Reinvest long-term capital gains from sale of a house in a new house to avoid LTCG tax

The LTCG shall be computed as the difference between net sale proceeds and the aforesaid indexed cost of acquisition and improvement


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My sister wants to give me her share of the property that we bought jointly. I want to pay for her share. If I do so, what will be the tax implication on either or both of us? The house was bought in 1998.

—Nihal Kamath

We have assumed the property was jointly owned and funded by both of you. If your sister sells her share in the house to you for a consideration, the gains if any, arising from the sale of her share will be taxable as ‘capital gains’ in her hands. Your sister’s share in the joint house property will be determined on the ratio of funding towards the cost of the property.

Since the house property was bought in 1998, the gains shall be classified as long-term capital gains (LTCG). The cost of her share of acquisition and improvement, if any, incurred by her, subsequent to purchase should be indexed as prescribed.

The LTCG shall be computed as the difference between net sale proceeds and the aforesaid indexed cost of acquisition and improvement.

You sister can avail an exemption from LTCG tax by reinvesting the LTCG in a new residential property located in India, within the time limit prescribed in section 54 of the income tax Act. Alternatively, she can invest the LTCG in the bonds notified within 6 months from the sale date, subject to a threshold of Rs50 lakh as per section 54EC.

If the sale proceeds receivable from sale of her share in the house is less than the value adopted for payment of stamp duty, then for computing the capital gains, the value as assessed for the purpose of payment of stamp duty shall be considered as the sale value.

On a related note, if your total income exceeds Rs50 lakh during the relevant financial year (FY), then you will have to report the cost of the entire house property (including your sister’s acquired share in the house) in your personal tax return (schedule AL).

Further, stamp and registration fees will have to be paid in relation to the transfer of her share and the transaction has to be evidenced by suitable documentation. If the sale consideration exceeds Rs50 lakh, appropriate tax will have to be deducted and deposited by you from the payments made to your sister, assuming both of you are tax residents of India, as per section 194-IA.

I have changed three jobs in the past 5 years and want to transfer the PF money from my previous two organisations to my current one. Can this be done? Or should I withdraw the money from my first organisation? Will I be taxed?

—Raheem Khan

The withdrawal of the cumulative recognised provident fund (PF) will be as per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which requires you to have a non-employment period of 2 months post leaving your job.

The withdrawal of the cumulative PF balance triggers tax liability, if an employee does not render continuous services for a period of at least 5 years with the employer. To compute this period of continuous service of 5 years, the period of service rendered with the previous employer(s) should also be added (if the cumulative PF balance maintained with the old employer has been transferred to the PF account of the new or current employer).

If you withdraw the PF balance from each of the previous PF accounts maintained with the ex-employers, as the period of services with each of the aforesaid employers is likely to less than 5 years, the same will be taxed in your hands in the FY of receipt of the PF balance. If you transfer the accumulated PF balance maintained with ex-employer(s) to the PF account maintained with the current employer and, if you withdraw the accumulated PF balance, then at that time to ascertain the period of continuous services, you can add the service period of the ex-employers. So, if the cumulative years of services with all the employer(s) exceeds 5 years, there will not be any tax implications on PF withdrawal.

Parizad Sirwalla is partner (tax), KPMG.

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