount of LTCG in the Specified bonds REC/ NHAI within a period of 6 months from the date of transfer. [There is a maximum investment ceiling of Rs. 50 Lacs in a financial year for investment in 54EC Bonds.]
    iii) Exemption Under Section 54F:
    For exemption u/s 54F, subject to various other terms / stipulations, you have to invest the amount of net sale consideration for purchase of a residential house property within a prescribed period.

 

Query 2]

 I am a retired central government employee. My pension for the year 2013-14 is Rs. 2,40,000/. I am getting bank interest of Rs. 60,000/. From Share market, I have earned Rs. 10,000/ as short term capital gain. I have sold shares within one year. I have already credited Rs. 1,00,000/ in my P.P.F. account. I had a doubt about short term capital tax gain payable in this situation. Please reply through ‘tax talk’ column. [Narayan Laghate-nvlaghate@gmail.com]

Opinion:

  1. No deduction towards LIC/PPF etc is admissible against Short Term Capital Gain (STCG) on sale of shares taxable @15% u/s 111A of the Income Tax Act-1961. However, if other income of the taxpayer is below the basic exemption limit then unutilize basic exemption can be adjust against the amount of STCG arising from sale of shares and only the balance amount of STCG on shares would be taxable.
  2. Your Gross Total Income (GTI) during the current FY 2013-14 shall be Rs. 3,10,000/-. You can claim deduction u/s 80C of Rs. 1,00,000/- for deposits in the PPF A/c against your pension & Bank Interest. As a result, your total income would be Rs. 2,10,000/- consisting of Rs. 2,00,000/- as normal income & Rs. 10,000/- as Short Term Capital Gain of shares. You have not mentioned your age in the query.
    a] If you are a senior citizen (60 years or more), the basic exemption limit would be Rs. 2.50 Lacs & therefore nothing would be taxable.
    b] If you are not a senior citizen then the applicable basic exemption limit would be Rs. 2 Lacs only. In this case, tax u/s 111A @ 15% would be payable on STCG income of Rs. 10,000/-/. However, by the Finance Act-2013, a tax rebate under section 87A is provide to an 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. Effectively, your tax liability would be Nil only.

 

Query 2]

I am working with a multinational company. My mother owns a house in Bhilai. I approached bank for house loan to construct 1st floor on this house. Bankers made me and my mummy as co-borrower and disbursed loan amount of Rs. 9,50,000/-. Margin money has be paid by me and the installments will be paid from salary as my mummy has no income of her own. Now the question is whether I will get tax benefits on this loan? This question has arisen since the property stands in the name of my mummy. [Narayan Chawda- nchawda66@gmail.com]

Opinion:

  1. Ownership is a condition precedent for claiming deduction towards Interest u/s 24(b) and towards Principal Repayment u/s 80C. It may be note that Right to claim deductions originate from ownership. Without ownership, deduction would not be admissible.
  2. It is very much possible in a family that a land is owned by one person & the structure/construction by another. The claim towards deduction would not be hamper by the fact that some other person (mother, in your case) has also joined in the loan documentations.
  3. If the structure on the first floor constructed by you is an independent habitable unit then you can claim deduction u/s 24(b) & u/s 80C as
    a] you own the first floor house
    b] you have borrowed funds for construction of house property
    c] you are repaying the loan so availed.

 

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