Taxability of Capital gain arising on sale of residential property and tax planning thereof after considering amendment made by Finance Bill 2012

We know that investment in residential property or Flats is one of the common investment avenue for individuals.

Here we are trying to summarise the tax implication on sale of residential property and tax planning to save tax on the Capital Gain arising on the sale of such property.

On the sale of a residential property either Short Term Capital gain (herein after referred to as STCG) or Long Term Capital Gain (herein after referred to as LTCG) may arise which depends on the time period for which such property is held. If the residential property is sold within 36 months from the date of acquisition of such property then it will be treated as STCG and if such property is sold after a period of 36 months from the date of acquisition of such property then it will be treated as LTCG.

The amount of Capital gain is calculated in the below format:

Computation of Short Term Capital Gain		Computation of Long Term Capital Gain
Full consideration	XXX	Full consideration	XXX
Less: Expenses on Transfer	XX	Less: Expenses on Transfer	XX
Net Consideration	XXX	Net Consideration	XXX
Less: Cost of Acquisition	XX	Less: Indexed Cost of Acquisition	XX
Less: Cost of Improvement	XX	Less: Indexed Cost of Improvement	XX
STCG	XXX	LTCG	XXX
Less: Exemption u/s 54B/D/G	XX	Less: Exemption u/s 54 to 54GB	XX
Taxable STCG	XXX	Taxable LTCG	XXX

The rate of tax applicable for STCG arising on transfer of residential property would be the slab rates applicable for individuals/ HUF. However LTCG would be taxable @ 20%. If the Total Income (before considering LTCG) is below the maximum amount not chargeable to tax (i.e for Previous year 2012-13, Rs 2,00,000 for individual, Rs 2,50,000 for senior citizen below 80 years of age and Rs 5,00,000 for senior citizen above 80 years of age) then the LTCG would be reduced by such shortfall amount and the balance LTCG would be taxable @ 20% (Sec 112 of Income Tax Act 1961).

An individual can save the amount of tax payable, on Capital gain arising on transfer of residential property, substantially by investing the money u/s 54, 54EC and 54GB of Income Tax Act 1961. It may be noted that section 54GB has been introduced via Finance Bill 2012 and hence is available for Capital Gain arising during Financial year 2012-13 onwards.

The details of Section 54, 54EC and 54GB is as below:

(i) Capital Gains on sale of residential house [Section 54]

Eligible assessees .     Individual & HUF

Conditions to be fulfilled

Ø  There should be a transfer of residential house (buildings or lands appurtenant thereto)

Ø  It must be a long-term capital asset

Ø  Income from such house should be chargeable under the head Income from house property

Ø  A new residential house should be

o   purchased within 1 year before or 2 years after the date of transfer (or)

o   constructed within a period of 3 years after the date of transfer.

Quantum of Exemption

Ø  If cost of new residential house ≥ Capital gains (LTCG only) , entire capital gains is exempt.

Ø  If cost of new residential house < Capital gains(LTCG only), capital gains to the extent of cost of new residential house is exempt

Consequences of transfer of new asset before 3 years

If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.

Unutilised amount

Ø  The amount not utilised before the due date of filing return shall be kept in Capital gain account scheme of the nationalized bank.

Ø  The amount should be utilized within the prescribed time i.e within 3 years from the date of transfer.

Ø  The amount not utilized within the prescribed time shall be treated as LTCG of the PY in which the prescribed period expires.

(ii) Capital Gains not chargeable on investment in certain bonds [Section 54EC]

Eligible assessee . Any assessee

Conditions to be fulfilled

Ø  There should be transfer of a long-term capital asset.

Ø  Such asset can also be a depreciable asset held for more than 36 months.

Ø  The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.

Ø  Long-term specified asset means specified bonds, redeemable after 3 years, issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL).

Ø  The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 3 years from the date of acquisition of such bonds.

Ø  The investment made in specified bonds should not exceed Rs 50 Lacs.

Quantum of exemption

Ø  Capital gains or amount invested in specified bonds (subject to maximum limit of Rs 50 Lacs), whichever is lower.

Violation of condition

Ø  In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds before the expiry of 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

(iii) LTCG on sale of residential property Exempted for Investment in Equity Shares of Eligible company [Introduced via Finance Act 2012 and hence applicable from Financial Year 2012-13 on wards ] [Section 54GB]

Eligible assessees: Individuals / HUFs

Conditions to be fulfilled

Ø  There should be transfer of residential property.

Ø  It must be a long term Capital Asset.

Ø  The amount is invested by the assessee for subscription in the equity shares of eligible company before due date of furnishing return u/s 139.

Ø  The company utilizes the amount invested by the assessee for the purchase of new asset (i.e new Plant & Machinery except old used plant & machinery, vehicle, office appliances etc) within 1 year from the date of subscription of shares by the assessee.

Quantum of exemption

Ø  If cost of new asset ≥ Net sale consideration of original asset, entire capital gains is exempt.

Ø  If cost of new asset < Net sale consideration of original asset, only proportionate capital gains is exempt i.e.

LTCG   X   Cost of new Asset

Net Consideration

 Unutilised amount

Ø  The amount not utilised by the company before the due date of filing return by the assessee u/s 139, shall be kept in the specified account.

Ø  The amount should be utilized within the prescribed time i.e within 1 years from the date of subscription of shares by the assessee.

Ø  The amount not utilized within the prescribed time shall be treated as LTCG of the assessee of the Previous Year in which the prescribed period expires for the proportionate amount only.

Consequences if the Equity Shares of Eligible Company is transferred within a period of 5 years

Ø  Short-term capital gains or Long Term Capital Gain as the case may be would arise on transfer of the Equity Shares; and

Ø  The capital gains exempt earlier under section 54GB would be taxable as long-term capital gains in the year of transfer

Practical issue with regard to date of transfer and computation of capital gain:

In all the above section i.e 54, 54EC and 54GB, the period of 3 years, 6 months and due date of filing return u/s 139 respectively is being computed with regard to the date of transfer. Here the date of transfer will be the date on which the possession of the property is given to the buyer. This can be explained with the help of following example:

Example 1: Mr X enters into an agreement to sell the House property on 01.01.2010 with Mr Y for Rs 20 lacs. Mr X handover the possession of the House property to Mr Y on 15.02.2010. Mr Y make the payment on 30.04.2010. The House property is registered in the name of Mr Y on 30.06.2010. When the transfer has taken place.

Ans: 15.02.2010. The transfer is deemed to have taken place on the handover of the possession of the property.

Example 2: Mr X enters into an agreement to sale a House Property on 01.01.2010 with Mr Y for Rs 20 lacs. Mr X received Rs 5 Lacs on 15.02.2010 and on the same day handover the possession of House Property to Mr Y. Mr Y makes the balance payment of Rs 15 Lacs on 30.09.2010. The House Property is registered in the name of Mr Y on 30.12.2010. Determine the date of transfer and capital Gain taxability in the hands of Mr X for Previous year 2009-10 and 2010-11.

Ans: The Date of transfer would be 15.02.2010 since on that day the possession of the property was given to Mr Y .

Capital gain for Previous Year 2009-10:

Full value of consideration                 Rs 20 lacs

Less: Cost of acquisition (Say)           Rs   7 lacs

Capital Gain                                       Rs 13 Lacs

Capital Gain for Previous Year 2010-11:   Nil

Example 3: Mr X enters into an agreement to sale his house property to Mr Y (his tenant) on 01.01.2010 at an agreed price of Rs 20 Lacs. Mr Y paid Rs 5 Lacs on 15.04.2010 and balance Rs 15 lacs on 30.09.2010. The House property is registered in the name of Mr Y on 15.04.2011. What is the date of transfer and capital gain applicable to Mr X for previous year 2009-10, 2010-11 and 2011-12.

Ans: Date of transfer would be 01.01.2010 since the tenant is already is in possession of the property and agreement to sale is entered on 01.01.2010.

Capital gain for Previous Year 2009-10:

Full value of consideration                 Rs 20 lacs

Less: Cost of acquisition (Say)           Rs   7 lacs

Capital Gain                                       Rs 13 Lacs

Capital Gain for Previous Year 2010-11:   Nil

Capital Gain for Previous Year 2011-12:   Nil