LTCG is tax exempt if cost of new house exceeds sale amount
Residential plot held for more than 36 months from date of acquisition is classified as LTCA
My mother owns two residential plots in Chennai which she purchased 30 years ago. She does not own any other property. She wants to sell one plot and construct a house on the other. Can there be tax exemption on selling the plot to construct a house? She wants to gift the rest of the money to children/relatives. Can this be done without paying any tax?
—Premchand
Under section 54F, a long-term capital gain (LTCG) tax from sale of any long-term capital asset (LTCA) other than a residential house can be claimed as exempt by reinvesting the net sale proceeds into a new house, subject to specified conditions.
The residential plot being held for more than 36 months from date of acquisition by your mother shall be classified as LTCA. Accordingly, any LTCG resulting from sale of the said plot can be claimed as exempt from tax by reinvesting in a new house (including construction of a new house). The LTCG shall be computed as difference between the net sale proceeds and the indexed cost of acquisition. If the said plot has actually been acquired prior to 1 April 1981, she has the option of taking the actual cost of acquisition or fair market value (FMV) of the property as on 1 April 1981. Further, the indexed cost of acquisition will have to be computed by multiplying the original cost of acquisition or FMV, if any, by the notified Cost Inflation Index (CII) for the year of sale and dividing by the CII of the year of purchase of the plot or during the financial year 1981-82 if FMV has been considered. Similarly, the cost of improvement, if any, incurred has to be indexed.
As your mother wants to reinvest the net sale proceeds into a new house, it should be ensured that the construction of the new house should be completed within three years of the sale of the old plot. One of the specified condition requires that while claiming LTCG exemption, you should not own more than one house (other than the new house) on the date of sale of the old land.
The LTCG exemption can be claimed in the ratio of net sale proceeds resulting from the sale of the old plot reinvested into construction of a new house. Where the cost of new house exceeds proportionate net sale proceeds, entire LTCG should be exempt from tax. And where the cost of new house is lower than the proportionate net sale proceeds, LTCG is exempt from tax in proportion of the cost of construction of the new house to the net sale proceeds. Accordingly, the balance LTCG shall be taxed at 20.6% (inclusive of education cess). Additionally, if total taxable income during FY15 exceeds 1 crore, surcharge at 10% on basic rate (i.e. 20%) should be applied.
If your mother is unable to reinvest the net sale proceeds into construction of the new house before filing tax return for the fiscal of sale of old plot, then the unutilized balance sale proceeds should be deposited into the Capital Gains Account Scheme.
The amount deposited into the CGAS should be utilized towards construction of a new house within three years from the sale of old plot. If she is unable to utilize the amount deposited into CGAS within the aforesaid time frame, then the unutilized amounts shall be taxable as LTCG in the fiscal in which three years from sale of old plot has lapsed.
If her total income for the fiscal as reduced by the said LTCG is below the applicable (depending upon age) basic income exemption threshold for the said fiscal, then such LTCG shall be reduced by the amount by which the total income so reduced falls short of the basic income exemption limit. The balance LTCG shall be taxed at flat rate of 20.6%.
Alternatively, she can invest LTCG in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC. The investment should be made within six months from sale date of old plot subject to threshold of 50 lakh and fulfilment of specified conditions.
Please note that the investment in new house or specified bonds has a lock-in period of three years. Accordingly, if the new house is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of old plot shall be revoked. If she takes any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash.
With respect to the part of the sale proceeds proposed to be given to the children/relatives as gift, please note that she will not be able to claim the aforesaid LTCG exemption as well as any other tax benefit. Though there would be no tax implications in the hands of your mother as giver of the gift, if the recipient of the gift is not a relative as defined in the domestic tax law, there would be tax implication in the hands of the recipient.
In case of gift, it would be advisable to consult lawyer for documentation.
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First Published:28 Jan 2015, 05:40 PM IST
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