CA Srikant Agarwal

Taxability of Capital gain arising on sale of residential property and tax planning thereof after considering amendment made by Finance Bill 2012

We know that investment in residential property or Flats is one of the common investment avenue for individuals.

Here we are trying to summarise the tax implication on sale of residential property and tax planning to save tax on the Capital Gain arising on the sale of such property.

On the sale of a residential property either Short Term Capital gain (herein after referred to as STCG) or Long Term Capital Gain (herein after referred to as LTCG) may arise which depends on the time period for which such property is held. If the residential property is sold within 36 months from the date of acquisition of such property then it will be treated as STCG and if such property is sold after a period of 36 months from the date of acquisition of such property then it will be treated as LTCG.

The amount of Capital gain is calculated in the below format:

Computation of Short Term Capital Gain

Computation of Long Term Capital Gain

Full consideration

XXX

Full consideration

XXX

Less: Expenses on Transfer

XX

Less: Expenses on Transfer

XX

Net Consideration

XXX

Net Consideration

XXX

Less: Cost of Acquisition

XX

Less: Indexed Cost of Acquisition

XX

Less: Cost of Improvement

XX

Less: Indexed Cost of Improvement

XX

STCG

XXX

LTCG

XXX

Less: Exemption u/s 54B/D/G

XX

Less: Exemption u/s 54 to 54GB

XX

Taxable STCG

XXX

Taxable LTCG

XXX

The rate of tax applicable for STCG arising on transfer of residential property would be the slab rates applicable for individuals/ HUF. However LTCG would be taxable @ 20%. If the Total Income (before considering LTCG) is below the maximum amount not chargeable to tax (i.e for Previous year 2012-13, Rs 2,00,000 for individual, Rs 2,50,000 for senior citizen below 80 years of age and Rs 5,00,000 for senior citizen above 80 years of age) then the LTCG would be reduced by such shortfall amount and the balance LTCG would be taxable @ 20% (Sec 112 of Income Tax Act 1961).

An individual can save the amount of tax payable, on Capital gain arising on transfer of residential property, substantially by investing the money u/s 54, 54EC and 54GB of Income Tax Act 1961. It may be noted that section 54GB has been introduced via Finance Bill 2012 and hence is available for Capital Gain arising during Financial year 2012-13 onwards.

The details of Section 54, 54EC and 54GB is as below:

(i) Capital Gains on sale of residential house [Section 54]

Eligible assessees .     Individual & HUF

Conditions to be fulfilled

Ø  There should be a transfer of residential house (buildings or lands appurtenant thereto)

Ø  It must be a long-term capital asset

Ø  Income from such house should be chargeable under the head Income from house property

Ø  A new residential house should be

o   purchased within 1 year before or 2 years after the date of transfer (or)

o   constructed within a period of 3 years after the date of transfer.

Quantum of Exemption

Ø  If cost of new residential house ≥ Capital gains (LTCG only) , entire capital gains is exempt.

Ø  If cost of new residential house < Capital gains(LTCG only), capital gains to the extent of cost of new residential house is exempt

Consequences of transfer of new asset before 3 years

If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.

Unutilised amount

Ø  The amount not utilised before the due date of filing return shall be kept in Capital gain account scheme of the nationalized bank.

Ø  The amount should be utilized within the prescribed time i.e within 3 years from the date of transfer.

Ø  The amount not utilized within the prescribed time shall be treated as LTCG of the PY in which the prescribed period expires.

(ii) Capital Gains not chargeable on investment in certain bonds [Section 54EC]

Eligible assessee . Any assessee

Conditions to be fulfilled

Ø  There should be transfer of a long-term capital asset.

Ø  Such asset can also be a depreciable asset held for more than 36 months.

Ø  The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.

Ø  Long-term specified asset means specified bonds, redeemable after 3 years, issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL).

Ø  The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 3 years from the date of acquisition of such bonds.

Ø  The investment made in specified bonds should not exceed Rs 50 Lacs.

Quantum of exemption

Ø  Capital gains or amount invested in specified bonds (subject to maximum limit of Rs 50 Lacs), whichever is lower.

Violation of condition

Ø  In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds before the expiry of 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

(iii) LTCG on sale of residential property Exempted for Investment in Equity Shares of Eligible company [Introduced via Finance Act 2012 and hence applicable from Financial Year 2012-13 on wards ] [Section 54GB]

Eligible assessees: Individuals / HUFs

Conditions to be fulfilled

Ø  There should be transfer of residential property.

Ø  It must be a long term Capital Asset.

Ø  The amount is invested by the assessee for subscription in the equity shares of eligible company before due date of furnishing return u/s 139.

Ø  The company utilizes the amount invested by the assessee for the purchase of new asset (i.e new Plant & Machinery except old used plant & machinery, vehicle, office appliances etc) within 1 year from the date of subscription of shares by the assessee.

Quantum of exemption

Ø  If cost of new asset ≥ Net sale consideration of original asset, entire capital gains is exempt.

Ø  If cost of new asset < Net sale consideration of original asset, only proportionate capital gains is exempt i.e.

LTCG   X   Cost of new Asset

Net Consideration

 Unutilised amount

Ø  The amount not utilised by the company before the due date of filing return by the assessee u/s 139, shall be kept in the specified account.

Ø  The amount should be utilized within the prescribed time i.e within 1 years from the date of subscription of shares by the assessee.

Ø  The amount not utilized within the prescribed time shall be treated as LTCG of the assessee of the Previous Year in which the prescribed period expires for the proportionate amount only.

Consequences if the Equity Shares of Eligible Company is transferred within a period of 5 years

Ø  Short-term capital gains or Long Term Capital Gain as the case may be would arise on transfer of the Equity Shares; and

Ø  The capital gains exempt earlier under section 54GB would be taxable as long-term capital gains in the year of transfer

Practical issue with regard to date of transfer and computation of capital gain:

In all the above section i.e 54, 54EC and 54GB, the period of 3 years, 6 months and due date of filing return u/s 139 respectively is being computed with regard to the date of transfer. Here the date of transfer will be the date on which the possession of the property is given to the buyer. This can be explained with the help of following example:

Example 1: Mr X enters into an agreement to sell the House property on 01.01.2010 with Mr Y for Rs 20 lacs. Mr X handover the possession of the House property to Mr Y on 15.02.2010. Mr Y make the payment on 30.04.2010. The House property is registered in the name of Mr Y on 30.06.2010. When the transfer has taken place.

Ans: 15.02.2010. The transfer is deemed to have taken place on the handover of the possession of the property.

Example 2: Mr X enters into an agreement to sale a House Property on 01.01.2010 with Mr Y for Rs 20 lacs. Mr X received Rs 5 Lacs on 15.02.2010 and on the same day handover the possession of House Property to Mr Y. Mr Y makes the balance payment of Rs 15 Lacs on 30.09.2010. The House Property is registered in the name of Mr Y on 30.12.2010. Determine the date of transfer and capital Gain taxability in the hands of Mr X for Previous year 2009-10 and 2010-11.

Ans: The Date of transfer would be 15.02.2010 since on that day the possession of the property was given to Mr Y .

Capital gain for Previous Year 2009-10:

Full value of consideration                 Rs 20 lacs

Less: Cost of acquisition (Say)           Rs   7 lacs

Capital Gain                                       Rs 13 Lacs

Capital Gain for Previous Year 2010-11:   Nil

Example 3: Mr X enters into an agreement to sale his house property to Mr Y (his tenant) on 01.01.2010 at an agreed price of Rs 20 Lacs. Mr Y paid Rs 5 Lacs on 15.04.2010 and balance Rs 15 lacs on 30.09.2010. The House property is registered in the name of Mr Y on 15.04.2011. What is the date of transfer and capital gain applicable to Mr X for previous year 2009-10, 2010-11 and 2011-12.

Ans: Date of transfer would be 01.01.2010 since the tenant is already is in possession of the property and agreement to sale is entered on 01.01.2010.

Capital gain for Previous Year 2009-10:

Full value of consideration                 Rs 20 lacs

Less: Cost of acquisition (Say)           Rs   7 lacs

Capital Gain                                       Rs 13 Lacs

 

Capital Gain for Previous Year 2010-11:   Nil

Capital Gain for Previous Year 2011-12:   Nil

Regards,

CA Srikant Agarwal

Shared Services (Finance) (ER)

Ph: (033) 2429 3022

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0 responses to “Budget 2012- Capital Gain Tax on Sale of Residential Property & Tax Planning”

  1. shanthi says:

    Hi Srikant,

    Had been following your advises on the tax related queries through Tax Guru. Wish with great hopes that you would take time to clarify me on the sale of a small flat.
    Below provided are the details:

    Date of agreement to sale with builder: jan 2011 on payment of 505000 in Dec 2010 through my own funds.

    Proposed date of sale to buyer: Dec 2014
    Purchase cost of flat to us 3670000 including all deposits

    We had taken a loan from the bank for 28 lakhs for this property in Jan2011. Had been paying EMIs from then onwards. I have still around Rs. 400000 to be paid to the builder before going for registration.

    Government valuation for the area at present Rs.4050 per sft and ours is 1100 SFT flat. We would want to sell the flat at the Rs.4800000.

    I need clarification with respect to the following points:

    1). While calculating Indexed cost, should I consider the payments made periodically by the Bank to the Builder or the EMIs that I had been paying to the Bank from Jan 2011.
    2). What would be the base date for calculation of Indexation? Occupancy by the builder for the whole venture or our sale date Pl Note: we have not so far registered the property in our name. The builder shall provide a NOC to our benefit to transfer our rights to the new Buyer and all 3 parties( builder, ourselves and buyer shall sign for the registration to the buyer).
    3). Would this sale come under long term capital gain or short term capital gain tax purview?

    Would appreciate if you could guide me on this as different tax ad visors are providing me different answers and Im confused as to what should be my base for payment of Advance Tax if any. ANd Im running out of time to complete the deal with the buyer.

  2. R Jhang says:

    I own three residential properties, sold 1 of them in May 2013, with the sale proceeds paid for a new flat in June 2013, expect to get possession by Jan 2015, am I eligible for exemption from long term capital gains?

  3. Satish Kadam says:

    Can I use the sale proceeds of one property (Expecting Long Term Capital Gain) to pay off the other loan amounts ( i.e. Mortgage Loan, Personal Load & Gold Loan).
    What would be Tax implications?

  4. srinivasulu says:

    1.I sold a land property of 1000 yds-sale value 50 Lakhs
    2.I tis inth ename of my US citizen sons-500 yds each
    3.I am apower of attorney for execution of the deed
    4.The sale proceeds are now in my name and my banks
    5.The amount is received in 2011 dec/2012 April/2013 April in three trenches
    Questions
    who has to submit IT return-ME or my two sons separately
    can US citizens submit IT Returns?
    Please advice

  5. Rahul says:

    Sir, i have gained Rs 10lac from sale of property, please advice when will capital bonds from bank, will be issued.

  6. Deepak says:

    I booked an apartment in 2006 at Rs 100(assume) and took bank loan. bank paidup flat cost in instalments until 2011. Got possession in Oct 2012 and paid additional rs 20 (against modification charges, electricity/water govt charges, registration cost etc). bank loan is still outstanding and paying EMI.

    Now selling another property in mar 2013 with LTCG of rs 100. Can possession date oct 2012 be taken as date of reinvestment to offset LTGC (using clause of reinvestment in flat 1 year before selling another house)?

  7. saravanan s says:

    Hello Sir,

    I sold a property for 60 lacs last week .The buyer deposited the amount in my account using demand draft .Now its in my savings account.i am purchasing a flat by next month .(april 2013)

    1) I need to transfer the amount immd to the cgas account?
    2) or how long(maximum) i can keep the money in my savings account?
    3) my purchase of property on april 2013 is for 40 lakhs. can i purchase another property for 20 lakhs to avoid the long term capital gain tax?

    4) or else i need to pay tax for the remaining 20 lakhs?

    thanks in advance sir..

  8. Manish Jadav says:

    hi,

    Very poor explanation
    Very very poor,improve presentation.

    Thanks

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