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Profits from selling a redeveloped house can attract short-term capital gains tax

The rate and final taxability will depend on various factors like individual share, other income and reinvestment into other property or specified bonds

We have an ancestral property that we are giving for redevelopment. After the construction, three-fourth of the property will be with us and the rest will be with the builder. Will we be taxed for the portion with the builder? If we were to sell the parts with us, will our holding be considered long term or short term? We inherited the house in 2001 and it was bought in 1985.

—Karthikeya

Tax laws were recently amended to tax the capital gains arising to an individual from a real-estate development project, where an existing property (either land, building or both) is handed over to a builder to re-develop, in the financial year in which the competent authority that approved the building plan issues a certificate of completion for either the whole or part of the project. Your family will need to have a registered agreement with the builder permitting the development of a real estate project. Such capital gains will be taxable in the hands of each family member depending on their share in the property.

The proposed redevelopment itself, as well as any subsequent sale of your share of the redeveloped property, will give rise to capital gains.

At the first instance on the redevelopment of the property, the first event of capital gains taxation will occur.

Gains from the sale of any immovable property held for more than 24 months is treated as long-term capital gains (LTCG) and is taxable at 20.60% (plus applicable surcharge). The taxable LTCG is computed as the difference between the sale proceeds value (determined as below) net of any expenses incurred for the transfer (such as brokerage) and the indexed cost of acquisition or improvement of the property (in respect of costs incurred to acquire the property). Since the property was inherited by you, the period your ancestors held the property will also be considered when computing the total holding period.

The stamp duty value (as on the date of issue of the completion certificate by competent authorities) of the property that you receive from the builder after re-development, and any additional consideration paid by the builder, is treated as the sale proceeds of the ancestral property handed over for re-development.

In this case, the FY of purchase by your ancestors would be considered and since this ancestral property was purchased before 2001, you may opt to use the Fair Market Value (FMV) of the property as on 1 April 2001 as the cost, to compute the capital gains. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income tax department for FY of purchase and FY of transfer.

The resultant capital gains will be taxable in your (or joint holders’) hands. The rate and final taxability will depend on various factors like individual share, other income and reinvestment into other property or specified bonds.

If you sell your share of the re-developed property within 2 years from the date the redevelopment was completed, the resultant gains would be taxable as short-term capital gains (STCG) and taxable at the normal rates of tax applicable to you in the year of sale. Otherwise, the said gain would be taxable as long-term gain. The cost of this property would be the respective share of the sales consideration offered to tax at the time of receiving completion certificate from the competent authorities.

I have taken separate health insurance plans for myself, my wife and my parents, but I pay the premiums. Am I eligible for any tax benefits?

—Sharad Jain

Health insurance premiums paid by you to cover specified family members qualify for a tax deduction under section 80D of the Income-tax Act, 1961. This deduction is capped at Rs25,000 for premium paid for your family (self, spouse and children). This cap is enhanced to Rs30,000 if either you or your spouse are above 60 years of age. You can claim a further deduction of up to Rs25,000 (Rs30,000 if either of your parents is a senior citizen) towards health insurance premium paid for your parents. The tax deduction is allowed only if the premiums are paid in any mode other than cash.

Parizad Sirwalla is partner (tax), KPMG.

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