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LTCG is taxable if it is used to buy a house outside India

The exemption is available only if the residential house is purchased and constructed in India

I am moving to the UK. I have two houses in India, which I plan to sell and build my own house in Yorkshire, UK. Will I get capital gains exemption if the house is completed before 3 years?

—Ajay Thomas

Sale of property situated in India will be taxable in the year of sale of property. Any immovable property held for a period of more than 24 months (earlier 36 months) is classified as long-term capital asset. In case of a long-term capital asset, taxable capital gain will be sale proceeds less indexed cost of acquisition (i.e., adjusted as per cost of inflation index or CII) less cost of improvement less cost of transfer. Long-term capital gain (LTCG) is taxable at 20% plus surcharge, if applicable and education cess. Short-term capital gains are calculated as the difference between the sale proceeds and the cost of acquisition (no indexation benefit is available) at respective slab rates.

The LTCG may be claimed as exempt from tax to the extent it is re-invested in a residential house:

(a) Purchased one year before the date of transfer

(b) Purchased two years after the date of transfer

(c) Constructed within 3 years after the date of transfer

Further, the exemption is available only if the residential house is purchased and constructed in India. Capital gains exemption will not be available for the house bought or constructed outside India.

There are other options to claim LTCG as exempt from tax. LTCG can be claimed exempt to the extent it is re-invested in India in specified bonds (NHAI and/or REC). But there are certain restrictions on the quantum of investment made in bonds. If the LTCG is not invested until the due date of filing of tax return in India (i.e., 31 July), you may put the amount of capital gain in a Capital Gain Account Scheme (CGAS) with a bank (not later than the due date of filing returns), and subsequently withdraw this amount for reinvestment in India.

If the entire amount is not reinvested or deposited in CGAS, the remaining portion of the gain will be taxable. In your case, if you re-invest the amount in Yorkshire, there will be no exemption from tax available in India. Tax on LTCG can be either paid by way of advance tax in four instalments (15% by 15 June, 45% by 15 September, 75% by 15 December, and 100% by 15 March) or before filing a return along with interest by 31 July.

I am an NRI based in Vancouver, Canada and I have four flats in India that I have rented out—two in Delhi, one each in Chandigarh and Bangalore. The total income from rentals is Rs1.5 lakh per month? What will be the tax treatment?

—Sukhwant Minhas

Taxability in India depends on the following factors:

—Source of income

—Residential status

Typically, source of income lies where the services are performed, or where the asset, from which the income arises, is located. Rental income from property in India is considered as income accrued in India and taxable in India irrespective of residential status. You need to pay tax on this rental income.

The taxable value of rental income will be calculated after considering various deductions such as:

► Municipal taxes paid to the local authority;

► Standard deduction at 30% of the taxable value;

► Interest paid on a loan taken for construction, repairs, acquisition, or renewal of the property;

► Pre-construction period interest deduction (available as deduction in five instalments from year subsequent to construction completion year). Additionally, any repayment of principal amount against housing loan taken for such property is also eligible for deduction under section 80C (maximum deduction under this section is Rs1.5 lakh). However, if your total taxable income in India (including rental income and or any other source of income) does not exceed the maximum amount not chargeable to tax (Rs2.5 lakh), you are not required to file an income-tax return in India.

Sonu Iyer is tax partner and people advisory services leader, EY India

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