LTCG invested in specified bonds, new house has 3-year lock-in
My grandfather gifted me some land in 1958, which I sold in 2015. It is situated more than 8 km from the notified area. How should I compute my tax liability, especially when no indexation factors are available for before 1981?
We understand that your land does not qualify as agricultural land. Accordingly, any gains resulting from sale of land shall be taxable in your hand as capital gains. In case of gift, the period of holding of land is reckoned from the acquisition date of land by the owner who has actually acquired the said asset other than by inheritance, gift, among others. As the land had been held for more than 36 months from acquisition date, the same shall be termed as long-term capital asset and the resulting gains, if any, shall be classified as long-term capital gains (LTCG).
The LTCG shall be computed as the difference between the indexed cost of acquisition and the net sale proceeds. The cost of acquisition shall be the cost for which the previous owner, who has actually acquired the land other than by inheritance, gift, among others. As the land has actually been acquired prior to 1 April 1981, you have an option of taking the actual cost of acquisition or Fair Market Value (FMV) of the land as on 1 April 1981. Also, 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 CII of the previous FYs are unavailable.
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 Income-tax Act, 1961. If the cost of new house exceeds the net sale proceeds, entire LTCG should be exempt from tax. But where the cost 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). Additionally, if your total taxable income during financial year (FY) 2015-16 exceeds Rs.1 crore, surcharge at 12% on basic rate (i.e., 20%) should be applied.
Alternatively, one can also invest LTCG in specified bonds issued by the National Highways Authority of India or Rural Electric Corporation Ltd under section 54EC. The investment should be made within six months from sale date of old land subject to limit of Rs.50 lakh and fulfilment of specified conditions.
The investment in a new house or specified bonds has a lock-in period of three years. So, if the new house is sold or the bonds are converted into cash within this period, the exemption claimed from LTCG in respect of the land sold shall be revoked. If you avail any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash.
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