Capital gains tax planning while buying a house

Capital gains tax planning while buying a house
By Advocate K. K. Ramani

Friends, The savings made during the entire life normally may not be sufficient for you to purchase a flat of your own choice. Hence many a time, it becomes imperative to sell your existing flat and utilize the sale proceeds in the Purchase of a new house. The transaction in respect of sale results in the liability for Capital Gains tax. This is a very important topic which has to be understood by all those who intend to use their sale proceeds of the previous flat in the purchase of a new house.

Types of capital asset Sec 2(42A) and 2(29A) (Period of holding 3 years)
“Short term capital asset” means a capital asset held by an assessee for not more than 36 months immediately prior to the date of transfer. Asset other than short term capital asset is regarded as long-term capital asset. Sometimes a property may consists of more than one capital asset. e.g. Bungalow which consists of land and construction. How to compute capital gain on the sale of a Bungalow ?

Suppose a land is purchase more than 3 years ago and a building is constructed recently. The building is sold within 3 years of construction. Whether capital gain can be bifurcated ?
Yes. CIT v Vimal Chand Golecha 201 ITR, 442 (Raj).
In some cases when a capital asset becomes the property of the assessee in the circumstances mentioned in section 49(1) the period for which the asset was held by the previous owner should also be included,
For example, (i) acquisition of asset on partition of HUF,
(ii) acquisition of asset by way of gift or inheritance etc.

Sec. 48 read with Sec. 112 (Charging Sections) :
Capital gains are computed u/s 48 at the rates specified u/s 112.
Old Sec. 48 has been amended and instead of giving deduction it now gives allowance for inflation. Instead of merely deducting the cost of acquisition and cost of improvement from the sale consideration, assesses can now deduct indexed cost of acquisition and indexed cost of improvement. Indexed cost of acquisition means the cost of the asset as modified on the basis of cost inflation index (CII) notified by the Central Government by taking the base year as 1981-82. This takes into account inflation from the year of purchase to the year of sale. It can be determined as under :
Indexed Cost = Cost of Acquisition x CII for the year of Sale / CII for the year of purchase.
For example flat was purchased in 1981 for Rs. 10 Lakh hence its indexed Cost = Cost of Acqui (10L) X CII for year of sale that is 480 = 48 lakhs / CII for the year of purchase (100)

Capital gains arising from the transfer of residential house property (Sec. 54)
Capital gain arising from transfer of a house property is exempt from tax propvided the following conditions are satisified :-
· The house property is a residential house whose income is chargeable under the head “Income from house property” and transferred by an individual or a Hindu undivided family.
· The house property is a residential house whose income is chargeable under the head “income from house property” and transferred by an individual or a Hindu undivided family.
· The house property (may be self-occupied or let out) is a long-term capital asset (i.e. it must have been held for a period of more then 36 months before sale or transfer).
· The assessee has purchased another residential house within a period of one year before the transfer or within 2 years after the date of transfer or has constructed a residential house property within a period of three years after the date of transfer with the amount of capital gain.
· Construction of the house should be completed within 3 years from the date of transfer. Date of commencement of construction is irrelevant. (Construction may be commenced even before the transfer of house) – CIT v. J.R. Subramanya Bhat (1987) 165 ITR 571 (Kar.).
If the amount of the capital gains is less than the cost of new house property, amount of capital gains is fully exempt from tax. On the other hand, if the amount of the capital gains is greater than the cost of the new house property, the difference between the amount of capital gains and the cost of new house is chargeable to tax as capital gains. One can save tax by investing in Bonds u/s 54EC
C.G. Accounts Scheme i.e. The Deposit of unutilized capital gain before due date of I.T. Return.
E.G. Mr. X sold old flat in March 04
The Capital Gain is 25 Lakhs
He purchased a new flat in April 2004 from builder for Rs. 30 Lakh or
He paid 5 lakhs in April 2004 and paid 5 Lakh in July 2004.
He deposited 15 lakhs in Capital CG Account Scheme – Before due date of filing IT return Hence no Tax
in order to save Capital Gain Tax on the sale of previous house the assessee is required to invest the gain in a residential house. What is the meaning of a residential house used in Sec.54 ? Whether it refers to one residential house or does it mean any residential house. According to the Income-tax Department if an assessee sells a house he has to invest the capital gain in one residential hopuse. He cannot buy more than one house. Even though different Benches of ITAT have taken different views on this issue the department’s interpretation causes lots of problems for many assesses. Supposing a family stays at Marine Drive having a flat of 3 bed – rooms and hall which is valued FMV at Rs. 2 crores and the parents are old and all their three sons are married, ladies find it very difficult to stay in the same house. The flat stands in the name of the father he would like to sell the same and buy four flats at four different places. The question is how to purchase four flats in Bombay or Suburbs by selling the Marine Drive flat.
The solution could be : father should Gift away one-fourth undivided interest to each of the 3 sons. Thereafter they could take the four cheques each of Rs. 50 lakhs and buy four flats at different places on the very next day. It may not be necessary for the sons to hold the four sons-I.T. flat for three years after accepting gift in view of Sec. 47 and there is no gift tax. This could be one of the easy solutions.
Consequences If the new house is transferred within 3 years. – the cost is reduced by the amount of exempted Capital Gain
If the new house property is transferred within a period of three years form the date of its purchase or construction, the amount of capital gains arising therefrom, (Pwhich is short term) together with amount of capital gains exempted earlier, 9which was actually long – term) will be chargeable to tax in the year of slae of the new house property as short term Capital gains.
Let us take an example :
Supposing an assesses has sold a flat in Bombay for Rs. 1.5 crores and the indexed cost of the said flat is say Rs. 50,00,000/- and he make s a long term gain of Rs. 1,00,00,000/- Out of this sum of rupees one crore hen purchases a bungalow in Delhi for Rs. 80 lakhs and pays tax on Rs. 20 lakhs. The assessee leaves India and sells the Delhi house within three years of Rs. 90 lakhs. The entire amount of Rs. 90 lakhs will be treated as short-Term capital gain. If, instead of buying a house in Delhi he would have paid tax on Rs. 80 lakhs he would have been taxed on long-term capital gain and not short term capital gain. Because he has sold the flat within a period of three years from the date of purchase, the amount which should have been taken as long term capital gain, is now being taxed as short-term capital gain.

5. Section 54 (F). Capital Gain on transfer of long terms capital asset other than a residential house.
Exemption under section 54F is available if the following conditions are satisfied :
Conditions
The assessee is an individual or a Hindu undivided family. (Company not eligible)
The asset transferred is a long term capital asset other than a residential house. For example Shares, Jewellery.
The assessee should not own more than one residential house on the date of transfer of original asset.
Nor further acquisition 2-3. He should also not purchase within a period of two years after such date any additional residential house.
6. Amount of deduction :-
If investment of net consideration is 100% – Exemption of CG is also 100%. If investment of net consideration is less than 100% – Exemption of CG is also less than 100%, say 30% 40% etc.
If the above conditions are satisfied, then capital gain will be treated in a concessional manner as under :
Example : The net consideration received by the assessee on the sale of shares is Rs. 40 lakhs and he invest more than Rs. 40 lakhs in the purchase of new residential house. There will be no tax as 100% of Net consideration is invested in the new residential house. On the other hand if he invests 50% of net consideration that is Rs.
20 lakhs then he will get 50% exemption as far as Long Term Capital Gains are concerned.
7 The exemption granted under section 54F can be withdrawn under following circumstances :-
if the assessee sells or transfers the new house within 3 years of its purchase or construction; or
if the assessee purchases, within a period of two years of the transfer of original asset, or constructs, within a period of three years of transfer of original asset, an addition residential house a residential house other then the new house.
In the aforesaid two cases, the amount of capital gains arising from the transfer of the original asset, which was not charges to tax, will be deemed to be the income by way of long term capital gains of the year in which new house is transferred or additional residential house (other than the new house) is purchased or constructed, as the case may be. If the additional house is purchased within one year, the Assessing Officer may deny him the benefit of Section 54F.

Common queries on Sec. 54F of I.T. Act.
Questions with answer