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