Capital Gain Tax on sale of House Property & Eligible Exemptions

1. CAPITALGAINTAXONSALEOFHOUSEPROPERTY& ELIGIBLEEXEMPTIONS AUTHOR:PAREENAPATEL https://taxguru.in/income-tax/capital-gain-tax-sale-house-property-eligible-exemptions.html CalculationsofCapitalGainTaxonsaleofHousePropertyandExemptionavailableunderIncomeTax Act WhatisCapitalGain? According to section 45 of the Income Tax Act,1969 any profits or gains arising from the transfer of a capital asseteffected inprevious yearwill bechargeable to income-taxunder thehead ‘capitalgain’. Suchcapitalgainwillbedeemedtobetheincomeofthepreviousyearinwhichthetransfertookplace. WhatisCapitalAsset? According to section 2(14), a capital asset means property of any kind held by an assesses, whether or not connectedwith his business or profession However,itdoesnotinclude–Stock-intrade:Anystock-in-trade,otherthansecurities,consumablestoresor raw materials held for the purpose of the business or profession of the assessee and Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any memberof his family dependent on him. Treatment of capital gain tax on sale of Rural agricultural land in India i.e., agricultural land in India which isnot situated in any specified area. As per the definition, only rural agricultural lands in India are excluded from the purview of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets. Accordingly, the agricultural land described in (a)and(b)below,beinglandsituatedwithinthespecifiedurbanlimits,wouldfallwithinthedefinitionof “capitalasset”, and transferof such land wouldattract capital gains tax– agriculturallandsituatedinanyareawithinthejurisdictionofamunicipalityorcantonmentboard havingpopulation of not lessthan ten thousand, or agriculturelandsituatedinanyareawithinsuchdistance,measuredaerially,inrelationtotherangeof populationas shown hereunder- Populationaccordingtothelastpreceding census of which the relevant figures have been published before the first day of previousyear. Shortest aerial distance from the local limitsofamunicipalityorcantonment boardreferredtoinitem(a)

2. 1. 2. 3. <=2kms >2kmsbut<=6kms <6kmsbut<=8kms >10000 >100000 >1000000 Explanation regarding gains arising on the transfer of urban agricultural land – Explanation1 to section 2(1A) clarifies that capital gains arising from transfer of any agricultural land situated in any non-rural area (as explainedabove) willnot constituteagricultural revenuewithin themeaning ofsection 2(1A). In other words, the capital gains arising from the transfer of such urban agricultural lands would not be treated as agricultural income for the purpose of exemption under section 10(1). Hence, such gains would be eligible to tax undersection 45. Specified Gold Bonds: 62% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds,1980, issued by the CentralGovernment; SpecialBearerBonds,1991issuedbytheCentralGovernment; Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under theGoldMonetisationScheme,2015andGoldMonetisationScheme,2018notifiedbytheCentral Government. Note – Property includes and shall be deemed to have always included any rights in or in relation to an Indian company,including rightsof management orcontrol or anyother rights whatsoever. TypeofCapitalAssets Therearemainlytwotypesofcapitalassets:Shorttermcapital(STCA)&Longtermcapitalasset(LTCA) As per section 2(42A), short-term capital asset means a capital asset held by an assessee for not more than 36 monthsimmediately preceding the date ofits transfer. Aspersection2(29A),long-termcapitalassetmeansacapitalassetwhichisnotashort-termcapitalasset. Thus,acapitalassetheldbyanassesseeformorethan36monthsimmediatelyprecedingthedateofitstransfer isa long-term capital asset. Exceptions: A security (other than a unit) listed in a recognized stock exchange, or a unit of an equity-oriented fund or a unit of the Unit Trust of India or a Zero-Coupon Bond will, however, be considered as a long-term capital asset if the sameis held formore than 12months immediately precedingthe date ofits transfer. Further, a share of a company (not being a share listed in a recognized stock exchange in India) or an immovable property,beinglandorbuildingorbothwouldbetreatedasashort-termcapitalassetifitwasheldbyan assesseefor not morethan 24 monthsimmediately precedingthe date ofits transfer. Thus,theperiodofholdingofunlistedsharesoranimmovableproperty,beinglandorbuildingorboth,for beingtreatedasalong-term capitalassetwouldbe“morethan 24months”insteadof“more than36months” SummaryofSTCA&LTCA

3. MEANINGOFTRANSFER Theprovisionsofsection2(47)oftheIncomeTaxActcontainsaninclusivedefinitionoftheterm“transfer”. Accordingly,transfer inrelation toa capitalasset includesthe followingtypes of transactions- thesale,exchangeorrelinquishmentoftheasset;or theextinguishmentofanyrightstherein;or thecompulsoryacquisitionthereofunderanylaw,or theownerofacapitalassetmayconvertthesameintothestock-in-tradeofabusinesscarriedonby him.Such conversion is treated astransfer, or thematurityorredemptionofazero-couponbond;or Part-performanceofthecontract:Sometimes,possessionofanimmovablepropertyisgivenin considerationof part-performance of a contract. Lastly,therearecertaintypesoftransactionswhichhavetheeffectoftransferringorenablingthe enjoymentof an immovable property. ComputationofCapitalgain Thereislongtermcapitalgainonlongtermcapitalasset&short-termcapitalgainonshorttermcapitalasset Incase of short-term capital asset: Particular Fullvalueofconsiderationreceivingoraccruingasaresultoftransfer Less:Expenditureincurredwhollyandexclusivelyinconnectionwithsuchtransfer (fore.g., brokerage on sale) NetSaleConsideration Amt.(?) Xxx Xxx Amt.(?) Xxx

4. Incaseoflong-termcapitalasset: Particular Fullvalueofconsiderationreceivingoraccruingasaresultoftransfer Less:Expenditureincurredwhollyandexclusivelyinconnectionwithsuch transfer(for e.g., brokerageon sale) NetSaleConsideration Amt.(?) Xxx Amt.(?) Xxx Xxx

5. Less:IndexedCostofacquisition(ICOA) CostofAcquisition×CIIfortheyearinwhichtheassetistransferred÷CIIforXxx theyearinwhichtheassetwasfirstheldbytheassesseeorP.Y.2001-02, whicheveris later

6. RateoftaxonShort-termCapitalGains Short-termcapitalgainsarisingontransferof(ResidentialHouseProperty)Short-TermCapitalAssets wouldbechargeableatnormalratesoftax. RateoftaxonLong-termCapitalGains Long-term capital gains arising on transfer of (Residential House Property) Long-Term Capital Assets would bechargeable at 20%. YEAROFCHARGEABILITY Any profits or gains arising from the transfer of a capital asset effected in the previous year (other than exemptions covered here) shall be chargeable to Income-tax under this head in the previous year in which the transfertook place. Computationofcapitalgainsinthecaseoftransferoflandandbuilding[Sec.50C)- Section50C isapplicable ifthe followingconditions aresatisfied- There is a transfer of land or building or both. The asset may be long-term capital asset or short-term capitalasset. It may bedepreciable or non-depreciable asset. Stamp duty value adopted (or assessed or assessable) by the Stamp duty authority in respect of such transferis more than 110per cent of sale consideration. If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be taken as “full value of consideration” for the purpose of computation of capital gains. In other words, section 50C is applicableonlyinthosecases,wherestampdutyvalueismorethan110percentofactualconsideration. ifthestampdutyvalueonthedateofagreementandonthedateofregistrationisdifferent- It is quite possible that stamp duty on the date of agreement (fixing the value of consideration) is different fromstampdutyonthedateofregistration.Insuchacase,thestampdutyonthedateofagreementmay be taken (and not as on the date of registration). However, this rule shall apply only in those cases where amount of consideration (or a part thereof) has been received by way of an account payee cheque/draft for by use of electronic clearing system through a bank account (or through prescribed electronic mode*)] beforethe date of the agreement. *As per rule 6ABBA, prescribed modes of electronic payment are (a) credit card, (b) debit card, (c) net banking, (d) IMPS (immediate payment service), (e) UPI (Unified Payment Interface), (f) (RTGS) Real Time Gross Settlement) (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat interface formoney) Aadhaar Pay. Differentsituations Whenassesseedisputesvalueadoptedbystampdutyauthority Wheretheassesseehasdisputedvalueadoptedbystampduty authorityunderthestampact(i.e.,stampdutyproceedings) Stampdutyvalue Valueadoptedbystampdutyauthority Thestampdutyvaluationasfinallyacceptedforstamp purpose.

7. Theassessingofficerwillhavetoreferthemattertoth Where the assessee claims before income-tax authorities that value adopted by stamp duty authority is more than the fair marketvalue(buthehasnotdisputedsuchvaluationinstamp dutyproceedings) valuationofficerandthefairmarketvaluedetermined willbesubstitutedforstampdutyvalue(ifvalueso ismorethanoriginalstampdutyvalue,theoriginalsta valuewillbetaken). • VALUATIONOFCAPITALASSET–WHENCANBEREFERREDTOVALUATIONOFFICER • With a view to ascertaining the fair market value of a capital asset, the concerned assessing officer may refer the valuation of the capital asset to the valuation officer appointed by the income-tax department in the following cases: • Where the value of the assets as claimed by the assessee is in accordance with the estimate made by a registered valuer (who works in a private capacity under a licence issued by the central board of direct taxes and his valuation is not binding on the income-tax department), but the assessing officer is of the opinionthat the value so claimed is • Lessthanitsfairmarketvalue,or • Atvariancewithitsfairmarketvalue[sec.55a(a)]; • Where the assessing officer is of the opinion that the fair market value of the asset exceeds the value of theassetby morethanRs. 25,000or15% ofthevalue claimedbythe assessee,whicheveris less;or • Where the assessing officer is of the opinion that having regard to nature of an asset and relevant circumstances,it is necessary to doso. • ExemptionAvailable: • Section 54: Residential House Availableto:Individual/HUF • When:Long-termResidentialHouseissoldoff • How:CapitalGainarisingfromsaleofresidentialhouseisinvestedinpurchaseorconstructionof ONERESIDENTIAL HOUSEIN INDIA withinthe specified period* • Exemption:InvestedAmountorCapitalGainwhicheverisless • Lockinperiod:3years SpecifiedPeriod:

8. Purchase:Within1yearbeforeor2yearsafterthedateoftransferofoldresidentialhouse. Construction:Within3 yearafter thedateof transferof oldresidentialhouse. • FinanceAct,2019:AccordingtoFinanceAct,2019ifamountofLTCGdoesn’texceed2crore • assessee can avail exemption u/s 54 for purchase or construction of 2 residential houses in INDIA in place of 1 residential house in INDIA. Above benefit can be availed only once in life time by the assessee. • Section54EC:NHAIorRECBonds Availableto:AnyAssessee • When:Anylong-termcapitalAssetbeingimmovablepropertysoldoff. • How:Amountofcapitalgainisinvestedwithin6monthsofdateoftransferinbondsof: NHAI:National Highway Authorityof India • REC:RuralElectrificationCorporation • Exemption:Investmentorcapitalgainwhicheverisless. Lockin Period:5 years • AggregateinvestmentsinthebondsofNAHI&RECduringpreviousyearofsalepflong-term • capitalasset&P.Y.immediatelyfallingthereaftercan’texceed?50,00,000. • Section 54B: Agriculture Land Availableto:Individual/HUF • When:Long-term/short-termagriculturelandsold.[Itmustbeusedforagriculturepurposesince lastminimum 2 yearsfrom date oftransfer by assessee,parents, HUF. • How:CapitalGainisinvestedinpurchaseofagriculturelandwithin2yearsafterthedateof • transfer. • Exemption:InvestmentorCapitalGainwhicheverisless. LockinPeriod:3yearsFor individual&HUF:

9. Section54F:1stor2ndResidentialHouse • Availableto:Individual/HUF • When:AnyLong-termcapitalAssetotherthanResidentialHousesold. • How:Netconsiderationisinvestedinpurchaseorconstructionof1stor2ndresidentialhousein INDIAwithin specified period [Sameas section 54] • LockinPeriod:3years • Exemption: • Ifinvestmentismorethanorequaltonetconsiderationthenwholecapitalgainexempt. • Ifinvestmentislessthannetconsiderationthenexemptionu/s54FisInvestment×Capital Gain • NetConsideration • Casestudies

10. OneofthebenchmarkjudgementunderMs.MoturiLakshmivsTheIncomeTaxOfficeron17August,2020 isbriefed us under: This appeal by the assessee filed underSection 260Aof the Income Tax Act, 1961 for the assessment year 2013- 14. When The taxpayer Ms. Moturi Lakshmi appealed the ITAT’s order to the Madras High Court, the Hon’able Madras High Court, on 17thAugust 2020 issued its decision that where an investment is made in new residential property, prior to the sale of the original residential property, any gain on the sale of the original property is eligibleforlong-termcapitalgains(LTCG)taxexemptionundersection54oftheIncome-taxAct,1961(ITA). Backgroundandfactsofthecase The taxpayer Ms. Moturi Lakshmi is an individual who claimed an exemption under section 54 of the ITA in her income tax return for the financial year 2012-13, corresponding to assessment year 2013-14. Section 54 provides anexemptionfrom LTCGtaxon thesale ofaresidential propertybyan Indianresident individualwho: Purchases a new residential property in the period from one year before to two years after the date of the originaltransfer; or ConstructsanewresidenceinIndiawithinthreeyearsafterthedateoftheoriginaltransfer. (Incertaincasesanindividualmaypurchaseorconstructtworesidentialproperties.) In the current case, the taxpayer had paid an advance deposit for purchasing an apartment prior to the sale of her original apartment, against which she claimed an exemption under section 54. The Assessing Officer (AO) disallowed the exemption since the investment was made prior to the sale of the first apartment. Both the Commissioner of Income-tax Appeals and the Income-tax Appellate Tribunal (ITAT) dismissed the taxpayer’s subsequentappeals and upheld the AO’sorder. DecisionoftheHighCourt TheHighCourtnotedthatthefollowingsubstantialquestionoflawaroseinthecaseunderconsideration, namely whether or not for the purposes of section 54, the advance payment made by the taxpayer for the purchase of the residential apartment constitutes part of the purchase price, where the advance payment is made tothe seller ofthe apartment priorto the date ofsale of theoriginal capital asset? TheHighCourtnotedthat: The Madras High Court in an earlier case had held that the investment in the new asset for the purposes of deduction under section 54F of the ITA (which provides a similar exemption for certain LTCG on the transferofcapitalassetsuponinvestmentinaresidentialproperty)neednotbeoutofthesale considerationreceived on the transferof the original asset; TheMadrasHighCourtinanothercase,whenevaluatingwhetherforthepurposeofsection54thecostof a new asset (which is eligible for set off against the capital gain) would include the cost of land purchased threeyears priorto thesale of theproperty onwhich the gainshad arisen,had heldthat: Theinterpretationofstatutoryprovisionsshould,totheextentpossible,beinaccordancewiththe plainmeaningofthelanguageusedintheprovision;and The condition precedent for claiming exemption under section 54 was that the new residential property should have been purchased or constructed within the specified period from the date of transfer of the original residential property giving rise to the capital gains. The provisions did not contemplatethatthesamemoneyreceivedfromthesaleoftheoriginalresidentialpropertyshould beused for theacquisition of the newresidential property;

11. Similarprincipleswereupheldinvariousothercases;and Inviewoftheabove,theHighCourtheldthat: The Supreme Court in an earlier case, in the context of section 54 had held that the intention of the legislature was to give relief to the taxpayer from the payment of tax on LTCG. That case supported the contention of the taxpayer. The High Court rejected reliance on the Supreme Court case cited by the tax authorities (in which it was held that the exemption provisions must be construed strictly, with any ambiguitybeing interpreted infavor of the taxauthorities); and Basedonthenotestoclausesamendingtheprovisionsofsection54,theintentionofthelegislaturewasto purchasethenewresidentialpropertyeitherbeforeorafterthedateofsaleoftheoriginalproperty. In view of the above, the High Court allowed the benefit under section 54 with respect to the advance payment made by the taxpayer for the purchase of a residential apartment prior to the date of sale of the original apartment. LegalConclusionunderRulings Theserulingreaffirmthefollowingprinciples: Payments made for the purchase of new residential property prior to the sale of the original residential property qualify for the LTCG tax exemption under section 54 of the ITA, subject to the satisfaction of otherconditions; and Theintentionofthelegislaturewithrespecttosection54wastogiverelieftothetaxpayerfromthe paymentoftaxonLTCG. The logic of the Law is to give relief to the taxpayer for residential house and thereby “ease of living” life. No assessecan cross this logicwithout paying capital gain tax. Acknowledgement:- IncomeTaxAct,1961asamendedfromtimetotime The author of this Article is Student of Institute of Chartered Accountant of India, pursuing CA.The Author can bereached at email id pareenapatel9@gmail.com Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisionsofstatute,latestjudicialpronouncements,circulars,clarificationsetcbeforeactingonthebasisof theabovewriteup.Thepossibilityofotherviewsonthesubjectmattercannotberuledout.Bytheuseofthe saidinformation,youagreethatAuthor/TaxGuruisnotresponsibleorliableinanymannerforthe authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action takenthereof. Thisis notany kind ofadvertisement orsolicitation of workby aprofessional.