I purchased an under-construction flat in 2014 and got possession in 2015. This flat is rented out. Now I want to purchase a new flat to live in with the help of a home loan. Which is a better option: selling the existing flat and purchasing a new flat with the proceeds; or buying a new flat with the help of a home loan and using the sale value to pre-pay the home loan? What will be the tax liability?

—Ramdas Patil

You will be liable to pay tax on capital gains arising from the sale of the flat. The gains are computed as the difference between the net sale proceeds and cost of acquisition and improvement. As the flat has been held for over 24 months, you will be eligible to claim indexation of costs of acquisition/improvement and the gains would be taxable as long-term capital gains (LTCG).

You can claim exemption from tax on such LTCG, where you reinvest the LTCG in a new residential property situated in India, within 1 year prior or 2 years after the sale date of the old house (if the property is acquired) or within 3 years (if the house is constructed), subject to other conditions laid down in Section 54 of the Income-tax Act, 1961.

The reinvestment in the new flat (either by using the sale proceeds of the existing flat to purchase the new flat or using the sale proceeds of the existing flat to repay the home loan on the new flat) will need to take place within the above periods, in order to avail this tax exemption.

In case you sell the existing flat and do not reinvest before the deadline to file your tax return for the year in which the flat is sold, the funds will need to be temporarily placed in a Capital Gains Accounts Scheme (CGAS) to claim tax exemption.

You will eventually have to purchase/construct a new residential property in India from the funds parked in CGAS to retain the tax exemption—else there could be a tax impact on withdrawal from CGAS/non-utilization for purchase/construction of residential property in India.

As you would be selling the flat before the expiry of 5 years from FY2015-16, any tax deduction you may have claimed under section 80C for prior years towards repayment of housing loan principal, if any, would be deemed to be your taxable income in the current year and you would be liable to pay tax thereon.

I received Rs10 lakh from an inheritance. Will I have to pay income tax on this amount?

—Gautam Gill

There is no tax on inheritance in India, so you don’t need to pay tax on money or property you inherit. But you would need to pay tax on any income subsequently earned by you from the sum inherited. It would be advisable to document the inheritance in a legal document viz. a deed and place it in your records.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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