The Hindu Business Line : Avoiding tax on sale of capital assets

I purchased a flat in Bangalore in May 2002 along with my father. We sold the flat in May 2008. How will the tax payable on such a sale be computed? What is the timeframe within which we can invest in capital gain bonds? Do we have to pay income-tax if we purchase land in Chennai, and is it mandatory that we have to construct a house on that land?

If we opt to buy land, house or a flat, what is the timeframe by when we have to open a capital gains account and invest the proceeds to avoid tax on long-term capital gains? — Brindha

The gain arising from the sale of land will be taxable under the head capital gains. As you have held the land for more than 36 months, the gain will be treated as long-term capital gains.

Long-term capital gains are calculated by first deducting the expenditure incurred wholly and exclusively in connection with the transfer from the full value of consideration. From this amount, called net consideration, the indexed cost of acquisition is deducted to arrive at long-term capital gains.

The indexed cost of acquisition, in this case, is cost of acquisition multiplied by cost inflation index of financial year 2008-09, which is divided by cost inflation index of financial year 2002-03.

[The cost inflation index of financial year 2008-09 is 582 and the cost inflation index of financial year 2002-03 is 447]

Tax on the long-term capital gains is to be calculated at 20 per cent as increased by a surcharge of 10 per cent (if the total income exceeds Rs 10,00,000), additional surcharge of 2 per cent and education cess of 1 per cent

Exemption u/s 54EC against the long-term capital gains is available on investment in bonds if the asset transferred is a long-term capital asset, the investment is in bonds of the NHAI or the Rural Electrification Corporation and the bonds are redeemable after three years.

For claiming exemption under section 54EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset. In your case, the six-month period has expired and you cannot claim exemption u/s 54EC by investing in the bonds.

As far as investment in land is concerned, you cannot get any exemption unless a residential house is constructed on the land within the prescribed time.

Exemption can be availed u/s 54F if you propose to purchase a land and construct a residential house or purchase a flat if the assessee is an individual or HUF, the gain is from the transfer of a long-term capital asset that is not a house, the assessee does not within two years purchase or within three years construct a house other than the new house and the assessee is not the owner of more than one house (other than the new asset) on the date of transfer of the original asset.

For claiming exemption under sections 54F, the new residential house should have been purchased within a year or two years after the date of transfer or the construction of the new house should have been completed before the expiry of three years from the date of transfer of the capital asset.

For the purpose of claiming the exemption under section 54F, the amount not utilised for the purchase or construction of the new asset before the due date for furnishing the return of income for the relevant assessment year may be deposited before the due date for furnishing the return of income in any bank or institution in a specified account known as capital gains account scheme.

The proof of investing should be furnished along with the return of income for the amount to be considered to having been utilised for the purchase or construction of the asset.

The invested amount may be withdrawn for the purchase or construction of the new asset within the specified time.

If the invested money is not utilised within three years from the date of transfer of the original asset for investmenting in the new asset, it would be treated as income of the year in which the three-year period from the date of transfer of the original asset expires.

Mail your queries to taxtalk@thehindu.co.in

or by post to ‘Tax Talk’, Business Line, Kasturi Buildings,

859, Anna Salai, Chennai-600002

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