Tag: Capital Gain

Tax Query: How to save real estate capital gain?

Personal Finance

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I have a house and a flat, and the same are declared in my IT returns every year. Last financial year, I have sold a plot (purchased during 2004-05) at a profit. I have opened a capital gains account and invested the entire proceeds in the capital gains account. Out of the sale proceeds, I have used about 85 per cent for booking a flat in Bangalore. The new flat is not yet registered. The balance amount in capital gains account is equal to my plot’s original cost. I need guidance on the following:

(A) Can I claim exemption from tax on capital gains, since I have used the proceeds from sale for purchase of property (booking advance)? Is capital gains tax applicable for my sale transaction since I have used the proceeds from sale for purchase of property (booking advance)? (B) I understand that I have to pay capital gains tax since I have two properties in my name, as per prevailing IT rules. But it is to be noted that the third property (new flat) is not yet registered. If capital gains tax is applicable, can I gift the property to my wife by making settlement deed before filing IT return for FY 2020-21, so that I remain a owner of only two properties (including new one)? (C) Also, please suggest whether I can remit back the amount withdrawn from the capital gain accounts and avoid capital gains tax?

Satyanarayana KS

A) Capital gain (CG) tax provisions shall apply on sale of plot under Income tax Act, 1961 (the Act). You are eligible to claim the tax deduction under section 54F of the Act from the capital gains earned, by investing the net sale consideration in buying the residential house property, provided you don’t own more than one residential house property (excluding the new property) on the date of transfer of the plot. As you own more than one residential house property (house and flat) on the date of sale of plot of land, you may not be eligible to claim this exemption. We would also like to add that you may still claim the deduction under section 54EC of the Act upon investing making investment in specified bonds (including National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited bonds) up to ₹50 lakh. Such investment should be made within six months from the date of transfer of such capital asset and the lock-in period is five years. The option of depositing the capital gains in CGAS is not available for exemption in this category.

B) There are two transactions here. One is sale of plot and the other is gifting of property. Gifting of immovable property to your spouse is exempt under section 56 (1) (x) of the Act. Your spouse is not required to pay tax on such gifts. In order to claim exemption under Sec. 54F, as mentioned earlier, the crucial point is the date of sale. If on the date of transfer of the plot you own more than one house property then, you will not be eligible to claim exemption.

C) LTCG could be deposited in Capital Gain Account Scheme (CGAS) for the purpose of utilising the money in making the requisite investments. However, such deposits should be made on or before the due date of filing the tax return. There are specific conditions for transferring / withdrawing the amount from CGAS account or closure of such account whereby you are required to complete certain formalities with your banker. Further, if the amount remains unutilised after expiry of prescribed period of time, then the amount not so utilised shall be charged as capital gains of the year in which the prescribed period expires.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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How does grandfathering of capital gains apply in case of corporate actions

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My question pertains to the applicability of grandfathering of capital gains in the case of corporate actions such as demergers and amalgamations. Let me illustrate with an example: I bought 100 shares of Company A in September 2016. In February of 2019, a scheme of demerger was approved by shareholders that entitled them to an equal number of shares in Company B (100 in this instant case; shares listed on the exchange in November 2019). I sell shares of both companies in October 2020. What should I reckon to be grandfathered price as on Jan 31, 2018, for both Company A and B to crystallise my capital gains liability? Please also confirm that the holding duration for both companies will be reckoned from the date of the original purchase, which is September 2016, and hence tax rate applicable in the case of Company B will also be LTCG.

Girish Balakrishnan

The following comments are based on assumption that the shares of company A are equity shares & listed in a recognised stock exchange in India.

As per the provisions of Section 112A of the Act, Long term capital gain (LTCG) on sale of STT paid equity shares exceeding ₹1 lakh shall be taxable at the rate of 10 per cent. Further, surcharge (if any) and health & education cess at 4 per cent shall apply. For the purpose of computing LTCG/LTCL, in cases where the asset is acquired before the 1st day of February, 2018, the cost of acquisition, shall be the higher of the following, as defined in Section 55(2)(ac) of the Act:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on 31 January 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

The term FMV, in the context of equity shares, has been defined in section 55(2)(ac) of the Act, as follows:

· In case the equity share is listed on any recognized stock exchange, the highest price quoted on such stock exchange as on January 31, 2018;

· Where the equity share, is not listed as on January 31, 2018 but is subsequently listed on the date of the transfer, an amount which bears to the cost of acquisition the same proportion as the CII for the financial year 2017-18 bears to the CII in which the asset was held by the tax payer or for the financial year 2001-02, whichever is later.

On a literal interpretation of the wordings in section 55(2)(ac) of the Act, one may find it difficult to contend that the equity shares in B Ltd have been acquired prior to February 1, 2018. Hence, technically, the grandfathering benefits may not be available in case of the equity shares in B Ltd.

Given the above, one could argue that the FMV of the equity shares in A Ltd as on January 31, 2018 should be adopted for determining the proportionate FMV of the shares in A Ltd and B Ltd. However, adopting the grandfathering benefits for shares in B Ltd is not free from litigation.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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Can I buy an apartment to get capital gains tax relief?

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This is with further reference to your reply to the query raised by Mr. GSR Murthy in the column ‘Tax Query’ in BL dated January 3. It was stated that the flat in question was purchased on November 16, 2010 for ₹24.5 lakh and sold on March 11 for ₹38 lakh. You had replied that the profit on sale would qualify as LTCG. Please explain how indexation shall apply in this case, and how LTCG is to be calculated?

Mathew Joseph

As per the provisions of the I-T Act, any capital asset, being land or building or both, held by a taxpayer for a period of more than 24 months qualifies as a long-term capital asset and any gain / loss on transfer of such asset is to be considered as long-term capital gains/loss (LTCG / LTCL). In the instant case, the LTCG is to be calculated as below:

Cost Inflation Index (CII) for every FY is notified by the Central government and is available on the official website of IT Department — tinyurl.com/taxCII . The property was purchased in FY 2010-11, for which the CII was 167 and sold in FY 2019-, for which the CII was 289.

I bought a piece of land a year ago, and will sell it shortly. I may get ₹ 20- lakh capital gain. Can I buy an apartment to get relief? Currently, I own one apartment.

Srinivasa M Reddy

I note that the capital asset in consideration is land. Also, the same was acquired by you a year ago. Please note that the I-T Act provides for relief from taxation of long-term capital gains (LTCG) on sale of land by investing in a residential house property, as per section 54F of the I-T Act. However, as per the provisions of the Act, the land shall be considered to be a long-term capital asset (LTCA) if it is held at least for 24 months. In this case, since the land is expected to be held for less than 24 months, the same shall qualify as short-term capital asset (STCA). No relief shall be available from taxation of any gain arising on transfer of such STCA.

On an assumption that you shall sell the same after holding for 24 months, you shall be eligible to claim exemption of the total amount of LTCG by investing the Net Sales Consideration (NSC — sale price less any expenditure incurred wholly and necessarily for such sale). In case a lesser amount is invested, a proportionate exemption shall be allowed (ie, in proportion of LTCG and NSC invested). Also, the following conditions merit attention and are required to be satisfied for claiming such exemption:

— Purchase of a house should be done a year before or two years after the date of sale. In case of construction, the same should be done within three years from the date of sale.

— You should not hold more than one residential house other than the investment in new asset.

In case this condition is breached in subsequent years, the exemption earlier allowed would be withdrawn and capital gain will be brought to tax in the year in which the breach has taken place. Since you own only one residential house property in your name, you shall be eligible to claim benefit of exemption under Section 54F, subject to fulfilling the specified conditions

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