SAVING TAX ON LONG TERM CAPITAL GAIN- ISSUES INVOLVED

SAVING TAX ON LONG TERM CAPITAL GAIN- ISSUES INVOLVED

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Query 1]

I am presently residing in a house purchased from DDA in 1986 in the joint names of self and wife by also taking loan from the Bank. A case regarding my father’s residential property was decided by the Court in March, 2005 and property was divided by court in  3 equal shares – 1/3rd for my brother, 1/3rd for myself and 1/3rd for my father as my sisters relinquished their right in favor of my father. 1/3rd share of my brother was disposed off by him and after sale expired as well. My father who was residing with me has made a Registered Will of his 1/3rd share in my favor. My mother expired in 2002 and father in March, 2010. In this way, I became owner of 2/3rd share of that house (1/3rd mine share and 1/3rd my Father’s share by virtue of Will).

Now, I have sold this 2/3rd portion of house for Rs. 29.99 Lacs with area approx. 50 sq. mts. and Sale Deed was executed on September 22, 2013. I have deposited the above sale proceeds in S.B. Prudent Scheme A/c  (where interest is paid more than Savings Bank but at lower rate as compared to Fixed Deposit) in a Nationalized Bank in the joint names of self and wife. Please give your valuable advise in regard to following queries to deal with the sale proceeds so as to avoid Capital Gain Tax by purchasing another residential house/ opening of Capital Gain A/c / Investing in Govt. Funds:

  1. How capital gain amount will be calculated in respect of above property as Conveyance Deed of above property was got executed by my Father in the year 1965 and at the time sale by me on 22nd September, 2013, it was very old structure. It was situated in old Delhi’s Deputy Ganj /Bahadur Garh Road Area (Circle Rate of the area at the time of sale was Rs. 58,800/- per Sq. Meter and in earlier years there were no Circle Rates notified by the Municipal Corporation of Delhi).  Please also inform me exact amount of Capital Gain.
  2. Whether the Capital Gain amount of my father’s share and my share will be different?
  3. I am looking for a residential house but want to know what is last date for me:
    a] For purchasing a new residential house/plot? Whether last date for registering Sale/Purchase Deed is 21st March, 2014 or before due date of filing return for income?
    b] Can I purchase two properties e.g. for Rs. 20 Lacs + Rs. 9.99 Lacs with different Municipal Numbers?
    c] Whether Registry Charges/Stamp Duty/Brokerage of dealer or other expenses can be added for arriving at Capital Gain Amount i.e. Rs. 29.99 Lacs or exact amount calculated by you?
    d] If I go for a plot/house for Rs. 20.00 Lacs then what other alternatives are left to me to deal with the remaining amount of Rs. 9.99 Lacs to save Capital Gain Tax?
    e] Can I go for booking a developer’s flat in which case payment is to be made in installments for a period of say 2 years (certain date of possession is also not informed by developer)?
    f] Whether I can purchase new house in the names of self and wife jointly?
    g] If I could not materialize the purchase of residential house by the date/period advised by you then what I should do to avoid Capital Gain Tax and within what time frame? [B.K. Khurana-
    iadrevaudit@pnb.co.in]

Opinion:

  1. The property sold by you is an old property which is acquired originally before 01.04.1981. The purchase price of the property could be replaced by the Fair Market Value (FMV) of the property as on 01.04.1981 while computing the amount of Long Term Capital Gain (LTCG). You can obtain the Valuation report from the Government approved valuer in support of FMV as on 01.04.1981. The FMV would be multiplied by 9.39 to arrive at the indexed cost of the house property. Further, if any expenditure/addition is done in the property after 01.04.1981, same could also be indexed and would be deductible while working out LTCG. The difference between the sale consideration and 2/3rd share of indexed cost of acquisition (& improvement also) would be the amount of LTCG. Since the circle rate of the plot (i.e., Rs. 58,800/- * 50 sq.mtr = Rs. 29.40 Lacs) is lower than the actual sale price (i.e., Rs. 29.99 Lacs), the LTCG would be computed by considering the amount of Rs. 29.99 Lacs only. In the absence of FMV/ Improvement/Addition, exact amount of LTCG could not be worked out.
  2. After the death of your father, you become the owner of his 1/3rd share in the property by virtue of his will. Entire LTCG on sale of this 2/3rd share of the property is assessable in your hands only. There is o need to segregate the capital gain on your share & your father’s share.
  3. Tax on Long Term Capital Gain (LTCG) on sale of any residential house property can be saved (U/s 54 of the Income Tax Act-1961) if the LTCG is invested within a prescribed time for purchase/ construction of a house property. The exemption u/s 54 would be available even if the taxpayer already owns another residential house property (i.e., exemption would be admissible even if second house property is purchased). Another option to save LTCG tax could be by investing the amount of LTCG within a period of 6 months from the date of transfer in the specified bonds issued by Rural Electrical Corporation (REC) or National Highway Authority of India (NHAI).
    a] Time limit to Purchase the Property: Exemption u/s 54 is available if the taxpayer invests the amount of LTCG for purchase/construction of a house property. The time period within which investment should be done is as under:
    a] For Purchase: Within One year before or two years after the date of transfer; or
    b] For construction: Within a period of three years from the date of transfer.
    If you are planning to purchase a flat, you have to complete the transaction of purchase before 21.09.2015. Mere investment in plot is not sufficient for claiming an exemption u/s 54. However, if the house is constructed thereon then the cost of the plot would also be eligible for exemption u/s 54 along with construction cost.
    Scheme of Deposits:
    Even though u/s 54, taxpayer is allowed 2 years for purchase and 3 years for construction of the house property, the capital gain tax on such transfer is taxable in the previous year in which transfer took place. The return of income of that previous year has to be filed before the specified date i.e., due date. Hence, the tax payer has to take a decision for purchase/ construction of the house property before the date of furnishing of the return otherwise the capital gain would be taxable. To cope up with such situation, Income Tax Act has specified an alternative in the form of Deposit under the Capital Gain Deposit Accounts Scheme-1988 (CGDAS) for earmarking the amount for purchase/construction within specified time limit. The amount of LTCG which is not utilized by the taxpayer for purchase or constructions of the new house till due date has to be deposited under the CGDAS before the DUE DATE of furnishing the return of income. After deposits, the amount already utilized by the taxpayer for purchase/ constructions of the new house till due date, along with unutilized LTCG so deposited, shall be eligible for exemption u/s 54 in the year in which LTCG has arisen. Later on, whenever taxpayer purchase/ constructs the house property within a specified time slot, he can make payment from the CGDAS.
    b] Exemption u/s 54 is available if the assessee invests the amount of LTCG for purchase of “a” residential house property. Interpretation of the word “a” is a matter of controversy. To be on a safer side, you are advised to invest the amount of LTCG in one house property only. You may further note that, for claiming an exemption u/s 54, you are required to invest the amount of LTCG only (not entire sale consideration of Rs. 29.99 Lacs).
    c] Registry Charges/Stamp Duty/Brokerage etc can be added to the cost of new flat for arriving at the amount of exemption u/s 54.
    d] If you are not able to utilize entire LTCG for new house property, you can invest balance LTCG in the specified bonds issued by NHAI/REC. Exemption U/s 54 & U/s 54EC can be claimed simultaneously as well. If you are planning to invest in specified bonds, ensure to make the investment within a period of 6 months i.e., before 21.03.2014.
    e] You can claim an exemption u/s 54 by booking a flat & making the payment in installment to the developer. After considering the amount paid to developer till due date of filing the return of income, ensure to deposit the balance of LTCG in CGDAS. Subsequent installment can be paid to the developer from CGDAS.
    f] You can incorporate the name of your wife also in the sale deed for the name sake. Ensure to make the payment through your account only so that you would be able to prove that your wife don’t have any ownership stake in the property & her name is incorporated in the sale deed for the convenience only.
    g] If you are not sure of investing LTCG for purchase or construction, you can safely & timely think of claiming an exemption u/s 54EC by investing it in the specified bonds issued by NHAI/REC.


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