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My father and I jointly own a residential flat in Mumbai. The flat was purchased by my father in 2009, while I was still studying and I had no source of income. We now wish to sell the flat and want to know the tax implications on each of us.

I also have a couple of other questions.

1. Can I show the entire proceeds of the sale as my income under long-term capital gains (LTCG?) If not, what is the maximum amount I can show as my income?

2. My father had already invested 25 lakh in 54EC bonds from the sale of another property in 2018, which will mature in 2023. Can he invest any taxable income arising from the sale of this property in 54EC bonds again this year?

—Name withheld on request

 

The basis of apportionment of capital gains in the hands of the co-owners, where the share is not defined, has not been specifically prescribed in the Income Tax Act, 1961 (the Act). The same may therefore be considered basis general interpretation of law and various judicial precedents in this regard. Also, while there are conflicting judicial precedents in this regard considering the various property arrangements, guidance can be drawn therefrom.

Generally, each co-owner should be liable to pay tax on the capital gains arising from the sale of the property, in proportion to the percentage of their respective funding in the property, unless there are circumstances to justify otherwise (e.g., gift etc.). This would need to be substantiated with legal documents (purchase deed) as well as respective source of funding and the proportionate cost.

In the instant case, as the entire funding was done by your father and presuming there is no specific act of the property being gifted to you by your father, the entire capital gain should accordingly be offered to tax in his India tax return.

Further, as the residential flat was held for more than 24 months, the asset shall be considered as a long-term capital asset and the gains would be taxable as long-term capital gains (LTCG).

LTCG on sale of residential flat can be computed as the difference between net sale proceeds (sale proceeds less brokerage expenses) and the indexed cost of acquisition.

The indexed cost of acquisition of the asset in your case would be calculated as cost of acquisition / cost inflation index (CII) of year of acquisition (CII for FY09 is 137 and for FY10 is 148)* CII of year of sale. (CII prescribed for FY22 is 317). The tax is payable at 20% (plus applicable surcharge and cess) on the resulting LTCG. The said LTCG will be entirely taxed in your father’s hands.

In the case of sale of a residential flat, an exemption can be sought in any of the following ways, subject to the prescribed conditions and timelines:

• Under Section 54 of the Act, by investing the LTCG in a new residential house situated in India.

• Under Section 54EC of the Act, by investing the LTCG in specified bonds.

• Under Section 54GB of the Act, by investing the net consideration in equity shares of an eligible startup.

Further, for the purpose of claiming exemption under Section 54EC of the Act, an investments up to 50 lakh can be made per financial year.

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

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