Ask Mint Money | LTCG exemption will be revoked if new house is sold in 3 years

My two brothers and I have inherited two house properties and an agricultural land from our father. However, none of us live in the city where these properties are, neither do we plan to shift to that city. We want to sell the properties and acquire new properties in our respective towns. However, we are not sure about the tax treatment on these lands? Also, the agricultural land was gifted to my grandfather by a close friend in 1930.

—Abhinay

The tax implications on sale of house properties and agricultural land have to been seen separately.

House properties: We are assuming that the house properties have been inherited by you and your brothers jointly in an individual capacity and each of you have a definite share in the house properties. The gains from the sale of the house properties shall be taxable as capital gains in the hands of each of the individual as co-owner for the respective share in the properties. As the properties have been inherited from your father, the period of holding shall be reckoned from the date of acquisition of properties by your father.

Proceeding on the basis that the house properties have been held for at least 36 months from the date of acquisition, the resultant capital gains shall be termed as long-term capital gains (LTCGs). The LTCG shall be computed as the difference between the net sales proceeds (after reducing transfer charges such as commission/brokerage) and the “indexed cost of acquisition”. The cost of acquisition shall be the cost for which the original owner acquired the property as increased by the cost of improvement made subsequently. In case the properties have been acquired prior to 1 April 1981, each one of you have the option of taking the cost as the actual cost of acquisition or fair market value (FMV) of the properties as on 1 April 1981. While computing LTCG, the cost of acquisition needs to be appropriately indexed. Such LTCG shall be taxed at 20.6% (including education cess).

Each one of you could claim an exemption from tax on LTCG with respect to your respective share by investing in new residential house as per section 54 of the Act. In case of investment in residential house, the exemption shall be restricted to lower of the amount invested in new house property or LTCG from transfer of old house. For claiming the exemption, each one of you should purchase a new house within one year before or two years after the date of transfer of the old house. In case of an under-construction house, the construction needs to be completed within three years from the sale date of old house. Also, the new house should not be sold within three years, else the exemption gets revoked.

If any of you is unable to make the new investment by the due date of filing the individual tax return (i.e. 31 July), the unutilized sale proceeds should be deposited into the “capital gain account scheme” (CGAS) with a prescribed nationalized bank to be able to claim this exemption. However, the amount deposited into CGAS should be utilized for purchase or construction of new residential property within the aforesaid timeframes. Further, if you are unable to utilize the amount deposited into CGAS for purchase or construction of new house within the aforesaid timeframes, then the unutilized amounts shall be taxable as LTCG from the end of three years from the sale date of old house.

Alternatively, each once of you could invest in specified Bonds issued by National Highways Authority of India or Rural Electrification Corporation Limited within six months from the sale date, subject to cap of Rs.50,00,000 per FY. Where investment in the bonds exceeds the LTCG, the entire LTCG is exempt from tax. Where investment in the bonds is less than the LTCG, the exemption is prorated in the proportion of investment in the bonds to the LTCG. Further, each of you should ensure that the said bond is not redeemed before three years from the date of investment, otherwise the exemption is revoked.

Agricultural Land

Rural agricultural land in India per se is not treated as a capital asset under the provisions of the Act. However, if the agricultural land is situated within certain specified areas as defined in the Act, it shall be classified as capital asset and would have tax implications.

If the land held by you is not situated within the specified areas, then it shall not be treated as capital asset and there may be no capital tax implications on the sale of such agricultural land.

Parizad Sirwalla is partner (tax), KPMG

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