Issues in Capital gain taxation

Issues in Capital gain taxation


Query 1]

In Hyderabad, I had my only a residential house. Three year back, I had sold my residential house & earned capital gain of Rs. 49 lakhs on it & deposited it in capital gain account. Second year itself, I purchased flat costing Rs. 42 lakhs & spend 8 Lakhs on interior. I have only one account. Current year, I got notice from income tax department stating to give record of spending of capital gain Account. I want to ask you if,
1) I have to pay tax if any or if I could save it?

2) If only purchases price of house is considerable for Capital gain exemption or cost of furniture, plumbing, modular kitchen can also be considered? Please give me suggestion. [Ajay Jais-]


It appears that you have timely purchased a residential house property to claim an exemption u/s 54 against sale of Hyderabad house property. It may be noted that it’s an investment towards purchase or construction of the house property that offers exemption u/s 54. Going by the wording of section 54, no exemption is available for the amount incurred towards amenities, furniture, extension, addition or interior in the house property after purchase of already habitable house property.  However, though not specifically mentioned in section 54 (or 54F), in my considered opinion & relying on Rustom Homi Vakil Vs Asstt. CIT (ITAT Mumbai) IT Appeal No. 4450 (Mum.) of 2014 Order dated 30.03.2016, any expenditure incurred to make the house habitable could form the part of exemption u/s 54. In your specific case, it appears that you have purchased a habitable house property and resultantly expenditure incurred towards furniture & interior works of Rs. 8 Lakh may not be eligible for exemption u/s 54. However, stamp duty, registration expenses, brokerage paid for purchase of flat could be considered as the part of cost of acquisition and would be eligible for exemption u/s 54.


Query 2]

I have a query related to capital gain. My wife aged 40 years is about to receive an amount of Rs. 32 Lakhs in coming months from the sale proceed of residential parents property. Property was in her both the parents name and after demise of her father, mother’s name & three sisters (one of them being my wife) name is there on the property card. Sir, will she have to pay capital gain tax on funds received from parent property as being legal heir? If yes, then what are its figures & time frame and, ways to save the tax? [Makrand]


Taxability in the hands of Legal Heir:
Being a legal heir, your wife has received an ownership stake in the property after the demise of her father. On sale of property, she will be receiving her share in the property. “Capital Gain” arising on sale of the property would be taxable in her hands. The date & cost of acquisition/improvement of the property in the hands of your wife would be deemed as same as that of her father. If the property is held for a period of more than 3 years (by legal heir & father taken together), assets would be considered as Long Term Capital Assets & would result in Long Term Capital Gain (LTCG). In such case, indexation benefit would be available to the legal heir from the year of acquisition/ improvement.


Tax saving Options against profit arising from sale of House property:
An Individual/HUF can normally save Long Term Capital Gain (LTCG) tax from sale of house property either u/s 54 or U/s 54EC, as under:
 i) Exemption Under Section 54:
For exemption u/s 54, individual have to invests the amount of LTCG for purchase or construction of another residential house property within a prescribed time period. The prescribed time periods are as under:
a] For purchase:
One year before or two years from the date of sale.
b] For Constructions:
Three years from the date of sale.
ii) Exemption Under Section 54EC:
To save tax u/s 54EC, taxpayers have to invest the amount of LTCG in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India ( NHAI) within a period of 6 months from the date of sale.


Query 3]

I had purchased a plot for Rs. 1,58,500/- on 25/09/2006 whose M.V. was Rs. 1,10,000/-. I had spend Rs. 2,010/- for Registration, Rs. 3,160/- forwards Brokerage & Rs. 25,000/- on site development. I had sold the above plot on 30/09/2015 for Rs. 19,00,000/- & incurred brokerage exp. of Rs. 38,000/-. Sir, now I want to know what will be my capital gain & tax thereon. Please advice. Whether I can get exemption form capital gain tax & if yes, under which section or provision? [Karuna Jambhulkar-]


Though simple, lot many taxpayers find it difficult to compute capital gain. I am covering the capital gain computation in slightly extensive way so as to enable the readers to compute the capital gain in their individual cases as well.

  1. Your cost of acquisition of the plot was Rs. 1,63,670/- (1,58,500/- + 2,010/- + 3,160/-) & year of acquisition is 2006-07. Market value of Rs. 1.10 Lakh at the time of purchase is not at all relevant in your case for computing capital gain.
  2. Your cost of improvement is Rs. 25,000/-. You have not mentioned the year in which development expenses were incurred. For the sake of working, it is presumed that you have incurred the development expenses in the financial year 2007-08.
  3. Cost Inflation index for the relevant financial year are as under:
S.No. Financial Year Cost Inflation Index Remark
1 2006-07 519 Year of property purchase
2 2007-08 551 Year of Development exp.
3 2015-16 1081 Year of Sale



  1. Your indexed cost of acquisition is Rs. 3,40,900/- (Rs 1,63,670 *1081/519) & indexed cost of improvement is Rs. 49,047/- ( Rs. 25,000 *1081/551)
  2. Expenses in connection with transfer (i.e., Brokerage) is Rs. 38,000/-.The same is also eligible for deduction.
  3. Effectively LTCG in your case would be Rs.14,72,053/- (i.e., Rs. 19,00,000 Less Rs. 3,40,900/- Less Rs. 49,047/-Less Rs. 38,000/-. You have not mentioned the amount of stamp duty valuation of the property. If it is higher than Rs. 19 lakh, capital gain would be required to be worked out by considering such higher valuation
  4. Tax saving Options against profit arising from sale of Plot:
    An Individual/HUF can normally save Long Term Capital Gain (LTCG) tax from sale of plot property either u/s 54F or U/s 54EC. To claim an exemption u/s 54F, taxpayers have to invest net sale consideration (& not LTCG) towards purchase/construction of another house property within a prescribed time frame. The prescribed time frames are same as mentioned in section 54 above. Stipulations for claiming an exemption u/s 54EC are also same as discussed in above query.

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