“UNTAXING THE TAX ON LONG TERM CAPITAL GAIN”

TAX TALK-05.05.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

“UNTAXING THE TAX ON LONG TERM CAPITAL GAIN” Query 1] Your help is sought in the following query:  One of my cousins at Durg (CG) has sold one Plot (with one shop constructed on it) for Rs. 60 Lacs in January-2014. The plot was purchased in the Year 1987 and its cost was Rs. 35000/- only. Please  advise:- 1.      The approximate amount of basic exemption (i.e., cost of purchase) after taking into account Index Factor? 2.      The amount of Capital Gains he will be required to pay? 3.      The different options for him to invest his money to save Capital Gains Tax? 4.      Whether he can invest in other Plot/ Shop to claim exemption under Section 54?  [manjit_parihar@yahoo.co.in]

Opinion:

1.      It may be noted that expenses towards registration, stamp duty, legal fees etc could also be added to the purchase price to arrive at the cost of acquisition of the plot. Further, you have mentioned the purchase price of the plot only & not the construction cost of the shop thereon. The construction cost of shop would also be eligible for deduction (after indexation) from the sale consideration of the property while working out the amount of capital gain. Furthermore, the month of purchase of plot in the year 1987 is also important for arriving at the amount of indexed cost of acquisition. Cost Inflation Index (CII) for the relevant FY 1986-87, 1987-88 & 2013-14 are “140”, “150” & “939” respectively. If the plot is purchased in the FY 1986-87 (i.e., on or before 31.03.1987), Indexed cost of acquisition (ignoring stamp duty, registration expenses etc) would be Rs. 2,34,750/- (i.e., Rs. 35,000/- * 939/140).  The same would be Rs. 2, 19, 100/- if the plot is purchased in the FY 1987-88.

2.      In absence of all the required information & data, exact amount of capital gain & tax thereon could not be worked out. However, whatever is the amount of capital gain, tax is payable @ 20% u/s 112.  It may cautiously be noted that capital gain is required to be computed by taking the higher of the following as sale consideration:
a] Actual sale price (i.e., Rs. 60 Lacs in your case) or
b] Value adopted for the purpose of Stamp Duty Valuation.

3.      Your cousin is transferring a shop after a holding period of more than 36 months. He can explore the possibility of saving tax on Long Term Capital Gain (LTCG) arisen from sale of shop either by claiming an exemption u/s 54F or u/s 54EC. Exemption u/s 54, as mentioned in the query, is not available since your cousin is transferring a shop & not a residential house property.

4.      Exemption U/s 54F:
LTCG arising on sale of Plot/Shop could be exempt from tax u/s 54F if following conditions are satisfied: -
a) The transferor is an individual or a Hindu Undivided Family.
b) The capital gain arises from the transfer of any long-term capital asset other than residential house property.
c)  The transferor has, within a period of one year before or two years after the date on which the transfer took place purchases, or within a period of three years after that date constructs, a residential house.
d)  The taxpayer does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
e)  The taxpayer do not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or constructs any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If all above conditions are satisfied, transferor can claim LTCG as exempt provided entire amount of net sale consideration is invested for new residential house property as mentioned above. If entire amount of net sale consideration is not invested then exempt LTCG would be available proportionately. [U/s 54F, it’s the investment of actual net sale consideration that determines the claim of exemption.]

5.      Exemption Under Section 54EC:
To save tax u/s 54EC, One can invest the amount of LTCG, within a period of 6 months from the date of transfer, in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). For exemption U/s 54EC, Investment of LTCG is relevant and not the amount of net sale consideration as required in section 54F.  [There is a maximum investment ceiling of Rs. 50 Lacs in a financial year for investment in 54EC Bonds.]

Query 2]

I need your advice on the following issues. I purchased a Flat in the year 2006 (Agreement to Sale) and Sale Deed was executed in June-2009. The price of the flat was Rs. 4.50 Lacs at that time.  Now, I am selling the Flat at 17 Lacs. I have claimed tax benefit and closed the home loan by 2009. I have also purchased one more house in Nagpur in the year 2010 only Agreement to Sale is executed till now for this house & the sale deed is still pending. The price of this new house is 18 Lacs. I have availed a Home Loan of Rs. 17 Lacs. Now, I want to close this loan with the help of Rs. 17 Lacs which I am going to get from selling of my first flat.  Please let me know if I have to pay any tax on Rs. 17 Lacs? If yes, please advise some measures to save it? Please don't disclose my identity in Newspaper. [**********.mudliyar@gmail.com]

Opinion:

1. Long Term Capital Gain (LTCG) arising on sale of house property could be claimed as exempt u/s 54 if taxpayer invests the amount of LTCG for purchase or construction of another residential house property within a prescribed time frame, as under:
   i] For purchase:
   One year before or two years from the date of Transfer.
   ii] For Constructions:
   Three years from the date of Transfer.

2.      In your specific case, you will be selling earlier flat (i.e., flat purchased in 2009) after a holding period of more than 36 months. This would result in Long Term Capital Gain.  As mentioned above, LTCG arising on sale of a house property could be claimed as exempt u/s 54 if tax payer invests the amount of LTCG for purchase/ construction of another house property. As mentioned in the query, you have already entered in to an agreement to sale & likely to purchase another house property by executing the sale deed within a prescribed time period as mentioned above. Resultantly, LTCG on sale of your earlier flat would be exempt and nothing would be taxable.

3.      A word of slight caution. It appears that you have purchased & taken possession of your earlier flat in 2009 and selling it now. If a person has claimed housing loan repayment benefit u/s 80C and sale the House within 5 years from the date of its purchase then all the benefit availed under this section 80C would be reversed and will be included in the taxable income of the year in which house is sold.

[The author is a practicing Chartered Accountant and is a partner of M/s. SSRPN & Co., Nagpur. Readers may send their queries at cassrpn@gmail.com. If you wish to unsubscribe from the mailing list, please reply back “unsubscribe” on the same email id]