Investment of capital gains from property has a lock-in of 3 years
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My uncle gifted a piece of land property in my name in 1972. I sold the property in January 2016. How should I compute my tax liability, especially since there are no indexation factors available before 1981?
We understand that your land does not qualify as agricultural land. Accordingly, any gains resulting from sale of the land shall be taxable in your hand as capital gains. We assume that the asset has been acquired by you by way of gift under a Will or inheritance.
In case of gift, the period of holding of land is reckoned from the acquisition date of land by the owner who actually acquired the asset other than by inheritance, and gift. As the land had been held for more than 36 months from acquisition date, it shall be termed as a long-term capital asset and the gains, if any, shall be classified as long-term capital gains (LTCG).
The LTCG shall be computed as difference between the net sale proceeds and the indexed cost of acquisition. The cost of acquisition shall be the cost for which the previous owner, who has actually acquired the land other than by inheritance, and gift. As the land was acquired prior to 1 April 1981, you have an option of taking the actual cost of acquisition or the fair market value (FMV) of the land as on 1 April 1981. Further, the indexed cost of acquisition will have to be computed by multiplying the original cost of acquisition or FMV, if any, by the notified Cost Inflation Index (CII) for the year of sale and dividing by the CII of the financial year (FY) 1981-82 (i.e., 100) as the CII of the previous FYs are unavailable. Similarly, the cost of improvement, if any, incurred has to be indexed.
One can claim an exemption from LTCG tax by re-investing the net sale proceeds into one new house situated in India subject to fulfilment of specified conditions laid in section 54F of the Income-tax Act, 1961.
Where the cost of new house exceeds the net sale proceeds, entire LTCG should be exempt from tax. But if the cost of new house is lower than the proportionate net sale proceeds, LTCG is exempt from tax in proportion of cost of construction of new house to the net sale proceeds. Accordingly, the balance LTCG shall be taxed at 20.6% (inclusive of education cess). Also, if your total taxable income during FY16 exceeds Rs.1 crore, surcharge at 12% on basic rate (i.e., 20%) should be applied.
Alternatively, you can invest LTCG in specified bonds under section 54EC. The investment should be made within six months of sale date of land subject to a limit of Rs.50 lakh and fulfilment of specified conditions.
Investment in a new house or specified bonds has a lock-in of three years. If the new house is sold or bonds are converted into cash within three years, exemption claimed from LTCG shall be revoked. If you take a loan against the security of the bonds, then the bonds shall be deemed to be converted into cash.
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