by Mr.
Rakesh Nangia, Nangia & Co
Capital gains tax is
an aspect that every property (Real Estate) seller needs to consider in a
cost-sensitive market. The amount of capital gains tax depends on the time
period the property is held on to.
If the property is
sold after three (3) years of purchase, the resultant gains (known as long-term
gains) are taxable at a fixed rate of 20 %. When it comes to long-term capital
gains, the acquisition cost of the asset is recalculated based on indexation, which
factors in inflation in its calculation by using the Cost-Inflation Index.
(CII)
The benefit is that
income tax on a long-term capital gain is taxed only at 20 % after indexation.
This brings down the amount of tax payable considerably compared to short-term
capital gains tax.
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| Rakesh Nangia, Nangia & Co |
Option 1..
Capital gains from
the sale of a house is exempt from income tax if the taxpayer invests the gains
in a residential property within two (2) years from the date of sale or
constructs another house within three (3) years.
However, one can not
claim the tax exemption by investing in a commercial property or / land. To save tax, you have to invest in a
residential property in India only.
Option 2..
Long-term capital
gains from sale of a residential property have been exempted from tax, if the
sale proceeds are invested in a small or / medium enterprise in the
manufacturing sector. The fund should be used by the enterprise to acquire new
plant and machinery before the due date of furnishing of return of income by
the assessee.
The pre-condition for
availing this income tax benefit is that the equity holding or / voting power
of the taxpayer in the enterprise after the investment should be more than 50
%.
Option 3..
Certain instruments
such as capital gain bonds have been prescribed in which the profit arising
from the sale of a property can be invested to avail tax exemption.
These instruments
have a lock-in period of three years and the maximum limit for investing in
such instruments is Rs. 50 lakh. These bonds are currently being issued by NHAI
(National Highway Authority of India) and REC (Rural Electrification
Corporation). If the entire amount of long-term capital gains is invested in
these bonds, the income tax is fully exempted.
Option 4..
If a property has not
been purchased before the return has been filed or / before the due date for filing the tax
return, whichever comes earlier, the money has to be deposited in a special
account known as the Capital Gain Account Scheme (CGAS).
Doing this conveys to
the authorities that you intend to buy a property to save the capital gains
tax. Any withdrawal from CGAS should only be for payments to be made in
relation to the purchase of the new property.
It is imperative to
keep in mind that the new property purchased to claim the tax exemption has to
be held for a minimum period of three (36 Months) years, failing which the
capital gains arising from the sale of the new property, together with the
amount of capital gains exempted earlier, will be chargeable to tax in the year
of sale of the new property.
About the author..
The writer Mr. Rakesh Nangia is managing partner,
Nangia & Co. With inputs from Neha Malhotra, Nangia & Co.
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