Photo: iStock
Photo: iStock

Cap of Rs50 lakh applies on LTCG re-invested in specified bonds under section 54EC

You can claim an exemption from tax by re-investing the LTCG in specified bonds notified by the central government within 6 months from the sale of the property

I purchased a 200 sq.mt residential plot in Varanasi from Varanasi Aam Bima Karmachari Sahakari Avas Samiti Ltd in May 1994 for Rs21,420. Since it was an undeveloped and unleveled plot, in the same financial year, I spent Rs25,000 towards land filling, erection of boundary wall and an iron gate for entrance. I spent another Rs5,000 for putting a hand pump and boring. In December 2017, I sold it for Rs28 lakh against a circle rate value of Rs35 lakh (stamp duty paid on Rs35 lakh). What will be the index cost of acquisition and whether cost incurred as above on improvement and construction on the plot will qualify for inclusion as acquisition cost? How will the long-term capital gains be calculated? Is brokerage deductible from sale proceeds? Also, I intend to invest Rs6-8 lakh in LTCG bonds in May 2018. Can I do that and also whether in such a case capital gains tax can be spread across two financial years? Or do I have to account for it in this FY2017-2018? I am a senior citizen. Also, please note that for above expenses on development and construction, no bills or vouchers are held as these petty jobs were done by casual labourers.

—Asha Sharma

You will be liable to pay tax on the gains arising from the sale of the residential plot. As you held the property for more than 24 months before selling it, the gains would be taxable as long-term capital gains (LTCG) and would be computed as the difference between net sale proceeds (sale proceeds less brokerage expenses) and the indexed cost of acquisition and improvement. The costs incurred by you (for purchase or improvement) need to be substantiated with documentary evidence. However, since this property was originally acquired by you prior to 1 April 2001, you have the option of treating the Fair Market Value (FMV) of the property as on 1 April 2001 as the cost of acquisition while computing taxes, instead of the actual costs incurred by you to purchase or improve the property. Such FMV will then be indexed using the Cost Inflation Index (CII) notified by the tax authority as on 1 April 2001 (for FY 2001-02 it is 100) and the year of sale (for FY 2017-18 it is 272), to determine the impact of inflation on the FMV. 

Also, the circle rate value will be regarded as the taxable sale proceeds since it is higher than the actual sale consideration received by you. The capital gain will be taxable in FY 2017-18 itself since the property was sold in December 2017.

You can claim an exemption from tax by re-investing the LTCG in specified bonds notified by the central government within 6 months from the sale of the property, as per Section 54EC of the Income-tax Act, 1961. Under the current law, the notified bonds are redeemable after 3 years from the date of investment. However, the finance minister has proposed in the recent Budget that the redemption period of such bonds be extended to 5 years in respect of bonds issued post 1 April 2018. 

If the resultant computation is a long-term loss, you can set it off against other long-term gains in the current year. If there is no other long-term gain or it is insufficient in the current year, the balance long-term capital loss can be carried forward to be set off against long-term capital gains of subsequent 8 years. 

My father has an old (30 years) property in his name. He also purchased a flat in Noida about 5 years back, for which he has not got the possession till date. Hence, the property has not been registered. Now he wants to sell the old property and reinvest the amount in some other property. Will he have to pay taxes on the gains he earns from selling the old property, or can he invest the amount immediately in some other complete property without paying taxes as capital gains?

—Tanuj Singhal

Presuming the property in question is a non-agricultural land, any gains arising to your father on the sale of the property is taxable as long-term capital gains (LTCG), as he has owned the property for more than 24 months before its sale. The LTCG is computed as the difference between the net sale proceeds and indexed cost of purchase or improvement. Since this property was originally acquired by your father prior to 1 April 2001, he has the option of treating the Fair Market Value (FMV) of the property as on 1 April 2001 as the cost of acquisition while computing taxes, instead of the actual costs incurred by him to purchase or improve the property. The resultant LTCG will be chargeable to tax in your father’s hands at 20.6% (plus surcharge, if applicable).

However, if he re-invests the net taxable gains from the sale of the property (‘old asset’ for ease of reference) in a residential property (‘new asset') situated in India, he can claim an exemption from taxes under section 54, subject to satisfaction of all other specified conditions. Such re-investment can either be through the purchase of the new asset (within 1 year prior or 2 years after the sale of the old asset) or construction of the new asset (within 3 years from the sale of the old asset). If he is unable to reinvest the LTCG into the new asset before the due date of filing his tax return for FY 2017-18, the unutilized balance should be deposited into the Capital Gains Account Scheme (CGAS) in order to claim the tax exemption. The amount deposited into the CGAS scheme can then be utilized to reinvest in the new asset within the aforesaid timelines. In case the amounts deposited are not utilized for this purpose, he would be liable to pay taxes. 

Alternatively, the LTCG can be re-invested in specified bonds under section 54EC, within 6 months of the sale of the old asset, subject to a cap of Rs50 lakh. 

Parizad Sirwalla is partner (tax), KPMG.

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