WANT TO INVEST THE MONEY FROM SALE OF “AGRICULTURAL LAND & PLOT” FOR PURCHASE OF “A READYMADE HOUSE”: INCOME TAX SAVING

TAX TALK-13.05.2013-THE HITAVADA

TAX TALK  

BY CA. NARESH JAKHOTIA

Chartered Accountant

WANT TO INVEST THE MONEY FROM SALE OF “AGRICULTURAL LAND & PLOT”  FOR PURCHASE OF “A READYMADE HOUSE”: INCOME TAX SAVING

Query 1]

I am in Government job and purchased an agriculture land for total amount of Rs. 4.00 Lacs  in the year 2008 and a plot in city area for total amount of Rs. 6.50 Lacs in the year 2011 (through loan & self saving). I want to sell these properties in the FY 2013-14. Please provide following information:

1.      Tax liability on capital gain;

2.      Presently, I do not own any house and want to invest above money to purchase a readymade house (new or old). What would be tax liability in FY 2013-14 or onwards if house is purchased after 2013-14?;and

3.      Till investment in readymade house, I want to do investment in Fixed deposit/ Bonds of Government owned bank/ company, Post office certificates etc. What would be tax saving as per Income Tax Act? [Dilip Singh-om1950lal@yahoo.co.in]

Opinion:

Tax Liability on Sale of Agricultural Land:

1.      In normal course, any income from transfer of agricultural land, which is being used for agricultural purpose, shall be tax free if the agricultural land is not situated in any area within the distance (measured aerially) of not more than:
a] 2 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
 b] 6 kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
c] 8 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

2.      If the agricultural land is situated within the radius of 2 kms/ 6 kms / 8 kms as mentioned above, then depending upon the period of holding, the profit arising on sale of agricultural land will be taxable as Long Term or Short Term Capital Gain.

3.      In your specific case, if the agricultural land is not covered in the situation mentioned in (1) above then the profit arising on sale of agricultural land would be taxable as Long term Capital Gain as the agricultural land is having a holding period of more than 36 months. In absence of the exact reference of the date/financial year of acquisition in the query, Stamp Duty valuation of the land at the time of sale & also the non availability of the Cost Inflation Index (CII) for the FY 2013-14, the amount of Long Term Capital Gain could not be worked out. The CII for the FY 2013-14 has not yet been notified by the CBDT & it is expected that the same may be notified in this month itself.

Tax Liability on Sale of Plot:

1.      The plot was purchased by you in 2011 and you are planning to sell it in the FY 2013-14. The profit on sale of plot would be a Long Term Capital Gain if it is sold after a holding period of more than 36 months. If the plot is sold within a period of 36 months, the profit would be treated as Short Term Capital Gain and for tax purpose, would be treated like your other regular income. It would be taxable as per the applicable tax slab to your income. Since you are ultimately planning to utilize sale proceeds for purchase of a residential house property, it is advisable to sell the plot after completing the holding period of 36 months so as to claim tax benefit conferred by section 54F.

2.      In absence of the exact reference of the date/financial year of acquisition in the query, Stamp Duty valuation of the plot at the time of sale etc, the amount of Capital Gain could not be worked out.

Tax Liability if the Sale proceeds is utilized for purchase of a Residential House property:

Subject to various other terms / stipulations, Tax on Long Term Capital Gain (LTCG) arising from the transfer of plot or urban agricultural land can be saved u/s 54F if the sale consideration is used for purchase of a residential house property within a prescribed period. The time limit prescribed for the purpose is:
a] For purchase:
One year before or two years from the date of Transfer.
b] For Constructions:
Three years from the date of Transfer.

It may be noted that although section 54F offers the time period of 2 years for purchase & 3 years for construction, the return of income is required to be filed before the specified date which is much shorter than the time period granted by Section 54F. If investment for purchase/ construction is not done by the tax payer before the due date of return filing, the amount need to be isolated by depositing it in the Capital Gain Deposit Accounts Scheme-1988 (CGDAS). Readers who wish to claim an exemption u/s 54F may note that if the amount is not invested for purchase/construction before the DUE DATE of furnishing the return of income, then it should be deposited under the CGDAS, before the DUE DATE of furnishing the return. After Deposit, the amount already utilized by the tax payer for purchase/ constructions of the new house along with the amount so deposited, shall be eligible for exemption under section 54F in the year in which LTCG has arisen.

[Consequence where the amount deposited in the capital gain deposit account scheme is not utilized for the purchase or the construction of a residential house property within the specified period:
In this case, the amount not so utilized shall be charged as capital gain of the year in which the period of 3 years from the date of LTCG expires and it will be taxable as LTCG of that year. The assessee then shall be eligible to withdraw the amount from the scheme. As per scheme, he is required to submit an application in Form G after getting the approval of the Assessing Officer.]

With above basic idea, it may be noted that temporary parking of the funds in fixed deposits/ bonds / post office certificates after the due date of furnishing the return of income, may obstructs your exemption claim u/s 54F. If you have to claim an exemption u/s 54F, you have to choose CGDAS as an investment tool for temporary investments of the funds.