TAX TALK-13.03.2017-THE HITAVADA
CA. NARESH JAKHOTIA
Revision in the base year would result in tax saving
The recent proposal in the Finance Bill-2017 to change the base year from 1981 to 2001 would benefit the taxpayers selling old properties. It would drastically bring down their tax liability.
We have and ancestor property in Kolkata. Now we wish to sale our portion to my uncle who made valuation from Govt of West bengal and it s value is Rs. 7.50 Lakh. Now we plan to sale it with Rs. 20 Lakh. Now my questions are as follows:
- He will pay the above amount with Rs. 5 lacs in cash and 15 lacs on DD?
- How income tax will act in this matter?
- Does registration will be done on Govt. valuation amount?
- What is capital gain and how it will effect on this earning?
- My parents have no other source of income, so we need to invest it in fixed investment option in their name for the rest of their life.
- Somebody saying that this amount should be invest in other property within one year, is it true?
- Actual matter is, we are not financially stable. This amount will be the source of income. If we pay income tax of may be 40% of this income, we would face severe financial problem, so what the way? Please suggest. [Debopriyo Banerjee, Nagpur- firstname.lastname@example.org]
- First of all, it may be noted that acceptance of Rs. 20,000/- or more is prohibited by virtue of provision of section 269SS of the Income Tax Act-1961. Any person accepting Rs. 20,000/- or more in cash could be subject to penalty of an equivalent amount. Your father should not accept any amount (Rs. 20,000 & above) in cash.
- The property to be sold has a Government valuation of Rs. 7.50 Lakh whereas your actual sale price is Rs. 20 Lakh. For the purpose of computing income tax (capital gain) liability as well as for levy of stamp duty valuation by the registrar, higher of actual sale price or stamp duty valuation would be considered (i.e., Rs. 20 Lakh in your case.)
- The property proposed to be sold is an ancestral property which might have been acquired before 1981. A special benefit to replace the cost price by the Fair Market value (FMV)of the property as on 01.04.1981 for working out the capital gain liability is available with the taxpayer. If you are planning to sale the property before 31.03.2017, you can calculate the capital gain by taking FMV as on 01.04.1981 as your cost of acquisition.
(Important note for all the readers proposing to sale the property acquired before 01.04.1981: Recent finance bill 2017 has proposed to replace the base year for computation of capital gain from 1981 to 2001. As a result of proposed amendment, capital gain could be computed by taking the FMV as on 01.04.2001 instead of 01.04.1981 which could drastically result in lower taxable long term capital gain in the hands of taxpayer. The proposed amendment would be applicable from 01.04.2017 (FY 2017-18). Taxpayer can defer the sale of the property to the next financial year so as to take the advantage of proposed amendment. The revision in the base year from 1981 to 2001 would lower down the capital gain tax liability.).
- Long Term Capital Gain (LTCG) is taxable @ 20% (& not 40% as mentioned in the query). Further, if the taxpayer’s other income is below the basic exemption limit, then the difference (between basic exemption limit & other income of the tax payer) could further be reduced from the amount of LTCG and balance amount only would be taxable as LTCG.
- Mode of saving Long Term Capital Gain(LTCG):
An Individual/HUF can save Long Term Capital Gain (LTCG) tax from sale of house property either u/s 54 or U/s 54EC. For exemption u/s 54, individual have to invests the amount of LTCG for purchase or construction of another residential house property within a prescribed time period. The prescribed time period is (a) is one year before or two years after the date of LTCG for purchase of house property & (b) 3 years for construction from the date of LTCG. To save tax u/s 54EC, taxpayers have to invest the amount of LTCG in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India ( NHAI) within a period of 6 months from the date of sale. Specified bonds have a lock in period of just 3 years only. After a period of 3 years, taxpayer is free to utilize such amount at their free will.
I have been a regular reader of your column, published in The Hitavada and it has helped me a lot to gain some insight into taxation laws and savings. I have a query regarding capital gains tax. My father-in-law, now 80 and central Govt. pensioner, purchased a plot in late 1960’s and constructed a house thereon. Cost of purchase was approx. Rs 10,000/- then. He has been living there since then. The present rates may offer him over a crore, if he sells the property. Now he wishes to sell the property outright and distribute the cash among his two sons and a daughter. However, this will attract capital gains liability, I suppose. What I have understood is that if he sells the house and buys another home using the funds (partially) and distributes the remaining amount among his sons and daughter, then also he will be facing capital gains liability. Is there any provision such as if he sells the house and buys three homes, jointly with each son and daughter, he will not have to pay capital gains? Another option, as was suggested few months back in Tax Talk could be, he makes a will or gifts it to his sons and daughter and they sell it later. Will the legal heirs be facing capital gains in this scenario? Kindly advise what can be the best solution so as to avoid paying capital gains tax?
- If you sale the property before 31st March 2017, you would be required to calculate the capital gain by taking the Fair Market Value (FMV) of the property as on 01.04.1981. However, if you sale the property after 31st March 2017, the LTCG calculation would be based on the FMV of the property as on 01.04.2001. As a tax planning measure, taxpayer can defer the sale of the property till the commencement of next financial year.
- Tax on LTCG arising on sale of house property can be saved by claiming an exemption u/s 54. For exemption, taxpayer have to invest the LTCG amount in purchase of “one” house property. Though joint ownership is permissible but exemption would be restricted to one house property only.
- It appears that your father-in-laws intend to sale the house property for purchasing 3 house properties for 2 sons and 1 daughter. Sale by your father-in-law and subsequent investment in the house property by his sons & daughter may not serve the purpose of saving LTCG tax in entirety. As a tax planning measure, he should first gift the present house property to his sons & daughter who in turn could sale the house property. As a result, LTCG would accrue in the hands of the sons & daughter who can individually claim an exemption u/s 54 by investing the LTCG amount for purchase/construction of house property.
[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
or email it at email@example.com]