The Hindu Business Line : Capital gains and real estate

I PURCHASED a house in 1974 for Rs 87,000. I now propose to sell the same for Rs 86 lakh. How will this gain be treated? Are there any investment options so as to avoid the payment of capital gains tax? Can I reinvest the proceeds in more than one house, one each for the benefit of my three children? If this is permissible can my children be joint owners for these three houses whereby they can take loans for the construction/purchase so that larger houses can be constructed/purchased?

K.V. Gopalakrishnan

Reply

The gain arising from the transfer of the house will be treated as a long-term capital gain and will be subject to a tax at the rate of 20 per cent. The gain will be computed in the following manner:

Full value of consideration: xxx

Less : Expenses incurred wholly and exclusively in connection with the transfer: xxx

Net consideration: xxx

Less: 1. Indexed cost of acquisition: xxx

2. Indexed cost of improvement: xxx

Long term capital gains (subject to exemption): xxx

The reader can reinvest in another residential house or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years. The quantum that will be exempt on such reinvestment will be:

If the amount invested is more than the capital gain the whole of the capital gains.

If the amount invested is less than the capital gain then to the extent invested.

The issue of whether reinvestment can be in more than one house property for the purpose of exemption is a debatable one.

The Bombay Bench of the Tribunal in K.G. Vyas v 7th ITO [1986] 16 ITD 195 (Bom) has taken a view on facts that more than one flat constituted one unit and that therefore the exemption is available for more than one flat since they on the facts constituted one unit.

However, the Mumbai Bench of the Tribunal has also taken a view in Gulshanbanoo R.Mukhi v JCIT [2002] 83 ITD 649 (Mum) that the exemption is not available for more than one unit. The reader is advised to weigh the pros and cons and seek professional advise in the matter before arriving at a final conclusion.

Query

Will the deletion of one of the names of the joint holder of shares, bonds or units on their death amount to a transfer and thereby attract capital gains tax?

Will the addition of the name of another person as a joint holder for the reason that such person can become the sole owner on the death of the original investor be treated as a transfer?

Sharad Hatekar

Reply

Neither of these will be treated as a transfer and no capital gains will arise at such time when the joint holder becomes the sole owner on the death of the other joint holder, or when the name of another person is included as a joint holder to ensure a smooth transition of the shares, bonds etc., on the death of the original investor.

Query

I bought a residential house at Noida and shortly thereafter sold a house property in Delhi.

The proceeds on sale of the house at Delhi are invested by me in bank deposits.

Will I be entitled to the exemption under Section 54? In such a case can I use the investments to purchase a car, jewellery, and so on?

Anonymous

Reply

The exemption under Section 54 is available to an individual or a HUF subject to satisfying the following conditions:

The asset transferred is a long-term capital asset.

The asset transferred is a residential house the income from which is chargeable under the head "income from house property."

An investment is made in another house property either by way of purchase or construction.

If the investment is to be made by way of purchase, the purchase should be one year before or two years after the date. of transfer of the original capital asset. If the investment is to be made by way of construction, the same should be completed within three years from the date of transfer of the original capital asset. There is no need to establish any correlation between the proceeds on sale of one residential house with the reinvestment for the exemption to be available under Section 54.

The reader, therefore, need not have any apprehension on utilising the profits on sale of the residential house, which are now in the form of fixed deposits for any other purpose.

Article E-Mail :: Comment :: Syndication

Stories in this Section
OCL: Accet

Matrix Labs: Reject

Aptech: Accept

Hind Powerplus: Accept

Demat account: Quick, easy and convenient

... on the prowl

Equity mutual funds: Slip-ups in managing risk

Perils of indexed investing

Stock prices: Watered down by drought

BSES: Why the dressing up

Problems in picking the right fund: Is it skill or just chance that decides a winner?