Wednesday, 12 March 2014

How to Save Taxes on Capital Gains arising on sale of house or flat

An estimate shows that the present 1.1 billion India’s population would touch 1.5 billion by 2030, thus edging out China as the most populous country in the world. Coupled with the significant rise in the working population and dependency ratio below 50per cent, it is expected it would generate higher personal savings and stronger investments, resulting boosting the growth of real estate.
Indian real estate boom has been partly backed by the revolution brought about by private banks in the Home Loans business as it has proved to be the most lucrative segment for the Indian banking industry as well.

Tax benefits associated with the sale and purchase of house/building/flat
Timing is critical in finance, especially if you want to make a profit. Of course, you need to pick a good time to take advantage of the appreciation in value, but it’s equally important to keep an eye on the calendar to avoid paying a hefty amount as tax. Residential real estate investment tax benefits are something that anyone who owns real estate should think about, especially when it comes time to figure your annual income tax. Section 54 provides tax reduction opportunity in respect of long-term capital gains due to selling a residential house or flat or building or part of the building. The following conditions are applicable to become eligible to derive the benefit of this section-
  1. The amount of capital gain is invested in another residential house or property. This investment must take place within 1 year before or 2 years after the date of transfer in case of purchase of new residential house and 3 years after that date in case of its construction. Exemption in respect of the entire amount of capital gain is allowed in cases where the investment in new house or flat is equal to or exceeds the amount of capital gain. Otherwise the gains in excess of the amount invested are brought to tax.
  2. The new residential house should not be transferred within 3 years of its acquisition; otherwise the capital gains exempted earlier is brought to tax. This is done taking the cost of acquisition of the new asset as reduced by the amount of capital gain exempted earlier.
  3. If the amount required to be invested in the new residential house is not so invested before the due date for furnishing the return of income for the relevant year, it must be deposited in separate bank account specified for this purpose, which can be opened in any branch, other than a rural branch, of the public sector banks. This is called as CGAS account.
There are tow types of accounts for depositing the unutilized amount – (1) Type A and (2) Type B.
Deposit Account Type A:-
All deposits into this account are in the form of savings. This account is suitable for taxpayers who want to construct a house over a long period as withdrawals are permitted according to the provisions of the scheme.
Deposit Account Type B:-
This account is similar to a term deposit as it is payable after a fixed time duration. The depositor can opt to keep the deposits cumulative or non-cumulative and withdrawals from this account can be made only after a stipulated duration.
Some important points to be noted:-
To claim section 54 deduction, it is not necessary to buy the new house out of the sale consideration received by you from selling the previous house. You can claim Section 54 deduction even if you invest in buying the new house by borrowing fund as per The Kerala High Court in the case of ITO vs K.C. Gopalan [2000]
Expenditures which are important to incur to make the new house habitable will also form part of the section 54 deduction. It is because residential house implies such house which is habitable enough. Thus investment made on flooring, wooden work, sanitary work, etc are also allowed under this section.
One more interesting point had aroused in case of Vyas (KG) vs 7th ITO [1986] where it was held that if a person has bought 4 flats then also he can claim exemption u/s 54 if he has only one kitchen and one ration card.
If a person is paying for the entire consideration to buy a new house but the house is under joint ownership with his wife or father, then also then person can claim the entire deduction u/s 54 as he has paid the entire consideration.
In case of construction of new house it is not necessary to complete the entire construction within stipulated time. If the substantial amount of the consideration has paid in this regard then a person can claim this exemption of sec. 54 as per the Delhi High Court in the case of CIT vs R.L. Sood [2000]

If a person sells a residential unit and purchases a portion of another residential unit (but not the whole residential unit), within the specified time then also the person can claim exemption under this section.

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