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Deduction permissible while computing Capital gain income
Capital gain tax liability arises whenever there is a “transfer” of capital assets. It is not dependent on the receipt of money. Once the asset is “transferred” the tax liability crystallizes. If the amount is not received from the buyer, no deduction towards bad debts would be available. Taxpayer need to note that are only three deductions are permissible while computing capital gain of the transferor which are as under:
- a)Cost of acquisition
- b)Cost of improvement
- c)Expenses in connection with the transfer
For optimum tax planning, one needs to know each and every components of above three items and need to keep proper documents to claim the deduction. Let us have a look at all above deduction.
- Cost of Acquisition:
No deduction towards cupboard, furniture, fans etc is eligible while calculating capital gain as they are treated as personal effects – Sachiner Mohan Mehta v. ACIT (2015) 53 Taxmann 114 (Del). Corporation tax or ground rent paid cannot be treated as the part of cost of acquisition whereas brokerage, Legal fees, parking charges paid to builder, public notice charges, etc paid at the time of purchase of property forms the part of cost of acquisition. Further, if the taxpayer has purchased a property below its stamp duty valuation then the difference between the actual purchase price and the stamp duty valuation is taxable as income of the purchaser and liable to be taxed under the head “Income from Other Source”. In all such cases, the stamp duty valuation (plus registration expenses, stamp duty etc) is treated as the cost of acquisition.
If the property is received by way of gift or by way of inheritance then the cost of acquisition in the hands of the previous owner is treated as cost of acquisition in the hands of the subsequent owners. If the original owner has acquired the property prior to 01.04.2001, then the FMV as on 01.04.2001 can be taken as cost of acquisition.
Payment of bank loan for release of mortgage:
i] Property received by inheritance along with mortgage thereon:
If legal heir gets the property with mortgage/charge created by the previous (original) owner, then amount paid to clear the mortgage will form the part of cost of acquisition while computing capital gain in the hands of the legal heir.
ii] When mortgage is created by the owner himself:
Where the mortgage is created by the owner himself for his loan then he will not be eligible for any deduction towards the loan repayment.
- Cost of Improvement:
Any expenses which results in improvement or addition in the capital assets is considered as part of the cost of improvement. Expenditure incurred prior to 01.04.2001 need to be ignored as the capital gain in such cases is required to be computed by taking the Fair Market Value (FMV) as on 01.04.2001.
Regularization charges or development charges paid to the local authority like NIT, Municipal Corporation etc are considered as cost of improvement.
Any amount paid to the tenant to obtain vacant possession is the part of the cost of improvement (CIT Vs. Spence’s & Co Ltd (2013) 359 ITR 644 (Mad). If the amount is paid to settle the case of disputant claiming title over the property then such amount is not deductible – CIT V. Indira (1979) 119 ITR 837 (Mad). If the asset is purchased with borrowed capital then interest can be considered as part of the cost of assets, as few tribunals have ruled it in favor of the taxpayers.
- Expenditure in connection with the transfer:
All expenditure incurred exclusively in connection with the transfer is eligible for deduction while computing the capital gain income. For deduction, expenses must have nexus with the transfer. It is not necessary that the expenses should be incurred prior to transfer, even expenses incurred after passing of the title is eligible for deduction. Legal expenses incurred either in the process of the transfer of property or for obtaining/realizing the sale consideration is eligible for deduction. Repayment of the loan taken by the taxpayer cannot be treated as “expenses in connection with the transfer” and not eligible for deduction.
Brokerage paid to agent against sale of property is eligible for deduction while computing capital gain. Amount paid to the consultants for obtaining NOC from local authorities or transfer charges paid to housing or apartment society is also eligible for deduction.
Above are compilations of some of the expenses. The list is unending but above illustration can provide guidance for optimum tax planning.
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