Reverse mortgage of property by a previous owner does not affect LTCG tax implications
LTCG is calculated as the difference between net sale consideration and the indexed cost of acquisition
An individual (A) inherited a property (built in 1980) by his father-in-law (B) via the latter’s Will. After a couple of years, B, who is a senior citizen, opted for a reverse mortgage loan of ₹30 lakh from a bank. Of this, he spent ₹3.5 lakh and invested the remaining ₹26.5 in an annuity plan. In the annuity, he opted for return of purchase price, and got ₹15,000 as a monthly payout. After five years, B passed away, and the loan amount stood at ₹60 lakh. A didn’t have sufficient funds, so he decided to sell the house to repay the bank. For this, he first applied for a change in the title, then, sold the property for ₹73 lakh. He then cleared the bank dues, which were ₹63 lakh by then. A incurred some expenses for these formalities such as legal fees. What is the tax liability for A?
—Sumer Chand Jain
As the immovable property was held for more than two years prior to the sale, it will qualify as a long-term capital asset. The gain or loss arising from its sale would be taxable as long-term capital gains/loss (LTCG/LTCL) in the hands of the seller.
LTCG is calculated as the difference between the net sale consideration (actual sale consideration less brokerage and incidental expenses) and the indexed cost of acquisition and improvement. Since the capital asset has been transferred under a Will, the cost of acquisition for the seller will be the cost to the original owner. If a capital asset was purchased before 1 April 2001, the cost of the asset for the purpose of calculating LTCG/LTCL on the sale shall be substituted with the fair market value (FMV) of the asset, as on 1 April 2001, at the option of the assessee.
As per the recently enacted Finance Act, 2020, with effect from financial year (FY) 2020-21, such FMV of the property as on 1 April 2001 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/cost inflation index (CII) of financial year 2001-02 (which is 100) x CII of the year of sale.
If the expenses incurred by the seller, in this case A, (legal fees, vendor’s fees, advocate fees and others) are exclusively connected with the sale of the property, deduction with respect to the same may be available from the sale consideration, subject to verification.
If the actual sale consideration is lower than the stamp duty value by more than 5%, the stamp duty value would be regarded as the deemed sale consideration for the purpose of calculating LTCG or LTCL.
It should be noted that as per the recently enacted Finance Act, 2020, with effect from FY 2020-21, the safe harbour limit has been extended from 5% to 10%.
The tax is payable at 20% (plus applicable surcharge and cess) on the resulting LTCG. The reverse mortgage arrangement of the previous owner, B, against this property, should not impact the LTCG or LTCL tax implications for A.
A can also look into availing of a roll-over exemption from LTCG on the sale of the property, which is available for certain investments made with the proceeds, subject to conditions.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com
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