My brother and I were gifted a property by our aunt (mother’s sister) in 2010. We sold this property in FY18. This property originally belonged to my maternal grandfather who left it to my aunt in his Will. What will be our tax liability if we hold the proceeds beyond this FY? How will long-term capital gains (LTCG) be calculated?
You and your brother are liable to pay tax on the capital gains from the sale of the property received as a gift from your maternal aunt. Since the property was received by you and your brother as a gift from your aunt, who in turn inherited the property from her father, this property will be deemed to have been held by you/your brother from the date that your grandfather purchased the property, when computing the taxable gain.
Gains arising from a property that has been held for more than 24 months before the sale is taxable as LTCG, subject to tax at 20.60% (plus applicable surcharge). The difference between the net sale proceeds (sale proceeds less brokerage expenses, if any) and the indexed cost of acquisition and improvement is taxed as LTCG.
If the property was acquired by your grandfather prior to 1 April 2001, you can treat 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 your grandfather to purchase/improve the property. Such FMV will then be indexed using the Cost Inflation index (CII) notified by tax authority as on 1 April 2001 (CII for FY02 is 100) and for the year of sale (i.e. CII for FY18 is 272, to determine the impact of inflation on the FMV.
If the LTCG is reinvested in the purchase of one residential property in India (under sections 54 if the property sold was a residential property)/in specified bonds (under section 54EC), a tax exemption can be claimed. If the property sold was not a residential property and if the sales proceeds are reinvested in one residential property in India, tax exemption can still be claimed.
The reinvestment in specified bonds would need to be made within 6 months from the date of transfer. Where the re-investment is made into another property, the capital gains would need to be used to acquire another property before the specified timelines. In case such reinvestment in property is not made before the date your tax return is due for filing (31 July 2018), you would need to deposit the gains into a Capital Gain Account Scheme prior to filing your tax return.
I bought a commercial property in 2000 in Delhi and I am using it for my business. I want to sell it now. How will LTCG be calculated? How can I save tax on LTCG? Can I also save tax if I don’t buy another property?
We have presumed that you have claimed a deduction from your business income in respect of the depreciation on this property. Hence, if this is the only property you owned for your business, the difference between the net sale consideration and the written down value of the property at the beginning of the FY in which the sale takes place, is treated as short-term capital gains (STCG) and would be taxable at normal rates of tax applicable to you in the FY of sale. If there is a short-term loss (in a scenario where the sales proceeds are lower than the written down value of the property at the beginning of the FY), then the same would be allowed to be set off against other STCG or LTCG in the same FY. In case there is no such other STCG and LTCG or it is insufficient, the balance short-term loss can be carried forward for 8 years to be set off against any STCG or LTCG of those years.
If you purchase another property that is also used for your business in the same FY, a liability to pay tax on STCG will not arise if the cost of the new property acquired is higher than STCG.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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