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My father bought a property for 1 crore in July 2008 and gifted it to me in May 2014 after paying the necessary stamp fees. The property was sold for 14 crore in November 2021. I want to know how the long term capital gains (LTCG) tax will apply in this case?  Also, how will tax be computed If either 70% or 90% of capital gains is invested in new property? Can I invest in a property which would be handed over to me in March 2025?

—Name withheld on request

 

As the property has been held for more than two years (period of holding calculated from the date of purchase of property by the owner who actually acquired the property), any capital gains made on this will be considered as LTCG.   If the actual sale consideration is lower than the stamp duty value by more than 10%, the stamp duty value is considered as the deemed sale consideration. 

 You are eligible for the benefit of adjusting the Cost of Acquisition (‘CoA’) based on the applicable Cost Inflation Index (‘CII’) for FY 2008-09. Further, stamp duty fee paid at the time of gifting shall also form part of CoA, and CII for FY 2014-15 will apply. 

LTCG income is taxed at a flat rate of 20% plus applicable surcharge (restricted to 15 % on LTCG) and education cess. In case your taxable income (other than LTCG) is below 2.5 lakh (tax exemption limit for individuals up to 60 years of age), benefit of the unexhausted exemption limit shall be allowed against the LTCG and the balance gain will be taxed at 20%.

 Under section 54, LTCG from the sale of a residential house is allowed for deduction if the gains are either invested to purchase another residential house (‘new house’) within one year before or two years or to construct a new house within three years of the transfer of the house. The deduction is available to the extent of LTCG invested. If the amount of LTCG is greater than the cost of the new house purchased or constructed, the difference between the amount of LTCG and cost of new house (i.e. 30% and 10%, respectively in your case) shall be taxable in the year of sale as LTCG. 

In case, you are unable to purchase/construct the new house till the date of filing the return of income for FY 2021-22 (due date is 31 July), the LTCG not utilized (in whole or part) can be deposited in Capital Gains Deposit Account Scheme with a specified bank and exemption claimed under section 54 of the Act. The new house can be purchased or constructed by withdrawing the amount from the account within the specified time limit of 2 or 3 years, as applicable. 

We understand that you plan to invest in an under-construction property, whose possession is expected in March 2025. Some courts have held that completion of construction of the house or occupation thereof is not a stipulated requirement and as long as the LTCG has been invested in construction of a residential house within three years, the exemption should be available up to that extent. 

Another school of thought is that the property should have been fully constructed and ready for use, within the stipulated period of three years. As the law stipulates that investment is required to be made in a residential property, in the case of under-construction property, the residential property comes into existence only on the date of completion of construction/ possession, which should be done in tjree years from transfer.

In view of the above, a position that investment in under construction property (even if construction not completed), may be highly litigious especially where at the time of investment itself the assessee is aware that the construction may take beyond 3 years.

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

(Write to us at mintmoney@livemint.com to get your personal finance queries answered from experts)

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