Claim tax exemption on LTCG by re-investing in specified bonds

You can claim exemption from LTCG taxation by re-investing the capital gains in specified bonds but these come with a lock-in period of 3 years

My father built a house in 1987 and we started living in it in 1990. He passed away in 2015. My mother draws a pension of Rs24,000 per month, apart from interest earned. Her income may be liable to tax but she has never filed returns. 

We want to sell the house, which will earn us Rs30 lakh at the most and buy a house near Kolkata, which will cost about Rs35 lakh. However, this flat will not be in her name but in my name, my son's name and that of two other persons. There will be a gap between when we receive the payment for the house sold and when we have to pay the seller. Where should we keep the money? Can it be kept in a normal bank account?  

1. Where should we keep this bulk amount? 

2. If it is deposited in any of my mother's bank accounts, then what to do with her income tax?

3. If the income tax department asks for an explanation for this sudden deposit of such a large amount, what should be my mother's response? How should we show the source of this money? 

4. What sort of preparation should be made before selling the house so that she does not get any letter from the tax department?

5. Will we have to prepare tax returns for her previous incomes? She has little recollection of her previous earnings and assets. 

6. She wants to keep some money aside from the house sale for medical purpose. Will this be taxed? 

—Swapan Kumar Banerjee

Assuming your mother has inherited the property after your father’s unfortunate demise, the sale of the house held by her will result in long-term capital gains (LTCG) since the house is held for at least 24 months by her. Only the net LTCG arising from the transaction will be taxed and not the entire sale proceeds. The LTCG is computed as the difference between net sale proceeds and the indexed cost of acquisition of the house. The cost incurred by your father to purchase the land and build the house will be indexed to consider the inflation in costs between the year of purchase by your father and the year in which the house is sold by your mother. As the house was built before 1 April 2001, the cost of such property can be considered the original cost incurred by your father—or the Fair Market Value (FMV)—as on 1 April 2001.

Tax is payable at the rate 20.6% (plus applicable surcharge) on the LTCG as computed above, unless this amount is reinvested in the purchase of another house property or specified bonds. 

Since your mother is re-investing the LTCG in the purchase of a flat near Kolkata (let's call it ‘new asset’ for ease of reference), she can claim exemption from capital gains tax, under section 54 of the Income-tax Act, 1961. The law permits such re-investment within 1 year before or 2 years after the sale date.

If the new asset is not purchased by the due date for filing her tax return, she can open a Capital Gain Account (CGA) in a scheduled bank, under the Capital Gain Account Scheme and place the LTCG funds in this particular account before filing her return. If this is not done or if the amount in her CGA is not utilized for 3 years or if is used for any other purpose that buying or constructing a new house, the tax exemption would not apply. 

In an ideal scenario, the new asset should be purchased in your mother’s name only. However, if the new asset is purchased by your mother and either includes your name or is purchased in your name—the purpose may be to facilitate succession as her legal heir—there are judicial precedents for and against the proposition for claiming the exemption.

It would be advisable to maintain adequate documentation of the sale of property (such as registered sale deed, bank statements, and possession letter) and reinvestment in the new asset (for example, purchase deed), since your mother may be required to provide these to the tax authorities, if questioned. 

If your mother is not buying the new property, she can still claim exemption from LTCG taxation by re-investing the capital gains in specified bonds up to a specified limit. Please note that these bonds generally have a lock-in period of 3 years.

For the past few years, during which your mother may have had income that was taxable, you may still file a belated tax return for financial year 2015-16. For the balance years, you may consider paying the appropriate taxes with interest and maintaining documentation for the same.

Parizad Sirwalla is partner (tax), KPMG.

Queries and views at