Article Details

INVESTMENT IN PLOT IS ELIGIBLE FOR CAPITAL GAIN EXEMPTION

TAX TALK-17.08.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

INVESTMENT IN PLOT IS ELIGIBLE FOR CAPITAL GAIN EXEMPTION

Query 1]
l own house in Nagpur, Can I buy second home in Mumbai with the money I received after selling agricultural land, Plots & shop purchased in 1990. I want to invest whole long term capital gains in second home. What will be my tax liability? [dragrawal.gp@gmail.com]
Opinion:
To save Long Term Capital Gain (LTCG) tax arising from transfer of any capital assets (other than residential house property), individual/ HUF have to invest the amount of “Net Sale Consideration” (differentiate it from “Capital Gain”) for purchase of another “one” residential house property. Exemption in such case is governed by section 54F of the Income Tax Act-1961. Before investing for the purpose of claiming an exemption u/s 54F, taxpayers should note the following key features of exemption provision:

The exemption is available only to an individual or HUF.
The capital gain should arise from the transfer of any long-term capital asset other than residential house property. (If capital gain arises from transfer of a residential house property, an exemption can be claimed u/s 54.)
Taxpayer must, within a period of 1 year before or 2 years after the date on which the transfer took place purchase, or within a period of 3 years after that date constructs, one residential house in India.
Taxpayer should not be owner of more than one house property, other than the new asset, on the date of transfer of the original asset.
Taxpayer should not purchase any other residential house, other than the new asset, within a period of 2 year after the date of transfer of the original asset or construct any residential house, other than the new asset, within a period of 3 years after the date of transfer of the original asset.
If all above conditions are satisfied, taxpayer can claim entire LTCG as exempt if entire amount of net sale consideration is invested in a residential house property. If entire amount of net sale consideration is not invested then proportionate exemption would be available, as under:
“Cost of New House * Capital Gain/ Net Sale consideration”.

It may note that profit arising on sale of rural agricultural land is totally tax free and doesn’t require any investment as such. However, profit on sale of urban agricultural land is subject to tax and taxpayer may opt for an exemption u/s 54F as mentioned above. Readers may refer Tax Talk dated 23.02.2015 & 19.01.2015 wherein taxability on agricultural land was discussed at length.
Subject to above, in the given specific query in hand, tax could be saved u/s 54F by investing the aggregate amount of net sale consideration of agricultural land/plot/ shop towards purchase of ONE residential house property. If investment amount in one residential house property exceeds the net sale consideration of all the assets taken together, your tax liability on the property transaction
Query 2]
I joined UTI ULIP 1971 Scheme (10 yr plan) in 1996 for yearly contribution of Rs 6,000/- with target amount of 60,000/-. I continue to hold this policy beyond maturity in 2006. Current value estimated to be approx. Rs. 2.50 lakhs. If I redeem, do I have tax implications? [Vijayalakshmi S-vjlak62@gmail.com]
Opinion
UTI- ULIP-1971 is not an equity-based mutual fund but is a debt-based instrument. Therefore, the redemption would not be tax free as is available on the redemption of equity fund which is subject to securities transactions tax (STT). Redemption of debt fund would be subject to capital gain taxation & it has to be calculated by considering investment on year to year basis. Since your investment holding period is more than 36 months, investment would be considered as Long Term Capital Assets. The income tax liability would be lower of the following:
(a) @ 10% of profit without indexation benefit or
(b) 20% of profit if indexation benefit is availed.
[It may be noted that by virtue of amendment by the FA-2014, the debt fund would be considered as long term capital assets if the holding period is more than 36 months. Prior to amendment w.e.f. 10.07.2014, the holding period of only 12 months was sufficient to qualify as a long term capital assets.]

Query 3]
I owned a Capital gain of Rs 9 lakhs in Dec 2014 by selling a RL open plot in Nagpur. I like to reinvest this capital gain amount for the purchase of open NATP plot. Can I get Capital gain tax exemption in 2015, if it materialize/ registered before 31st August 2015? If not, what are the criteria applicable for getting tax exemption besides buying open plot for tax exemption. Kindly advice ASAP. [Biman kumar- krbiman_72@yahoo.co.uk]
Opinion:.
1. LTCG tax arising out of sale of an open plot can be saved by claiming an exemption u/s 54F. Broad criteria u/s 54F are listed out above in reply to query No. 1. Investment in Plot could also be considered while working out an exemption u/s 54F. Cost of new house includes cost of the land also is specifically clarified by the CBDT Circular No. 667 Dated 18.10.1993. However, it may cautiously be noted that mere investment in the plot doesn’t make you eligible for exemption u/s 54F. You have to construct the house thereon within a prescribed time frame as discussed in above queries. If your investment in plot exceeds the net sale consideration received against sale of Dec-2014 plot, you would not be required to deposit any amount in the Capital Gain Deposit Account Scheme (CGDAS) before the due date of filing your income tax return i.e., August-2015 as mentioned in your query. Further, you need to invest entire “Net Sale Consideration “for claiming an exemption u/s 54F & not merely Rs. 9 Lacs as mentioned in your query.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com]