Friday, 11 April 2014

Tax Planning On Sale of House Property


Whenever a person sells any property, he has to pay income tax on the gain he earned.  This gain is the difference between the sale price of the property and the purchase price of the property. 

As we see the property rates have multiplied in recent years, this will result in big amount of capital gain and the person will have to pay income tax on this capital gain. 


Here, we are discussing few tax provisions which may be helpful to understand the taxability on sale of property and its planning for taxes.

  If the property kept for more than 36 months and than sold then  profit earned would be termed as long term capital gain.
  If the property sold within  36 months from the date of purchase than it would be termed as short term capital gain.
  Tax liability In the short term capital gain would be as per normal income tax rates under income tax Act.
  Tax liability in long term capital gain would be at the rate of 20%.

However this can be reduced through various means such as : 

-          Benefit of cost inflation index (CII).
-          Investment in to other residential property.

Mode of computation of Capital Gain :

  The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) Expenditure incurred wholly and exclusively in connection with such transfer;

(ii) The cost of acquisition of the asset and the cost of any improvement thereto :

 For example:

House purchased in year 2008-09 for Rs. 15 Lacs
Sold during year 2009-10 for Rs. 20 Lacs 
Then Capital gain (Short term capital gain) is Rs. 5 Lacs ( 20 – 15 Lacs)
However, in case of long term capital gain, a person can get the benefit of indexation. 

(iii)Indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;

Example with Cost Inflation Index on long term capital gain :

For example, if a property purchased in 1991-92 for Rs. 10 lakh  (CII of year 199)
Being sold during 2010-11 for Rs. 40 lakh, (CII of year 711)
indexed cost = (711/199) x 10 = Rs. 35.72 lakh.
And the long-term capital gains would be Rs. 4.27, that is Rs. 40 lakh minus Rs. 35.72 lakh.

(iv) "Indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place; 

For example, if a property purchased in 1991-92 for Rs. 10 lakh  (CII of year 199)

Person expended Rs. 5 lacs on improvement of property during 1997-98  (CII of year 331)
Property was sold during 2010-11 for Rs. 50 lakh,  (CII of year 711)
Now, indexed cost = (711/199) x 10 = Rs. 35.72 lakh. 
Further indexed cost of improvement = (711/331) x 5 = Rs. 10.74 lakh 
Total inflated cost  = 35.72 + 10.74 = 46.46 Lacs            
And the long-term capital gains would be Rs. 3.54, that is Rs. 50 lakh minus Rs. 46.46 lakh.

(v) "Cost Inflation Index" for any year means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for that year, by notification in the Official Gazette, specify 759 in this behalf.  This concept is introduced to provide benefit of inflation to the assessee. 

Individual or a Hindu undivided family have following exemption from long term capital gain under section 54 of Income Tax act :

      If the long Term capital gain invested  within a period of one year before or two years after the date on which the transfer took place purchased another residential house property
      Or ,  within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following way :-

-  If the amount of the capital gain is greater than the cost of the residential house so purchased or constructed the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year;
-  If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45.
- Till the time the amount of Long Term Capital gain is not utilized for the same, it should be deposited under the scheme of Long term Capital gain.

Thus by knowing these provisions an assessee can save Capital Gains Tax substantially.

2 comments:

Suraj S said...

One clarification sir,
exemptions under section 54 are available only to individuals and HUF? What about a company attracted by 50C provision making huge capital gains and investing in bonds specified in 54F?

CA MANISH AGARWAL said...

Yes, you are correct