I have sold a residential property for Rs70 lakh, which was inherited by me, and incurred long-term capital gains (LTCG) tax on it. To save tax, I intend to purchase another residential property costing about Rs1 crore, jointly with my son. I will invest Rs70 lakh and the balance will be contributed by my son. For calculating LTCG, the fair market value of the property as on 1 April 2001 will be required, and that has to be done by a government-approved valuer. Can I avoid going to a valuer, and not pay LTCG, if I re-invest the entire sale proceeds? Please advise.
Where a capital asset has been inherited, the period of holding of the capital asset by the previous owner also needs to be taken into consideration in computing the number of years of holding. It is presumed that the residential property sold by you was held by you and the original owner for an overall period exceeding 24 months. In that case, any gains arising from this (sale consideration less indexed cost of acquisition and improvement) will be taxable as a long-term capital gain (LTCG). Further, as this is an inherited property, the cost of the property for you would be the cost at which the property was acquired other than by inheritance. If such date of acquisition falls prior to 1 April 2001, you have a choice to consider the Fair Market Value (FMV) of the property as on 1 April 2001 as your cost. While there is no express requirement to obtain an FMV certificate from a documentation perspective, you should consider obtaining such a certificate. You can claim an exemption from LTCG, under section 54 of the income-tax Act if the LTCG is reinvested in a new residential property located in India within the specified time frames. Where the new property is purchased, the gain is required to be reinvested either within 1 year prior to sale date or 2 years after the sale date. Where the new property is constructed, the time period prescribed for the reinvestment is within 3 years from the date of sale of the original asset.
You intend to reinvest the entire sale consideration received by you, in a new residential house property that will be jointly owned by you and your son. You may still claim the tax exemption, even where you are part-owner of the new asset, given the interpretation taken by appellate authorities that have permitted the claim for tax exemption in similar cases. This will be naturally subject to you investing the capital gains of the sold residential property in the new residential property. In case you choose not to obtain the valuation certificate and consider the actual cost of acquisition, you may still have no net tax payable on such LTCG at this stage since you propose to reinvest all of the sale proceeds received by you. If the new asset is sold within a period of 3 years from its purchase, there would be an additional tax impact to you, in respect of any LTCG claimed exempt previously. If the new asset is not purchased before the due date for filing your tax return in respect of the year of sale, you should open a Capital Gain Account (CGA) in a scheduled bank under the Capital Gain Account Scheme and place the LTCG funds in this account before filing your tax return.
If the amount in the CGA is not utilized for 3 years or is used for any other purpose, the tax exemption would not apply.
I have a residential plot in Gurgaon which I booked in 1996 and gradually paid the entire consideration by 2007. The conveyance deed was signed in September 2007. Now I want to sell this plot and invest part of the sale consideration in a new built-up house. I also pay quarterly maintenance charges to the developer. Will I get indexation benefit on the sale of an un-constructed plot? If so, what amount will be deemed as LTCG?
—Name withheld on request
As you have held the land (residential plot) for more than 24 months from the date of purchase (i.e., September 2007), any gains arising to you from the sale would be taxable as long-term capital gain (LTCG) or loss (LTCL).
LTCG is computed as the difference between the net sale proceeds and the indexed cost of acquisition of the land. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income tax department. The taxable LTCG is subject to tax @ 20.60% (including education cess) and may need to be increased to include any applicable surcharge depending on your total income.
The maintenance charges paid by you to the developer may qualify for a deduction only if they are in the nature of ‘improvement’ costs. Any expenses incurred by you to sell and/or purchase the land (such as brokerage costs), can also be reduced from the taxable LTCG.
You can claim an exemption from such capital gains tax, under section 54F of the Income-tax Act, 1961, if the LTCG on sale of this land is re-invested in the purchase of a new residential property provided the following conditions are satisfied:
•You do not own any other residential house apart from the new residential house as on the date of transfer.
•You acquire the house property within 1 year before or 2 years after the transfer of the land owned by you.
Parizad Sirwalla is partner (tax), KPMG.
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