Sale of Immovable Property

The income arising on sale of immovable property is taxable under the head ‘Income from Capital Gains’.

* Plus Surcharge if applicable, and "Education Cess" (2%) tax and "Secondary and Higher Education Cess (SHEC)” (2%) of the tax amount.

Computation of Capital Gains:

 

Capital Gains is to be calculated in the following manner:

#Indexation benefit will be allowed if the asset held is Long Term in nature.

Reinvestment Options for Long Term Capital Gains:

Assessees are entitled to claim exemption from the capital gain tax if they reinvest long-term capital gains / net sale consideration earned on sale of long-term capital assets being residential house into the following assets:

A. Section 54 – Investment in Residential House

Note:
 

Purchase of Residential house - Within 1 year before or 2 years after

Construction of Residential house - Within 3 years after

B. Section 54EC – Investment in Specified Bonds

This is a tax-saving option that is utilized by most of our clients. Investment upto INR 50 lakhs can be made in Tax Saving Bonds issued by:

  • National Highways Authority of India (NHAI).

  • Rural Electrification Corporation Ltd. (RECL).

  • Bonds as may be notified by the Central Government

 

Investment is to be made within 6 months from the date of transfer of asset.

 

Bonds are to be held for a period of 5 years. (Earlier, such lock-in period was only 3 years. Considering the longer lock-in period, it is essential to determine your individual needs before investing in such bonds)

Points to Remember:

  • Options available for reinvestment of Capital Gains are applicable only for Long Term Capital Gains. No reinvestment options are available for Short Term Capital Gains.

  • The Period of Holding of an Immovable Property may be computed from the Date of Allotment, Date of Possession or Date of Registration of Agreement. There are judicial precedents in support of all 3 alternatives. However, it is important to evaluate the facts and circumstances of each case before determining the correct Period of Holding as per the provisions of the law.

 

Frequently asked questions

What is Indexed Cost of Acquisition/ Improvement for computation of Capital Gains?


Indexed Cost of Acquisition/ Improvement is a concept which grants deduction of a larger amount than actual cost of acquisition / improvement considering the prevalent inflation index for the FY. Indexation benefit is not available on depreciable asset, bonds (other than capital indexed bonds issued by Indian Government) and debentures. For indexation purpose, the Cost Inflation Index (‘CII’) is notified by the Government for every FY.




An NRI is selling his residential house in Mumbai to a resident Indian. What are the obligations of the Resident Indian on account of purchasing property from an NRI?


As per the provisions of the Act, the Resident Indian will be required to deduct tax at maximum marginal rate of 31.2% on short term capital gains or 20.8% on long term capital gains arising in the hands of NRI on sale of the house. In some cases, the Resident Buyer may deduct tax at the maximum marginal rate of 31.2% on the entire sale proceeds.




What are the options available with NRI to avoid such excess deduction of tax at the time of sale of his immovable property?


NRI is actually liable to pay tax at the rate of 31.2% or 20.6% depending upon the period of holding only on the amount of capital gain arising on sale of the immovable property. However, as the buyer may deduct tax at the prescribed rate on the entire sale proceeds (in the absence of exact details of capital gains), the NRI can avail any of the following options to optimise tax deduction: i. Obtaining Tax Exemption Certificate (TEC) from Income Tax Department ii. Filing ROI and claim refund of excess TDS withheld by the buyer Further, the NRI may also be a resident in another country and may also be liable to pay tax in the other country leading to double taxation of the same income. In order to avoid such hardship, NRI may avail benefits under the DTAA, if any, between the two countries. NRI may also claim credit of taxes paid in India in his country of residence.




Mr. R has sold a residential house on September 1, 2016 after holding it for a period of ten years, and intends to claim exemption of tax on capital gains arising on sale of the said house. What are the options available with him to claim exemption? Are there any timelines associated to claim such exemptions?


Mr. R has the following options to claim complete exemption of capital gains arising on sale of his residential house, provided the house that was sold was a Long Term Capital Asset: Reinvest in another residential house:

  • Mr. R can avail the exemption if the new residential house was purchased one year before the date of transfer.
  • Mr. R needs to purchase one/ two RESIDENTIAL house in India within a period of two years from the date of sale of the old residential house (i.e. before August 31, 2018), or,
  • Mr. R can construct one/ two RESIDENTIAL house in India within a period of three years from the date of sale of old residential house (i.e. on or before August 31, 2019).
  • If Mr. R has not purchased/constructed the new RESIDENTIAL house(s) before July 31, 2017 (i.e. due-date for filing tax return for the year in which the old residential house is sold), then he will have to open an account under the ‘Capital Gains Account Scheme’ with a Nationalized Bank and deposit the amount of capital gains. He needs to then utilize the amount out of this account for purchasing/constructing the new residential house within the time lines prescribed above.
Invest in Specified bonds:
  • Mr. R can reinvest the amount of capital gains arising on sale of old residential house in specified bonds within 6 months from the date of sale of old residential house
  • Such amount of investment in specified bonds should not exceed Rs. 50 lakhs in the current as well as subsequent financial year. Lock-in period of such specified bonds is ‘r’ years.
  • Further, the government has notified that an additional amount of Rs. 50 lakhs may be invested in a ‘long-term specified asset’, to avail an exemption for the same. However, no such ‘long-term specified asset’ has been notified till date.
Investment in equity shares of a new eligible Indian company:
  • Mr. R will be eligible to claim exemption in proportion of amount reinvested in equity shares of a new eligible Indian company or eligible start-up (as defined in Section 54GB of the Act) to the sales proceeds received on sale of residential property.
  • There will also be further conditions to be complied with in order to claim this reinvestment exemption.




Will the reinvestment options change if Mr. R sells capital asset other than a residential house?


Yes, it will change as far as Point 1 and 2 of the FAQ is concerned. Though the timelines to reinvest in the new residential house will be the same, NRI will get exemption of capital gains in the same proportion as the proportion of amount reinvested in the new residential house bears to the sales proceeds received on sale of the old capital asset Amount of Exemption = Capital Gains on Old Asset X Amount reinvested / Sale Consideration One more difference is that he should not hold more than one residential property (other than the new residential house) on the date of transfer of the original asset.




Is filing of return of income compulsory for claiming the various exemptions from capital gains on sale of immovable property?


Yes, the assessee has to file the return of income by prescribed due date for claiming the exemptions.




What if the whole or any part of amount invested in Capital Gain Account scheme is not utilized for purchase of new property within 2 year or construction of the new property within 3 years, as the case may be?


Amount which is not invested in the new property would be subject to the Long Term Capital Gain tax in the year in which the period of 3 years is completed.




NRI is the owner of a residential house, which was purchased by him in November, 2002. He died in the December, 2012, leaving behind this house to his son. His son intends to sell this property in December, 2016. When, how and in whose hands will the capital gains be taxed?


At the time of inheritance: There shall be no capital gains tax in the hands of NRI or his son at the time of inheritance, i.e. on the death of NRI. At the time of Sale by son: At the time of sale of the inherited house, the son shall be subject to capital gains tax on such sale. The details for the purpose of Capital Gains calculation shall be as follows:

  • Cost: The son shall be allowed to adopt the cost paid by his father for acquiring the asset as his cost of acquisition
  • Period of Holding: The period of holding the asset shall be computed from the year 2002
  • Practical Issue: Computation of indexed cost of acquisition is litigative in India. There is a debate regarding whether the son will be allowed to index the cost from the year in which the father bought the property or the year of death of the father.




Mr. P has received a residential house as a gift from his friend on the occasion of his marriage. Will his friend be liable for any tax on such gift?


Gifts received on the occasion of marriage are generally exempt from tax as per the provisions of the Act. In view of the same, there shall be no tax liability on the residential house received as a gift by Mr. P on the occasion of his marriage.




In the above question, what would be the tax liability if the residential house was received by NRI other than on the occasion of his marriage?


In case NRI receives the residential house as a gift from his friend other than on the occasion of his marriage, the gift received shall be taxable under the head ‘Income from Other Sources’ as per the provisions of the Act.




An NRI received advance money/ earnest money for the sale of an immovable property. Subsequently, the sale of property transaction was cancelled. However, the NRI retained the advance money/ earned money as per the agreement. What will be the tax liability on such advance money/ earnest money retained?


Advance money/ earnest money retained by NRI shall be taxable under the head Income from Other Sources. NRI shall be required to pay appropriate taxes on the said income.




Is there any capital gain tax implication in case where property is compulsorily acquired by the Government authorities?


Compulsory acquisition of the property is regarded as ‘transfer’ within the meaning of Section 2(47) of the Act. Any gains arising will be subject to tax in the FY in which the property was compulsorily acquired.





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