Photo: iStock
Photo: iStock

STCG from property sale is taxable at slab rates, re-investment doesn’t give tax benefit

The current income tax laws do not provide any exemption from taxes in case of re-investment of STCG

I bought a flat in Faridabad in June 2003 for 5.19 lakh and again paid 87,000 in 2013 and 47,000 in 2018 to HUDA for increased land price, as per a court order. If I sell it, how will its indexation value be calculated?

—Bimla Kumari

The gain arising from sale of immovable property held for over 24 months is treated as long-term capital gain (LTCG). The difference between the sale proceeds and the indexed cost of acquisition or improvement is taxed as LTCG. The asset’s cost is adjusted based on the cost inflation index (CII) notified by the tax authority for the FYs of purchase and transfer to determine the indexed cost of acquisition.

You acquired the property in June 2003 and subsequently paid HUDA in 2013 and 2018. The cost paid initially would be treated as the cost of acquisition and subsequent court-mandated payments as cost of improvement. Such costs can be indexed for inflation when computing capital gains using the CII of the FY of sale and the FY of incurring the cost of acquisition (FY04) and relevant FY of incurring the cost of improvement (relevant FY to payments made in 2013 and 2018).

I paid 3.6 lakh through cheque against a land with a real estate company in October 2016. I was supposed to pay another 6 lakh to get it registered or quit from the deal after taking 8.1 lakh from the company after a year. I chose the latter and got 8.1 lakh in December 2017. I used the capital gain of 4.5 to repay my car loan of 3.5 lakh. I fall under the 30% tax slab. This capital gain of 4.5 lakh is a gain from the property which was never transferred in my name. Am I liable to pay tax on this?

—Anuj Kumar Singh

We have presumed that the land referred to in the question is owned by the real estate company and it was never purchased by you. One would need to study the agreement to determine if this transaction is in essence a loan provided by you or if you received a right to acquire the property (i.e. land) upon payment of the initial sum of money. If it is the latter, the gain arising from the transaction would be treated as a “capital gain" arising from the relinquishment of the right to purchase the asset (i.e. land). In such a case, the difference between the amount received by you and the investment made by you, after reducing any other expenses would be considered a short-term capital gain (STCG) since you held this right to the asset for less than 24 months.

If it is a loan provided by you, the difference between the sums received by you and the amounts initially funded by you would be treated as interest income, chargeable to tax as “income from other sources". STCG or interest income are taxable at normal tax rates applicable to you. The current tax laws do not provide any exemption from taxes in case of re-investment of STCG.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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