BackSeller of gifted or inherited property will be taxed
Gains from land held for more than 3 yrs from acquisition date are termed as long-term capital gains
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My father bought some land in 1973, in my name. Can this property be considered as inherited property? Now I wish to sell it and use a portion of the proceeds towards my house loan. What are the tax implications on sale of land?
—K. Sheth
We have assumed that the land was funded entirely by your father and registered in your name. Hence, the transaction is likely to be considered as gift. As per section 56, since the land had been received from your father in the form of a gift, there shall not be any tax implications in your hands. But if you propose to sell the land, any resulting capital gains shall be taxable in your hands subject to the exemption provisions.
In case of gift, the period of holding of land shall be reckoned from the acquisition date of land by the owner who has actually acquired the land other than by inheritance, gift, and so on. As the land had been held for more than 36 months from acquisition date, the gains are long-term capital gains (LTCG).
The LTCG should be computed as difference between the net sale proceeds and cost of acquisition (the cost at which the previous owner, who actually acquired the land, bought it). Further, since the land had been acquired by your father prior to 1 April 1981, you have the option of taking the actual cost of acquisition or fair market value (FMV) of the property as on 1 April 1981. Accordingly, while calculating the LTCG, the cost of acquisition shall be the price at which your father acquired the land or FMV as on 1 April 1981, as per your choice.
The cost of acquisition and cost of improvement, if any, have to be indexed by multiplying the original cost of acquisition or FMV/cost of improvement by the notified cost inflation index for the year of sale and dividing by the CII of the year of purchase of the land, i.e., 1973 or during the financial year (FY) 1981-82 if FMV has been considered and of the year in which the cost of improvement was incurred.
The LTCG can be claimed as exempt from capital gains tax by reinvesting the net sale proceeds in one residential flat located in India as per section 54F, subject to specified conditions. The investment must be made within specified time frames (within one year prior to sale date or two years from sale date or within three years for an under construction property). Hence, this exemption can be claimed only if you had bought the property one year prior to the date of sale of the land.
The LTCG exemption can be claimed in the proportion of net sale proceeds resulting from sale of old plot of land reinvested into new house. If the cost of new house exceeds the net sale proceeds, entire LTCG should be exempt from tax. But if it’s lower, LTCG is exempt from tax in proportion of cost of new house to the net sale proceeds.
One of the specified condition categorically requires that at the time of claiming LTCG exemption, you should not own more than one house (other than the new house), on the date of sale of the old asset.
Assuming that you own only one flat (against which home loan has been availed) other than the proposed new house, you can avail the aforesaid exemption from LTCG tax provided the new house is purchased within the specified time frame.
If you are unable to reinvest the net sale proceeds into new flat before filing the tax return for the FY of sale of land, then said unutilized balance sale proceeds should be deposited into the Capital Gains Account Scheme (CGAS) before the due date of filing the personal tax return. The amount deposited into the CGAS should be utilized towards purchase of a new house within two years or in case of under–construction property, within three years of the sale of old plot. If you are unable to utilize the amount deposited into CGAS for construction of new house within the aforesaid time frame, then the unutilized amounts shall be taxable as LTCG in the FY in which three years from sale of old plot has ended.
You could invest the LTCG arising from sale of plot in specified bonds within six months from sale date of old plot subject to the cap of 50 lakh under section 54EC.
The balance LTCG shall be taxed at 20%. Additionally, if total taxable income during FY 14-15 exceeds 1 crore, surcharge at 10% on basic rate (i.e. 20%) should be applied. Further, an education cess of 3% on basic as well as surcharge (if any) is applicable.
Please note that the investment in new property or specified Bonds has a lock in period of three years. Accordingly, if the new property is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of old property shall be revoked. If you take any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash.
The portion of the net sale proceeds used for repayment of housing loan and funding of education shall not qualify for exemption from LTCG tax. However, the amount paid as tuition fees and the repayment of principal portion of housing loan, may be considered in the overall cap of section 80C up to 1.5 lakh. Further, if the sale of the land results in long-term capital loss, the same could be set-off against LTCG and/or short-term capital gain as the case may be, as per the specified set-off provisions under the domestic tax law.
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