TAX Implications of Investing in Property

The latest buzz these days is investing in the Property Market/ Real Estate. Bhai Paisa hai to Property me laga, is very common to hear even from someone who knows nothing about the churn of events in the market nor about investments. But still every Tom, Dick & Harry will come and advise you about investment in real estate.

One of the most important factor which a person should consider before investing in a property is the Effect of Tax on your Capital Gains. Let us consider the Taxation point of view if it is a Short Term Capital Gain or a Long Term Capital Gain in this article.

What Do You Mean By Short Term Capital Gain

Any property which is held for a period of not more than 36 months and then sold for a profit, the profit so derived is called Short Term Capital Gain.

However wef A.y 2018-19, there has been changes in period of holding to qualify as short-term/or long term capital asset. Like for property being land or building or both, the period oh holding should not exceeds 24 months to qualify as short term capital asset.

Illustration 1:

Mr. Pyaare purchased a residential house in January, 2016 for Rs.54,00,000. He sold the house in October, 2017 for Rs.89,00,000. In this case residential house is a capital asset of Mr. Pyaare and, hence, the gain of Rs.35,00,000 arising on account of sale of residential house will be charged to tax under the head “Capital Gains” as Short Term Capital Gain.

Illustration 2:

Mr. Mohan is a property dealer. He purchased a flat for resale. The flat was purchased in January, 2014 for Rs.54,00,000 and sold in October, 2015 for Rs.89,00,000. In this case Mr. Mohan is dealing in properties in his normal business. Hence, flat purchased by him would form part of stock-in-trade of the business. In other words, for Mr. Mohan’s flat is not a capital asset and, hence, gain of Rs.35,00,000 arising on account of sale of flat will be charged to tax as business income and not as capital gain.

The classification of Long Term & Short Term Capital gain and their respective tax rates are different for shares & mutual funds on which STT is paid. This article is focused on computation of capital gains on investing in property only.

Any income from Short Term Capital Gain from Sale of Asset is taxed as per Normal Income Tax Slab Rates. (No Indexation Benefit is provided to the seller.)

Computation of Short Term Capital Gain:

Particulars	Rs.
Full Value of Consideration ( Sale Value of Asset)	Xxx
Less: Expenditure incurred wholly and exclusively in connection with transfer of asset (E.g. brokerage, commission, stamp duty expenses advertisement expenses, etc)	Xx
Net Sale Consideration	Xx
Less: Cost of Acquisition	Xx
Less: Cost of Improvement	Xx
Short Term Capital Gain	Xxx
Less: Exemption u/s 54B,54D,54G,54GA	Xx
Taxable Short Term capital Gain	Xxxx

Cost of Acquisition:

Cost of acquisition refers to the price which the assesse has paid, or the amount which the assesse has incurred, for acquiring the Property/ Asset. The expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the capital asset became the part of the assesse in any of the manner mentioned below, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property has acquired it :

• Gift/ Will Deed
• Distribution of Assets / Partition of HUF
• By Succession/ Inheritance
• On Distribution of Assets on Liquidation of a Company.

In situations where the cost of the Asset of the previous owner cannot be ascertained, the cost of acquisition of the previous owner shall be the fair market value of the asset on the date on which the asset became the property of the previous owner.

Cost of Improvement:

All Capital expenditure incurred in making any additions or alterations to the Capital Asset by the assesse after it became his property shall be deductible as the Cost of Improvement.

Illustration 3:

Mr. Scooby Doo purchased a piece of land in May, 2016 for Rs. 150,000 and sold the same in July, 2017 for Rs. 10,75,000 (brokerage Rs. 25,000). What will be the taxable capital gain in the hands of Mr.Scooby Doo?

Computation of Short Term Capital Gain:

Particulars	Rs.
Full Value of Consideration ( Sale Value of Asset)	10,75,000/-
Less: Expenditure incurred wholly and exclusively in connection with transfer of asset (E.g. brokerage, commission, stamp duty expenses advertisement expenses, etc)	25,000/-
Net Sale Consideration	10,50,000/-
Less: Cost of Acquisition	150,000/-
Less: Cost of Improvement	–
Short Term Capital Gain	900,000/-

What Do You Mean By Long Term Capital Gain

Any property which is held for a period of more than 36 months (wef A.y 2018-19 it is 24 months) and then sold for a profit, the profit so derived is called Long Term Capital Gain.

Illustration 4:

Mr. Pyaare purchased a residential house in January, 2015 for Rs.54,00,000. He sold the house in October, 2017 for Rs.89,00,000. In this case residential house is a capital asset of Mr. Pyaare and, hence, the gain of Rs.35,00,000 (excluding indexation benefits) arising on account of sale of residential house will be charged to tax under the head “Capital Gains”.

Illustration 5:

Mr. Mohan is a property dealer. He purchased a flat for resale. The flat was purchased in January, 2015 for Rs.54,00,000 and sold in October, 2017 for Rs.89,00,000. In this case Mr. Mohan is dealing in properties in his normal business. Hence, flat purchased by him would form part of stock-in-trade of the business. In other words, for Mr. Mohan’s flat is not a capital asset and, hence, gain of Rs.35,00,000 arising on account of sale of flat will be charged to tax as business income and not as capital gain.

Any income from Long Term Capital Gain from Sale of Asset is taxed at a flat rate of 20% after providing for Indexation Benefits.

Computation of Long Term Capital Gain:

Particulars	Rs.
Full Value of Consideration ( Sale Value of Asset)	Xxx
Less: Expenditure incurred wholly and exclusively in connection with transfer of asset (E.g. brokerage, commission, stamp duty expenses advertisement expenses, etc)	Xx
Net Sale Consideration	Xx
Less: Indexed Cost of Acquisition	Xx
Less: Indexed Cost of Improvement	Xx
Long Term Capital Gain	Xxx
Less: Exemption u/s 54,54B, 54D. 54EC, 54ED, 54EE, 554F, 54G,54GA and 54GB	Xx
Taxable Long Term capital Gain	Xxxx

How to calculate Indexed Cost of Acquisition: Cost of acquisition of the asset whether movable or immovable is to be multiplied by the cost inflation index of that year in which the asset is transferred, and the resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired. If however, the asset was purchased before 1st April 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on 1st April 1981 (Wef A.y 2018-19 it will be 1^st April 2001)

Indexed cost of acquisition is computed with the help of following formula:

Cost of acquisition × Cost inflation index of the year of transfer of capital asset ÷ Cost inflation index of the year of acquisition

How to calculate Indexed Cost of Improvement: Any cost incurred on the improvement of an asset is to be similarly adjusted with the help of the cost inflation index, i.e. by multiplying the cost of improvement by the cost inflation index of the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the improvement to the asset was done.

Indexed cost of Improvement is computed with the help of following formula:

Cost of improvement × Cost inflation index of the year of transfer of capital asset ÷ Cost inflation index of the year of improvement

Illustration 6:

Mr. Scooby Doo purchased a piece of land in May, 2015 for Rs. 150,000 and sold the same in July, 2017 for Rs. 10,75,000 (brokerage Rs. 25,000). What will be the taxable capital gain in the hands of Mr.Scooby Doo?

Particulars	Rs.
Full Value of Consideration ( Sale Value of Asset)	10,75,000/-
Less: Expenditure incurred wholly and exclusively in connection with transfer of asset (E.g. brokerage, commission, stamp duty expenses advertisement expenses, etc)	25,000/-
Net Sale Consideration	10,50,000/-
Less: Indexed Cost of Acquisition	160,630/-
Less: Indexed Cost of Improvement	–
Long Term Capital Gain	889,370/-

 Computation of Long Term Capital Gain:

The Cost Inflation Index notified for the year 2015-16 is 254 and for the year 2017-18 is 272. Hence the Indexed Cost of Acquisition, i.e the inflated cost of acquisition will be computed as follows:

Cost of acquisition × Cost inflation index of the year of transfer of capital asset ÷ Cost inflation index of the year of acquisition

= Rs.150,000 * 272 ÷ 254     = Rs. 160,630/-

Conclusion:.

As it has been verified that the amount of Capital gain in both the cases of Short Term as well as Long Term is different considering the effect of Indexation, So is the amount of Tax Payable is also different because of the difference in Tax Rates in both the cases.

It should also be noted, that the amount of Tax Payable in Long Term Capital Gain shall further be saved by investing these gains in specified securities for a certain period of time – which shall be considered in our next article.

The Author is a Chartered Accountant and can be reached at rrco1905@yahoo.com or 9920930544

 (Republished With Amendments)