“TAX AXE ON SALE OF AGRICULTURAL LAND”

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Query 1]

I had already taken a housing loan 3 years back in my name. The loan is in my name and I am also getting the interest rebate of Rs. 90,000/- as per section 24(b).  Now, I had purchased another house and this time the loan is taken jointly in the name of my wife (who is also employed) and me. My query is, how can we both take the benefit of interest rebate in this case? The interest portion for our second house is around Rs. 2 Lacs. Can we both get the interest rebate of Rs. 1,50,000/- (Rs 1,50,000/-  for myself  and Rs 1,40,000/-for my wife). [KSK-kunjsuresh@yahoo.co.in]

Opinion:

The new house property purchased in a joint ownership is your second house property. It may be noted that, in case of joint ownership, deduction towards interest or principal repayment is not available as per the convenience of individual co-owners/co-applicant but is admissible based on the documentations & supporting evidences. In short, your claim against interest payment of Rs. 2 Lacs cannot be as per your convenience (Rs. 60,000/- & Rs. 1.40 Lacs) but has to be in the ratio of individual share in the loan of each co-owner.

Readers may please note that the tax treatment of the second house property is not same or similar as that applicable to first house property. The second house property has a different tax treatment under the Income Tax Act-1961. I am elaborating the tax issues involved in the second house property as under:

  1. The income from house property is taxable on the basis of its “Annual Value”.
    (The term “Annual value” is elaborated at point No. 5 hereunder.)
  2. One house used by the tax payer for his/her own residence is exempt from tax as its annual value is treated as Nil.
  3. Where the assessee owns only one house property and it cannot actually be occupied by him because it is situated at a place other than a place where he is employed or carries on business or profession, in such a case also the annual value of the property will be taken as nil provided the property is not actually let out.
  4. If taxpayers have two or more houses which are used for own residence, then assessee have the option to choose one of the house (according to his own choice) as self-occupied house, for which an assessee would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether not actually let out].
  5. What is Annual Value of house property and how it is determined?
    The annual value means the amount for which the property might reasonably be expected to be let out from year to year. However, if the actual rent received or receivable in respect of any let out property is higher, it shall be treated as its Annual Value. The annual value is always taken to be NIL in case of one self-occupied property.
  6. How to calculate annual value/taxable value of property:
    Annual value of property is considered as higher of the following:
    (i) Actual rent received a year;
    (ii) Reasonable expected rent of the property.
    [ The reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let out from year to year and is normally higher of (a) municipal value; (b) fair rent. However, if the property is covered by a Rent Control Act, then the amount so computed cannot exceed the Standard Rent determinable under the Rent Control Act.]
    As mentioned earlier, the assessee has the option to choose only one house as self-occupied property. Other house properties are assessable to income tax on the basis of its annual value.
  7. Deductions:
    From the annual value the following deductions are available under the Income Tax Act: –
    a] Municipal Tax paid.
    b] 30% of the net annual value of the house property towards Repair & Maintenance charges (Deduction is fixed @ 30% whether assessee incurs more or less amount on repair and maintenance of the house).
    c] Actual Interest paid on housing loan whether house is actually let
    out or is deemed to be let-out.
    d] For self-occupied property, maximum interest on housing load is restricted to Rs. 1,50,000 p.a., subject to certain other stipulations.
  8. Effectively, if Assessee owns more than one house property & is kept for own use,
    a] one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
    b] Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above.
    In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit.
    However, for the second house property, no deduction is available for repayment towards the principal portion of housing loan under section 80C as clause ( xviii)
    to section 80C of the I T Act reads as under: –
    “(xviii) for the purposes of purchase or construction of ‘ a’ residential house property the income from …..”.

In your specific case, it appears that your second house property have higher interest commitment as well as may have higher annual value in comparison to your first house property. If both the properties are kept for your own use, you can plan, based on the above tax issues involved, about the property to be treated as self occupied & the property to be offered for taxation on notional basis.

Query 2]

I have sold my ancestral agricultural land worth Rs. 2.40 crores on 3rd Feb 2014. The land is situated at 4 Kms from Bahadurgarh city (total population of city being approx 2 Lacs). The land was used only for agricultural purposes since past 100 years. Please advise me:

  1. Whether I had to pay any tax or not?
  2. If yes, how it can be saved?
  3. If yes, whether I have to pay any tax if I opt for Fixed deposit of subject amount for a period of three months?

Kindly suggest me the means by which tax can be saved. Also, I am planning to purchase agricultural land of around Rs. 1.30 crores and residential property of around Rs. 1.20 crores within 3 months.  [Suraj Prakash- spjoon@rediffmail.com]

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 your agricultural land is situated within the radius of 2 kms/ 6 kms / 8 kms of Municipality as mentioned above, then profit arising on sale of agricultural land will be taxable as Long 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, if agricultural land is not situated in the area mentioned in (1) above then profit arising on sale of agricultural land would not be taxable as 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%. Since yours is an ancestral property acquired before 01.04.1981, you can adopt the Fair Market Value (FMV) as on 01.04.1981 as cost of acquisition and can also have the benefit of indexation by multiplying cost of acquisition by 9.39.
    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.

Further, as you wish to invest the amount in agricultural land as well as residential house property, you can simultaneously claim an exemption u/s 54F & U/s 54B.


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