TAX TALK-21.03.2016-THE HITAVADA
TAX TALK
CA. NARESH JAKHOTIA
Chartered Accountant
Profit arising from sale of property & Tax saving options
Query 1]
I. I request you to kindly suggest me on the following issue. I have sold residential cum commercial plot at Bhopal for Rs. 1 Crore, which I had purchased for Rs. 28,000/- in the year 1994. Deal was completed through registry on 04/02/2016. Please guide me how to invest to minimize the Tax Liability? My age is 85 years. Can I gift the whole amount to my sons? If yes, then what will be my tax liability? [Hiralal Lala, Bhopal, MP, India-lalahiralal@gmail.com]
Opinion:
Any property sold after a holding period of more than 3 years is considered as Long Term Capital Assets and the profit arising therefrom is termed as Long Term Capital Gain (LTCG). Sale of a property usually results in considerable gains & since LTCG is taxable @ 20%, it results in heavy tax liability. It is possible to save LTCG arising from sale of the immoveable property & it is worth exploring every possible strategy to keep this big tax at a minimum. Needless to say, real estate transactions could result in hefty tax outgo if not properly planned.
Subject to various terms & conditions, there are provisions in the Income Tax Act that offer tax exemptions against capital gain income, as under:
a] If LTCG arises from transfer of a house property, exemption can be claimed u/s 54.
b] If LTCG arises from transfer of any assets other than house property, exemption can be claimed u/s 54F.
c] Exemption u/s 54EC is available against transfer of any Long term capital assets.
d] Exemption u/s 54B is available against any capital gain (long term or short term, both) arising from transfer of agricultural land.
e] Exemption u/s 54D is available in case of capital gain (long term or short term, both) arising on compulsory acquisition of land/building of industrial undertaking
f] Exemption u/s 54G can be availed against any capital gain (long term or short term, both) arising in the course of shifting industrial undertaking from urban area to rural area.
g] Exemption u/s 54GA is available towards any capital gain (long term or short term, both) arising from transfer of assets for shifting industrial undertaking from urban area to special economic zone (SEZ).
h] Exemption u/s 54GB is available against any LTCG arising from sale of house property if the sale consideration is invested in newly floated company to be engaged in manufacturing activity.
For claiming an exemption, taxpayers are required to invest the amount in specified assets within a prescribed timeframe. The most commonly availed exemptions by individuals are exemption u/s 54, 54EC & 54F.
The chart compiled hereunder could help taxpayer in knowing the scheme of exemption u/s 54, 54EC & 54F:
| No |
Particulars |
Section 54 |
Section 54EC |
Section 54F |
| 1 |
Who is eligible? |
Individual / HUF |
Any assessee |
Individual / HUF |
| 2 |
Exemption is available on sale of which capital asset |
Residential house (Long term capital assets) |
Any long term capital assets. |
Any long term capital asset, other than a residential house |
| 3 |
Re-investment should be made in which asset (‘New Asset’) |
A residential house |
3 years bonds issued by NHAI / REC |
A residential house |
| 4 |
What should be the quantum of re-investment? |
LTCG |
Lower of LTCG on sale of Original Asset or
Rs.50 lakhs.
[Exemption u/s 54EC cannot exceed Rs. 50 Lacs] |
Net sale consideration
[It may be noted that for exemption u/s 54F, entire net sale consideration is required to be invested whreas u/s 54, mere LTCG would be sufficient for exemption] |
| 5 |
Is there any time limit for re-investment of LTCG / sale proceeds in New Asset? |
For purchase of a residential house: 1 year before or 2 years after transfer of Original Asset
For construction of a residential house: 3 years after transfer of Original Asset |
6 months after transfer of Original Asset |
Same as in Sec. 54 |
| 7 |
Other conditions |
None |
None |
Taxpayer should not own more than 1 house property at the time of claiming exemption. |
| 8 |
What is the quantum of exemption? |
Lower of LTCG or amount re-invested in a residential house. |
Lower of (i) LTCG (ii) actual investment in bonds and (iii) Rs.50 lakhs, being the maximum investment an assessee can make under this section |
Exemption is calculated proportionately as under, restricted to LTCG:
LTCG x [(Cost of New Asset + Deposit in CGAS) / Net Sale Consideration] |
| 9 |
Can the exemption be withdrawn if any condition is not satisfied? |
- Yes, if New Asset is sold within 3 years of the date of acquisition/ const. or Amount in CGAS not utilized within prescribed time period.
|
Yes, if bonds are sold /converted into money (eg. borrowing funds by mortgaging Bonds) within 3 years of its acquisition |
1. Yes, if violation similar to mention u/s 54.
- 2. An additional new residential house (other than the New Asset) is purchased within 1 year / constructed within 3 years of transfer of Original Asset.
|
[It may be noted that if investment is not done before the due date of filing income tax return for claiming an exemption u/s 54 or 54F then one need to deposit the amount in Capital Gain Deposit Account Scheme (CGDAS) with a nationalized bank for subsequently utilizing the amount for exemption.]
You have an option to save tax by claiming an exemption u/s 54 or U/s 54EC. Gifting the amount would not help you save LTCG. It appears that because of age constraints, you may not prefer the tax saving options. Ideally, you could have gifted the property prior to sale and thereafter the property could have been sold by your son. As a result of this, the tax saving options could have been better utilized by your son u/s 54 or 54EC.
Query 2]
I have purchased a Flat in Coimbatore in November 2015. I have a flat in Nagpur which was purchased in 1995 & I am trying to sell it now. My query is, as I have already purchased the flat, up to what period I will get the benefit of LTCG under Section 54? I shall be very much thankful if you can clarify the same, because somebody has told me that I have to dispose of the old flat within 6 months after the purchase of the new flat to get the benefit of LTCG, under section 54. [N.Hariraj Iyer- nharirajiyer@gmail.com]
Opinion:
The time limit of 6 months by investing in NHAI/REC bonds is for claiming an exemption u/s 54EC. You would be eligible to claim an exemption u/s 54 if you sale your Nagpur flat within a period of 1 years of Bangalore Flat Purchase (i.e, Novebmer-2016)
Query 3]
My mother wants to sell out her landed property at her home town for Rs. 45 Lacs. We are two brothers wishing to purchase a flat at Pune for Rs. 65 Lacs. How to invest the sale proceeds of the land property value in the new property, where we both brothers will pay the difference without going for Capital gains? Can we claim HBL relief u/s 24b for Rs. 20 Lacs borrowed? Please suggest best options. Also advise the order of property holders for new registration? Further, the buyer wishes to pay some cash against the purchase, but we are opting for DD/Money transfer. Is it right? How to avoid future complications on Capital gains. [S.S.Rao- ss.r@rediffmail.com]
Opinion:
Your mother would be selling Land & not the house property. She has an option to save LTCG tax by opting an exemption u/s 54F. However, only purchase of one property is permissible for exemption u/s 54F. If both of you are purchasing only one flat with your mother, she would be eligible for capital gain exemption if her investment in the house property is more than the sale consideration of land property. For this, you can make her as the 1st Owner and both of you can join as the 2nd & 3rd owner. Both of you can claim deduction u/s 24(b) towards amount of Rs. 20 Lacs borrowed for purchase of house property. Ensure that (a) ownership ratio is mentioned in the sale deed of the house property as 70% (Rs. 45 Lacs out of Rs. 65 Lacs), 15%(Rs. 10 Lacs out of Rs. 65 Lacs), 15% (Rs. 10 Lacs out of Rs. 65 Lacs) of Mother & two sons respectively and (b) the fund flow of Rs. 45 Lacs & Rs. 20 Lacs is properly documented. The seller should strictly note that the acceptance of cash of more than Rs. 20,000/- is subject to penal consequences (u/s 269SS). It is now always advisable not to accept the sale consideration in cash.
[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.]
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