I am a senior citizen and own a 700 sq. ft house, which was purchased by my husband in 1973. My society will undergo redevelopment, starting May, and the owners will be compensated with around Rs2 crore each. Out of this, I would distribute half the amount among my children as gift. With the remaining amount I will buy a flat for myself and pay for registration charges and stamp duty. What will be the tax liability for me and my children? How can I save tax?
The facts stated by you do not indicate whether you have transferred the flat to the society or whether you would be given another flat by the society in addition to the amount of Rs2 crore. For the purpose of this query, it is presumed that the flat has been transferred by you to the society and you will only receive a sum of Rs2 crore from the society.
Any amount received with regard to redevelopment of society will attract the provisions of capital gain. As per section 45 of the Income-tax Act, any profits or gains arising from the transfer of a capital asset shall be chargeable to tax under the head capital gain and shall be deemed to be the income of the year in which the transfer took place. In your case, the date of redevelopment shall be taken as the date of transfer of the house and accordingly, the amount, Rs2 crore minus the indexed cost of acquisition, shall be chargeable to tax.
As per section 55 of the Act, where any capital asset becomes the assessee’s property, which had been acquired by him or the previous owner before 1 April 1981, then the cost shall be taken as the cost of acquisition to the assessee or the previous owner, as the case may be, or the fair market value as on 1 April 1981.
The capital gain arising on the transfer of the house shall be exempt under section 54 of the Act to the extent the assessee invests such capital gain in purchasing a residential house within a year before or two years after the date on which the transfer takes place or for constructing a residential house within a period of three years after the date of transfer. The remaining amount may be deposited in a capital gain scheme account before the date of filing returns to avail exemption.
In view thereof, capital gains shall be exempt from tax to the extent the amount is invested in purchasing a new flat. The remaining amount of long-term capital gain shall be charged to tax at the rate of 20% as per section 112 of the Act.
Further, the amount gifted to your children shall not be taxable in their hands as per the second provision of section 56(2)(vii) of the Act, which provides that gift to children is not taxable as income of the recipient.
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