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Home >Money >Personal Finance >If a residential property is held for over two years before sale, gains will be taxed as LTCG

I am 75 and planning to sell a flat in Delhi that I had inherited (bought by my mother in 1984). My mother passed away in 1999, and through her Will, the flat was transferred to me in the same year. I want to invest the entire amount to acquire a new property in Delhi after two years of the sale. What will be the long-term capital gains (LTCG) tax liability, if any?

—Vishwa Nath Bhargava

We are assuming that the property that you plan to buy is residential. As the flat was held for over 24 months prior to the sale (including by your mother), the said property will qualify as a long-term capital asset. The resultant gain or loss arising out of the sale would be taxable as long- term capital gains or loss (LTCG or LTCL) in your hands.

LTCG or LTCL is the difference between the net sale consideration (actual sale price less brokerage and incidental expenses) and the indexed cost of acquisition (ICOA) and improvement. Since the capital asset has been transferred under a Will, the cost of acquisition for you will be the cost to the original owner.

Where a capital asset is bought before 1 April 2001 (in your case, in 1984), the cost of the asset for calculating LTCG or LTCL on the sale shall be substituted with the fair market value (FMV), as on 1 April 2001, at the option of the assessee. It should be noted that as per the Finance Act, 2020, such FMV cannot exceed the stamp duty value as on that date. The indexed cost of acquisition of the asset would be calculated as the cost of acquisition or FMV as on 1 April 2001 or Cost Inflation Index (CII) of FY02 (which is 100) x CII of the year of sale.

Further, if the actual sale consideration is lower than the stamp duty value by over 10%, the stamp duty value will be regarded as the deemed sale consideration, to calculate such LTCG or LTCL.

The tax is payable at 20% (plus surcharge and cess) on the resulting LTCG. A rollover exemption from LTCG on the sale of residential house is available for the following investments, subject to conditions and timelines:

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

• Under Section 54EC, by investing LTCG in specified notified bonds.

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

As you plan to invest the entire amount on acquisition of a house in Delhi after two years of sale, note that as per Section 54, exemption can be claimed if a residential house is purchased one year before or within two years after the date on which the transfer took place or if the assessee has within a period of three years after that date constructed a residential house.

In your case, you would need to purchase the property within two years of sale or construct a property within three years of sale, to be eligible to claim the exemption.

All other conditions and timelines will need to be complied with such as deposit of the unappropriated LTCG before the date or due date of furnishing the tax return in a Capital Gains Account Scheme (since you are considering to purchase the property over a period of time), among others.

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

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