Tax Implications: Purchase of plot in unregularised layout & Cancellation thereof

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Tax Implications: Purchase of plot in unregularised layout & Cancellation thereof

 

Query]

I have taken Rs. 30 lakhs Home Loan from bank for self house construction on open plot on labour contract basis. Housing Loan amount directly transferred to my SB account by bank. House construction will be over by March-2021 (FY 2020-21). I have few queries as under:

  1. Is there any column/place to show home loan amounts received in ITR 2?
  2. How long the receipts/bills of payments to contractors, material suppliers, etc to be kept? Whether any separate book to be maintained for the same?
  3. I purchased one open plot in an undeveloped layout for Rs 60,000/- on installment basis from one builder in 2004. He handed over Possession Letter (Kabja Patra) of plot on Rs. 20 stamp paper on 02/08/2004 (Rs. 60,000/- was paid by 01/08/2004). There was no registration and in Kabja Patra, it was assured that whatever help is required in future like signing documents, the builder will do it. Later on the builder sold the entire land to another builder who again laid a new layout. The area has come under Municipal Corporation recently. The second builder asked Rs. 4 lakhs for developing the plot and later on registration in corporation. As unable to bear these charges, I sold the plot to him. He created cancellation deeds of the plot on Rs. 500 stamp paper and paid Rs 4,50,000/- by cheque for the plot on 31/12/2020.
    He has kept the original Kabja Patra and cancellation deed though he has handed over colour Xerox with Duplicate mentioned therein. I am utilizing this amount for above house construction. My further queries are:
    a) How much LTCG to be paid on the capital gains. Is it 20% of capital gains + 4% cess?
    b) I am a salaried person. Can it be paid as Self Assessment Tax/Advance Tax? As the transaction is over in the last quarter, I think I have to pay this before 15th March 2021?
    c) Also, how to fill up the CG sheet for LTCG in ITR 2 for FY 2020-21.
    [vijaybhaskar_aai@rediffmail.com]

Opinion:

  1. Reporting of Housing Loan:
    There is no specific column, place or requirements to show the amount of home loan availed in any of the ITR forms. Only the amount of interest & principal repayment which is claimed as deduction u/s 24(b) & u/s 80C is required to be reported.
  2. How Long Records be Kept:
    In normal course, the documents up to the previous 10 years should be kept by the taxpayers as it could be required to be submitted or produced before the income tax authorities (16 years if related to foreign transactions). However, with regard to expenditure on capital assets, taxpayers are advised to prepare a separate file of all the voucher, receipts, bills, payments to contractors, etc permanently as it will be highly useful & relevant whenever the property is sold afterwards. This document & record will enable the taxpayers to justify the cost of constructions/renovation in computation of capital gain. There is no need to maintain the separate books of accounts in such cases.
  3. Cancellation & Taxation:
    There are many instances wherein the property is purchased in undeveloped layout & so sale deed could be executed. Such transaction is simply followed with the assurance and possession note or even with Power of Attorney (POA) in certain cases. In your case, you have executed the document so as to purchase the plot for Rs. 60,000/- in 2004 (FY 2004-05). With the possession note & payment, you have acquired the rights but not the legal title over the property. By executing cancellation deed & receipt of Rs. 4,50,000/-on 31/12/2020 (FY 2020-21), you have surrendered all your rights over the property. Taxation in such cases depends upon the drafting & documentation of the cancellation deed. On the basis of information provided in the query & assuming that the cancellation agreement incorporates all the facts for cancellation, the amount received at the time of surrender of the rights is liable for taxation as “Income from Capital Gain”. Cost Inflation Index (CII) for the relevant financial years 2004-05 & 2020-21 is “113” & “301” respectively. The indexed cost of acquisition of your rights over the property will be Rs. 1,59,823/- (Rs. 60,000 * 301/113) whereas full value consideration shall be Rs. 4,50,000/-. The amount of LTCG in your case shall be Rs. 2,90,177/-. It may be noted that Long Term Capital Gain (LTCG) is taxable @ 20% plus education & health cess @ 4% thereon resulting in an effective tax rate of 20.80%.
  4. Exemption from Capital Gain Tax:
    It may be noted that the amount of LTCG arising on sale of any capital assets (other than residential house property) can be claimed as exempt U/s 54F if taxpayers invests the amount for purchase or construction of house property within a prescribed period which is as under:
    a] For purchase:
    One year before or two years after the date of sale or transfer.
    b] For Constructions:
    Three years from the date of sale or transfer.

In your case, it appears that you have invested the entire consideration towards construction of the house property within the prescribed time frame and so you are eligible for exemption u/s 54F. Resultantly, there will not be any tax liability on capital gain arising from cancellation deed of your plot & receipt of Rs. 4,50,000/- therefrom. It may be noted that exemption u/s 54F is subject to the condition that taxpayers own not more than one house property on the date of earning LTCG. There are few other stipulations also u/s 54F which may also be referred in our earlier issues of The Tax Talk.

  1. Reporting of CG in ITR Forms:
    The amount of Capital Gain, Exemption etc is required to be reported in the “Schedule CG” in the ITR forms. The columns therein are self explanatory.

 

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