Introduction- The topic of taxation of capital gains on real estate transaction under the income tax act is live and ever interesting topic from point of view of all concerned with such taxation. This is one set of provisions in the Act which has raised maximum number of issues of interpretation. In the recent years several amendments have been brought about in the income tax act relating to computation and chargeability of capital gain. Frequent changes have only added to the complexity of an already complicated subject.

Real Estate Transaction – Capital gain on real estate transaction is a broad topic, the term real estate itself is a vast term but same is briefly categorized as under:

CGRT 1

 Explanation of Important terms:

1. Long-term and Short-term capital asset:

  • Capital asset is a asset defined under section 2(14) of the Act, which says it to be property of any kind held by an assessee, whether or not connected with his business or profession.
  • For the purpose of computing capital gains , the capital asset is bifurcated into two categories on the basis of the duration for which they have been held by the assessee, namely:

          i)  Short-term Capital Asset

          ii)  Long-term Capital Asset

  • Generally, Short-term Capital Asset means capital asset held by the assessee for less than 36 months immediately before the date of transfer, Thus Long-term Capital Asset means a capital asset held for more than 36 months. Profits arising on a transfer of short-term capital asset are liable to tax as any other income On the other hand; gains arising on transfer of long-term capital asset are entitled to a concessional treatment. Thus classification of an asset as a long-term or short-term asset is therefore of considerable importance.
  • However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months

Note:

1) With effect from Assessment Year 2017-18, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company,

2) With effect from A.Y. 2018-19, period of holding to be considered as 24 months in instead of 36 months in case of immovable property being land or building or both.

3) Period oh holding for debt oriented mutual fund(listed/unlisted) to qualify as lon term assets shall be more than 36 months

2. Cost of Acquisition (COA):

  • Cost of Acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition.
  • Section 55 of Act states that where the capital asset becomes the property of the assessee before 01-04-2001, the assessee has the option to either take the actual cost of acquisition or fair market value as on 01-04-2001, whichever is more beneficial to the assessee as the cost of the asset for computation of capital gains. Where the capital asset becomes the property of the assessee by way of inheritance or gift and the previous owner of the property has acquired the same before 01-04-2001, then the Cost of Acquisition for computation of capital gains will be either the cost to the previous owner or the fair market value of the asset as on 01-04-2001, at the option of the assessee.
  • For the following flowchart please consider the following
    • Cost of inflation index (CII) of the year in which property is transferred (F.Y. 2018-19) — 280.
    • In case where the property is inherited or gifted then Cost of inflation index (CII) of the year in which property was first held by the previous owner (F.Y. 2007-08)—– 129.
    • In case where the property is not inherited or gifted but the same is purchased by the assessee (F.Y. 2006-07) CII—– 122

cost of Acquistion

*In case of transfer of a long-term capital asset, the cost of acquisition is required to be enhanced by a factor of Cost of Inflation Index. A Large portion of gains on sale of capital asset is on account of inflation and does not represent a real profit. The benefit of indexation is given in order to mitigate this hardship.

3. Cost of Improvement:

  • Cost of improvement is a capital expenditure incurred by the assessee in making any additions/improvement or adding/increasing the value of the asset.
  • For calculation of indexed Cost of improvement, CII is to be taken of the year in which improvement has taken place by the assessee or the previous owner. But in case the assessee exercises the option of substituting the FMV as on 01-04-2001 as the COA, then the expenses incurred for improvement will be added to the COA only to extent such expenses are incurred after 01-04-2001.

4. Full value of Consideration

  • The starting point of computing the capital gains is ascertaining the full value of consideration received or accrued. Where the transfer is strictly for money there may not be any problem in determining the full value of consideration. However, difficulties may arise in cases where consideration is received partly in cash and partly in kind. In case consideration is partly or fully in kind, the market value of the asset received as consideration together with cash amount received will be full value of consideration.
  • According to section 50C of the Act, where Sale consideration is received on transfer of land or building whether short-term or long-term is less than the Value adopted by any authority of a state government for the purpose of payment of stamp duty than the Value adopted by Stamp Duty authority is to be taken as Full value of consideration.
  • When transfer of a capital asset is by way of Compulsory Acquisition under any law then Initial Compensation received from the Legal body is taken as the full value of consideration. Here one important thing to take note of is that normally capital gain is taxed in the year in which asset is transferred but the case here is different because capital gain will be chargeable to tax in the year in which compensation is received which can be different from the year in which property is compulsorily taken over by legal body.

Exemptions

The Income tax Act grants total or partial exemptions of Capital Gains, but amount of exemption cannot exceed the quantum of capital gain. For the purpose of real estate transaction the sections which can help us to get a exemption in respect of Capital gains are 54, 54EC and 54F.  The following table represents the conditions to be fulfilled in order to get the exemption.

Particulars Sec. 54 Sec. 54EC  Sec. 54F
Exemption claimed Individual/ HUF Any person Individual/ HUF
POH of Capital asset Long-Term Long-Term Long-Term
Eligible specific asset A residential house property Any LTC asset. However wef A.y 2019-20 it should be land or building or both. Any LTC asset (other than a residential house property) provided on the date of transfer the tax payer do not own more than one residential house property from the A.Y. 2001-02 (except the new house as stated in 4 infra).

The Assesee Should either Purchase or Construct only one House within the specified time period. Also, the Assessee should not have more than one house in his name at the time of transfer of original asset income from which is charged under the head Income from house property

Type of asset should be acquire to get the benefit of exemption One Residential house property in India Long Term Specified Asset, that is, Bonds of national highway authority of India or Rural Electrification Corporation.

Wef Assessment Year 2018-19 investment in any bonds redeemable after three years shall be eligible for exemption.

Wef A.y 2019-20 investment in any bonds redeemable after five  years shall be eligible for exemption

One residential Property in India
Time limit for acquiring the asset Purchase: 1 yr backward or 2 yrs forward. Construction: 3yrs forward Six Months from the date of transfer. Purchase: 1 yr backward or 2 yrs forward. Construction: 3yrs forward
Relevant date for acquiring the new asset From the date of transfer of house property but in case of compulsory acquisition from the date of compensation. From the date of transfer of long term capital asset but in the case of compulsory acquisition from the date of receipt of compensation. From the date of transfer of capital asset but in case of compulsory acquisition from the date of receipt of
Amount exempted Investment in the new asset or capital gain, whichever is lower. Investment in the new asset or capital gain, whichever is lower. Amount of Exemption shall be equal to Capital Gains ÷ Net Consideration × Amount of Investment
Exemption revoke in a subsequent year If the new asset is transferred within 3 yrs of its acquisition. The Asset so purchased  should not be transferred before 3 years (5 years if the investment in specified asset is made on or after 01.04.2018 ). a) If the new asset is transferred within 3 yrs of its acquisition.

b) if the  assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset,

Different questions Sec. 54 Sec. 54EC Sec. 54F
When the exemption is revoked it is taxable as LTCG/STCG in the year in which the default is committed. STCG LTCG LTCG
Scheme of deposit is applicable Yes No Yes

Taxability

Almost everything use for personal or investment purposes is a capital asset. When a capital asset is sold, the difference between the cost of the asset and the amount it is sold for is a capital gain or a capital loss. However, not all capital gains are treated equally. The tax rate can vary dramatically between short-term and long-term gain.

CGRT 3

  • In case of Long-term capital gain Deduction of u/s 80C to 80U is not available.
  • Further the benefit of the exemption limit i.e. maximum amount not chargeable to tax is available to long-term capital gain, only if the said limit is not being exhausted by other income other than long term capital gain i.e. other income including short-term capital gain.
  • As per the newly inserted section 112A via Finance Act 2018, if the amount of long- term Capital gain exceeds Rs 1,00,000 than the amount in excess of Rs 1,00,000 shall be chargeable to tax @ 10% without indexation  (plus  heath and education cess and surcharge). However the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1stApril ,2018. such capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust om which STT has been paid.

 Set-Off and Carry Forward of Losses

  • Loss from transfer of a Short-term Capital Asset can be set off against gain from transfer of any other capital asset (Long Term or Short Term) in the same year. Loss from transfer of a Long- term Capital Asset can be set off against gain from transfer of any other long term Capital Asset only in the same year.
  • If there is a net loss under the head “Capital Gains” for an assessment year, the same cannot be set off against any other head of income viz., Salaries, House Property, Business or Profession or other sources. It has to be separated into Short term Capital Loss (STCL) and long term capital loss (LTCL) and carried forward to next assessment year. In the next year, the STCL can be set off against any gains from transfer of any capital asset (Long term or Short term) and the LTCL can be set off against gains from transfer of long term capital asset only. Any unabsorbed loss after such set off can be further carried forward to next assessment year.
  • Capital loss computed in an assessment year can be carried forward for eight assessment years and set off as above.

 Insertion of Section 194-IA by Finance Act, 2013

 194-IA “TDS on Immovable property” was inserted by Finance Act, 2013

  • It provides that any person, being a transferee, responsible for paying to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land) shall deduct an amount equal to one per cent. of such sum as income-tax at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of cheque or draft or by any other mode, whichever is earlier.
  • It is further provides that no deduction shall be made where consideration for the transfer of an immovable property is less than 50,00,000/-.
  • Here” immovable property” means any land (other than agricultural land) or any building or part of a building
  • The Tax so deducted is to be has to be deposited within 7 days from the end of the month in which the tax was deducted. Tax is to be accompanied by a challan-cum-statement in Form 26QB, electronically, within the specified time.
  • Every person responsible for deduction of tax u/s 194IA shall furnish a certificate of TDS in Form 16Bto the payee within 15-days from the due date for furnishing the challan-cum-statement in form 26QB (i.e. within 22days of the end of the month in which the tax was deducted)
  • No TDS return is required to be filled.
  • This amendment will take effect from 1st June, 2013.

Conclusion :- Capital Gain is one of the heads of income where maximum tax planning can be done especially for such real estate transactions, in order to minimize the gain to the maximum possible extent. But it is also one of areas of income tax where interpretations relating to sections differ a lot and thus support of judicial pronouncements and decisions should be taken.

(Article is written by ‘Shina Kampani’ ,  CA Final Student from Vadodara)

(Republished With Amendments)

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0 Comments

  1. Sohil Patel says:

    For the property which is purchase before 01-04-1981, actual cost or fmv whichever is more beneficial is taken.
    but what is the procedure to know fmv as on 01-04-1981…can any one reply to this question.

  2. narinder says:

    i purchased house in 52.00 lacs for which i sold property in 20.90 lacs and sbi loan of rs.30.00 lacs in nov.2012.i paid interest of loanabout rs. 5.50 lacs in 28 months i again sold it in 65.00 lacs in feb2015. what will be tax liabilities. i am going to invest the amount in 2 parts one commercial and i for residence.
    can i invest it on my son name

  3. Kalyan says:

    Hi,
    We bought a house for 40lakhs by taking housing loan for 35 lakhs,
    however the property was registered only for 15lakhs(this is the amount in the sale deed).
    Now we are planning to sell the house for 43 lakhs , the buyer is going to transfer the
    housing loan (for 33 lakhs) on his name and pay us the rest. In this case what will the capital gain? Will that be 28 lakhs(43 – 15)?
    How does housing loan fit into all this? Any comment would be really helpful.
    Thanks,
    Kalyan.

  4. mohan says:

    we have given land jd percent 60:40 for construction. but owner share flat’s sale s, how to capital gain calculation tell me sir.
    that land purchased of -2005, at the time land cost is 11,00,000/- now for flat is 15,00,000/- now owner share flats sales cost is -6,00,00,000/- how to calculation tell me sir.

  5. Shina Kampani says:

    Bhupal,

    As in section 54EC of the Act it is mentioned that “any long-term capital asset” is eligible for deduction and thus, here the word “any” includes commercial property also. But if the assessee’s business itself is of selling properties then it is his PGBP income and hence cannot avail the exemption.Please tell me the case name wid details which u mentioned in your query.Hope it clarified your doubt.

    Regards.

    Shina Kampani.

  6. JAYADEV KOMMINENI says:

    Dear Sir,
    Co-owners of immovable property eligible for separate small service providers exemption

    An immovable property may be owned by co-owners (usually though not necessarily through inheritance), who may give such property on rent. Issue is can each co-owner claim separate exemption available to small service provider having annual value of services less than ` 10 lakhs per annum. For example, if there are three co-owners of an inherited property, total rent is ` 24 lakhs per annum and if each co-owner is getting ` 8 lakhs per annum, can each co-owner claim the exemption?

    It is learnt that show cause notices and demands have been issued to various co-owners demanding service tax in such cases, alleging that each co-owner is not eligible for separate exemption.

    Recently in Dinesh K Pahwa v. CST (2012) 25 taxmann.com 515 (CESTAT), a prima facie view has been held that each co-owner is eligible for separate exemption, and stay for recovery has been granted. However, the order is brief. We have to wait for final outcome.

  7. Jitender Singal says:

    Dear Sir

    The exemption limit is based on the rent agreement and ownership in property. Further it has to be looked that whether the property is registered in municipal records under co-owners name. Also, if share is define in property and seperate rent agreement made than each co-owner will be allowed for Rs. 10 Lakhs exemption.

    Kind Regards

    Jitender Singal, CA

  8. Bhupal Singh says:

    Dear Ms Shina and other learned CAs,

    An systematic and intelligent critique by CA Student Shina Kampani. It is worth reading, especially by all students of CA and non-CA members.

    From the “EXEMPTIONS” para above, it appears that Capital Gains arising from transfer of both Residential & Commercial properties ( long term Capital Assets ) can be invested in NHAI or REC Bonds ( with lock-in period of 3 yrs ) u/s 54EC to avail the I.Tax benefit. Is my understanding of the critique above correct ?????? IN one case, AO orally stated that Capital Gain arising out of transfer of commercial property is NOT eligible for I.Tax benefit, even if the amount is invested in these Bonds and the transferor has to pay I.Tax @ 20 %.
    Can some one clarify the issue raised by me ?????

    Bhupal Singh

  9. Fariduddin Ismail Bijapure says:

    Dear Sir, We have two immovable properties (commercial premises). We are three co-owners(myself, my wife and my son) in each property.The rents received from both properties is shared by co-owners. My question is for the purpose service tax payment each co-owner will be assessed individually and will avail exemption if the total rent received by each opwner will not exceed Rs. 10 lakhs OR total rents received by all the co-owners from both properties will be clubbed together for assessment of service tax.
    Looking forward to your clarification/explanation at the earliest.
    With best regards.
    Bijapure

  10. Fariduddin Ismail Bijapure says:

    Sir, We have two immovable properties. We are three co-owners(myself, my wife, my son)in each property. Rent received is shared by each co-owner. My question is that for the assessment of Service Tax, whether each co-owner will be assessed individually and will get exemption of Rs. 10 lakhs or the rents received by all the co-owners from the two properties will be clubbed together.
    Looking forward to your clarification/explanation.
    With best regards.
    Bijapure

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