Photo: iStock
Photo: iStock

Gains from sale of property can be invested in specified bonds to get tax exemption

The balance LTCG can be set off against any qualifying short-term capital loss (STCL) carried forward from earlier years or incurred during the year

I own three apartments in different proportions. I have 50% share in apartments A and B; the other 50% is held under a deceased person’s name. I also have an apartment C (which is about 36 years old). We have sold this. Can the long-term capital gains (LTCG) from the sale of property C be invested to buy a new house under section 54F? If this is not permitted, do I have to deposit the money under section 54EC (maximum Rs50 lakh, within 6 months)? Can I adjust the LTCG against a short-term capital loss (loss in stocks)?

—Colonel P.S. Bedi (retd.)

You held the apartment C for more than 24 months before it was sold and the gains from the sale will therefore qualify as LTCG. This is computed as the difference between the net sale proceeds and the indexed cost of acquisition of this apartment. Indexation refers to adjusting the cost of the asset for inflation, based on the cost inflation index (CII) published by the income tax department, in the year of purchase and sale. 

Since you are selling a residential house, you could claim an exemption under section 54, if the LTCG on sale of apartment C is re-invested either in the purchase of one residential house in India within a period of 1 year before or 2 years after the date on which apartment C was sold, or in the construction of one residential house within a period of 3 years after the sale date. If the LTCG has not been reinvested before the due date for filing your tax return for the tax year in which apartment C was sold, such unutilized amount can be deposited in a Capital Gain Account Scheme notified by the government. 

Alternatively, you may choose to invest the gains in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC, within 6 months from the sale, subject to a cap of Rs50 lakh.

The balance LTCG can be set off against any qualifying short-term capital loss (STCL) carried forward from earlier years or incurred during the year. Any remaining taxable LTCG will be chargeable to tax at 20.6% (plus surcharge, if applicable).

I bought a shop in October 2011, within the limits of a municipal corporation, for Rs36.70 lakh (inclusive of stamp duty, registration charge, legal fee and travel costs). I sold the same shop in June 2017 for Rs1.05 crore. All the charges for it were borne by the buyer. The buyer has deducted TDS at 1%. I have invested Rs50 lakh of capital gains in 54EC bonds. The indexed cost is around Rs54 lakh. I also have interest income of Rs1.5 lakh. What shall I consider my income from capital gains to be? Will I have to disclose the assets and liabilities while filing the tax return, with respect to income limit of Rs50 lakh provision?

—Name withheld on request

We presume that you qualify as a tax resident of India during the financial year (FY) 2017-18. Also, it is our understanding that apart from the long-term capital gain (LTCG) from the sale of your property, you will likely only earn interest income of Rs1.5 lakh during FY2017-18. 

As you have held the property for more than 24 months, the gain from the sale would be taxable as LTCG, at 20.60% (plus applicable surcharge). The gains can be claimed exempt from tax if invested in specified bonds notified by the central government within 6 months from the property's sale as per Section 54EC of the Income-tax Act, 1961. 

The LTCG on sale of the property and taxes thereon shall be calculated as below:

Step 1: Calculate the indexed cost of acquisition, which is the cost of acquisition multiplied by cost inflation index (CII) in the year of sale, divided by CII in the year of acquisition (Rs36.70 lakh * 272/184 = Rs54,25,217).

Step 2: Calculate the LTCG (net sale proceeds less the indexed cost of acquisition) [Rs1.05 crore less Rs54,25,217 = Rs50,74,783)].

Step 3: Calculate net taxable LTCG after the exemption under section 54EC (Rs50,74,783 less Rs50,00,000 = Rs74,783).

If your net taxable income (i.e. the LTCG, interest income and any other gross taxable income earned by you in FY 2017-18) does not exceed the basic exemption limit of Rs2.5 lakh for FY 2017-18, there would be no taxes payable. Accordingly, you may choose to file your return to claim the refund of TDS deducted by the buyer.

An individual whose total income exceeds Rs50 lakh, has to report assets or liabilities held by him in the tax return. Since your total taxable income in India would be less than Rs50 lakh, this requirement ought not to apply, unless the rules change when the tax return form for FY 2017-18 is notified.

Parizad Sirwalla is partner (tax), KPMG.

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