The Hindu Business Line : Clearing the premise for taxes on property

My wife recently sold a property for Rs 12.60 lakh. The property was bequeathed by my father to her. The property was purchased in 1945. Some rooms were constructed with GI sheets in the 1970s. The cost and year of construction are not known. The land cost in 1981-82, as obtained from the Sub-Registrar’s office, was Rs 220 for a sq.yd.

The land cost was considered at Rs 1,600 per sq.yd and cost of construction at Rs 300 per sq.ft by the Sub-Registrar’s office at the time of registration in May 2009. The property was held by my wife for more than five years after the death of my father.

In the absence of the cost of construction of GI sheds, how should we arrive at the capital gains tax and what are the avenues available to claim exemption on the capital gains? – D. Gangadhar

For computing capital gains, the cost of acquisition can be taken as the price paid for the property. Else, at the option of an assessee, the fair market value as on April 1, 1981, can be taken as the cost of acquisition.

As you are unaware of the date of construction, the fair market value as on April 1, 1981, can be taken as the cost of acquisition. This value is likely to be higher than the cost incurred and therefore you would be at an advantage in taking such fair market value as on April 1, 1981, to be the cost of acquisition, particularly given that this can be substituted at the option of the assessee.

The fair market value may not correspond with the guideline value though it may be an indicator in determining the fair market value. Your wife’s holding of the property for five years will not make any difference as the period of holding is to be computed from the date when your father held it.

As for claiming exemption, you have not indicated if the property is a residential house. You can claim exemption u/s 54EC by investing in bonds of REC or the NHAI. You may consider the claim of exemption u/s 54 or u/s 54F by reinvestment in a residential house.

In the current financial year, I stayed in a rented house for the first three months and later shifted to my own house.

While calculating exemption u/s 10(13A) in respect of the house rent allowance, should I consider the basic pay for three months or basic pay for the entire year – will the calculation be actual rent paid less 10 per cent of annual basic pay or actual rent paid less 10 per cent of three months basic pay?

It may be noted that my salary remains constant for the entire year. – Sujith

The exemption u/s 10(13A) read with Rule 2A for house rent allowance is to be computed with the salary for the period when the rent was paid – only by taking into account the salary when the house was taken on rent.

Exemption u/s 10(13A) is available in respect of HRA to the extent of the least of the following: rent paid minus 10 per cent of salary; 50 per cent of salary (if the accommodation is in a place other than a metro city 40 per cent of salary); actual HRA received.

All of the figures are to be taken into account with reference to the relevant period – the period for which the rent is paid.

My father, who is 68, purchased a flat in June 2007 for Rs 13 lakh and sold it for Rs 26 lakh in June 2009. He spent Rs 5,50,000 on home improvement in June 2009 and Rs 52,000 on brokerage while selling.

Would it be possible to deduct the brokerage and the improvement cost from the sale amount to arrive at short-term capital gains? Can the costs of building cupboards, modular kitchen, laying marble and installing a fountain on terrace be included in the cost of improvement?

Is it possible to claim any exemptions in respect of the short-term capital gains? – Monu Chadha

The expenditures incurred towards cost of improvement and brokerage towards sale, being expenses incurred exclusively in connection with the transfer, are allowable deductions while computing capital gains.

The cost of building cupboards, modular kitchen work, cost of laying marble and the installation of a fountain on the terrace will qualify as expenditure incurred for improvement of the property and therefore will qualify for deduction

It will be your responsibility to prove that such expenditure has been incurred, if called upon to prove by the Assessing Officer. No exemption can be claimed under the act in respect of short-term capital gains.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)