Tax (Capital Gain) Tax on property transactions

One of the most important factors 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 24 months and then sold for a profit, the profit so derived is called Short Term Capital Gain.

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.)

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.

What Do You Mean By Long Term Capital Gain

Any property which is held for a period of more than 24 months and then sold for a profit, the profit so derived is called Long Term 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.

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 1st April 2001). For FY 2019-20 it is 289.

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

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

At the time of sale of any Long term Capital Asset, the gain is taxed at a steep rate of flat 20%. In order to save up on those taxes, the act has given us an option of claiming exemptions from paying such Capital Gains if the tax payer reinvests the amount in certain specified forms of Investment and thereby save up on Long Term Capital Gain Tax.

Section 54: Proceeds from Sale of Old Residential House Property used to purchase or construct Residential house in India.

Any Long term Capital Gain arising either to an Individual or a HUF from the sale of a Residential Property shall be exempt to tax to the extent such Gain is invested in:

ü The Purchase of another one residential property in India within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or

ü Construction of a Residential one House Property in India within a period of 3 years from the date of transfer.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

Amount of Exemption:

Exemption under section 54 will be lower of following:

ü Amount of capital gains arising on transfer of residential house; or

ü Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)

Consequences if the New House is transferred:

Provided the new residential House Property purchased / constructed should not be transferred within a period of 3 years from the date of transfer. If the new property is transferred within a period of 3 years from the date of transfer then the benefit granted under section 54 will be withdrawn. The ultimate impact of the restriction is as follows:

· The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.

· If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new

Capital Gain Account Scheme:

To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the due date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing due date of filing the return of income the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme).

The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2/3 years, as the case may be.

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 3 years is completed.

Note:

(i) Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

(ii) If the transfer takes place on or after 01.04.2017, the period of holding to be qualified as Long Term Capital Asset shall be more than 24 months.

Section 54EC: Proceeds from Sale of Any Long Term Capital Asset (WEF A.Y 2019-20, the said long term capital asset shall be land or building or both) used to Purchase a Specified Bonds.

Capital Gains arising from sale of any Long Term Capital Asset (WEF A.Y 2019-20, the said long term capital asset shall be land or building or both) are exempt under section 54EC if the assesse has within a period of 6 months from the date of transfer invested the gains in Long Term specified bonds as issued by NHAI and REC and notified by the Central Govt (bond issued by power finance corp/Indian Railway Finance Corp). For a minimum period of 3 years (5 years if such bonds are issued on or after 01.04.2018)

In cases where the assesse converts the specified asset into cash, or takes a loan or advance on the security of such specified asset within a period of 3 years (5 years if the investment is made in specified asset on or after 01.04.2018) from the date of its acquisition, the amount of Capital Gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.

Amount of Exemption:

Capital gain shall be exempt to the extent of amount of investment in such specified bonds up to a maximum of Rs.50 Lakhs

Section 54F: Proceeds from Sale of Any Capital Asset used to Purchase a one Residential Property in India.

Any Capital Gain arising either to an Individual or a HUF from the sale of any Long Term Capital Asset shall be exempt to tax if the entire sales proceeds and not only such Gain is invested in :

· The Purchase of one residential property in India within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or

· Construction of a one Residential House in India Property within a period of 3 years from the date of transfer.

Provided further that nothing contained in this sub-section shall apply where—

(a) The assessee,—

(i) Owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) Purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) Constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

If the entire sale proceeds are not invested and only a part of the sale consideration is invested, then even the benefit shall also be proportionately allowed i.e.

Amount claimed as Exempt = Capital Gain * Amount Invested ÷

Net Sale Consideration.

Consequences if the New House is Transferred/Purchases or constructs another house:

(i) Where 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, other than the new asset,

(ii) Where the new asset is transferred within a period of three years from the date of its purchase/its construction

In the above two cases, the amount of capital gain arising from the transfer of the original asset which was not charged to tax shall be deemed to be income chargeable as long-term capital gain of the previous year in which such residential house is purchased or constructed/transferred.

Capital Gain Account Scheme:

To claim exemption under section 54F, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing on or before the due date of furnishing return the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme).

The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or3 years, as the case may be.

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54F is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 3 years is completed

TDS 194IA

As per Finance Act of 2013, TDS is required to be deducted on transfer of Immovable property, wherein the consideration of the property exceeds or is equal to Rs 50 lakhs. TDS is required to be deducted under section 194IA. For all such transactions w.e.f 1st June 2013, tax @ 1% is required to be deducted by the buyer of the property at the time of making the payment of sale Consideration.

For NRIs (Seller of Property), buyer would have to deduct TDS @ 20% of consideration plus applicable surcharge & Cess. NRIs can approach Income Tax Department for lower TDS.

Important Points need to consider:-

Ø No requirement for procuring the Tax Deduction Number (TAN) Number for tax deduction and payment of TDS under this section.

Ø Limit of Rs. 50 lakhs is applicable on total sales consideration of property and will not apply to different sellers individually. For example- If there are two sellers and the payment of Rs. 30 lakhs is required to be made to each seller then TDS is required to be deducted since the payment is more than Rs. 50 lakhs in totality.

Ø Tax is required to be deducted at the time of payment either it is payment of entire amount or in the installment. If the payments are being made in installments then at the time of every installment.

Ø Tax is required to be deducted under Section 194-IA only if the seller is resident even if the property is situated outside India.

Ø If some amounts have been paid to the seller before 1st June 2013 then TDS is required to be deducted on the balance amount. Either the balance amount is less than Rs. 50 lakhs or more than 50 lakhs. This rule is applicable if the consideration of the property exceeds or is equal to Rs. 50 lakhs. No TDS is required to be deducted on the installments paid before 1st June 2013.

Ø TDS Deducted under this section is required to be paid to the government within a period of 7 days from the end of the month in which the deduction is made.

Ø TDS is required to be deposited through a Challan- cum-statement in Form No. 26QB.

Ø Person shall furnish the Certificate of deduction of tax at source in Form No. 16B to the seller within 15 days from the due date of filing the form 26QB.

Ø No TDS is required to be deducted if transfer is of Rural Agricultural land (which is not a capital asset).

Interest on Default of TDS Payment:-

Interest is payable under Section 201 of the Income Tax Act, 1961. Such Interest shall be payable before furnishing the Form 26QB.

Long Term Capital Gains on Property

Holding Period 2 years or more

LTCG @ 20% with indexation benefit and @ 10% without indexation benefits

Short Term Capital Gains on Property

Holding Period less than 2 years

STCG @ Applicable slab without Indexation benefits

For FAQs please visit:

https://www.incometaxindia.gov.in/Tutorials/15-%20LTCG.pdf

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