I was allotted a housing plot by the Odisha government in Bhubaneswar in 1991 on leasehold basis at ₹38,000 plus stamp duty of about ₹42. I travelled from Delhi to Bhubaneswar and back for formalities for which I spent approximately ₹50,000. I got the possession of the land in 2004 after which I got a dozen readymade RCC pillars constructed at ₹80,000 to mark my boundary. In 2009, in response to an advertisement, I applied for freehold and deposited fees of nearly ₹8,000. I also got the conveyance deed executed. In 2010, I again got the RCC pillars constructed as the earlier were damaged/stolen at a cost of ₹65,000. While there was no benchmark value (circle rate) in 2001, the present circle rate is ₹11.5 lakh for plots similar to mine. I presume the actual market rate is more than ₹50 lakh for the freehold plot. How can I save tax if I dispose off the plot at more than ₹50 lakh? How do I arrive at the fair market value (FMV)? If I sell the plot before 31 July 2018, will I have to keep the proceeds in a Capital Gain Account Scheme before that date?
—Name withheld on request
As the land was held by you for more than 24 months, the gains, if any, resulting from the sale would be taxable as long-term capital gain (LTCG). You are liable to pay tax at the rate of 20% (plus applicable cess and surcharge) on any LTCG arising to you on the sale of the land held by you.
The LTCG is computed as the difference between the full value of consideration and the indexed cost of acquisition and indexed cost of improvement of the house property. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the Income tax department for financial year (FY) of purchase and FY of sale.
Costs incurred by you to acquire/improve the property (including fees, stamp duty, construction of permanent structures which are capital in nature) would be treated as cost of acquisition/improvement and you will need to index beginning from the year in which you acquired leasehold rights. Commuting costs incurred by you may not be treated as cost of acquisition of the property. Please note that cost related to construction/ reconstruction can be treated as cost of improvement based on a few judicial precedents provided they are enhancing the capital value of the land. Similarly, fees paid for converting the land from leasehold to freehold will be considered as cost of improvement as it enhances the land’s value.
As this property was originally acquired by you prior to 1 April 2001, you have the option of treating the FMV of the property as on 1 April 2001 as the cost of acquisition while computing taxes, instead of the actual costs incurred by you to purchase/improve the property. FMV is the price that the asset would ordinarily fetch when sold in the open market on the relevant date. However, as a practical measure, you can obtain a report from a registered valuer for this purpose. Such FMV will then be indexed using the CII notified by the tax authority as on 1 April 2001 (CII for FY 2001-02 is 100) and the year of sale (i.e. CII for FY 2018-19 is 280), to determine the impact of inflation on the FMV. In case of indexation of improvement costs, the CII notified for the specific financial year will need to be considered. The CII for the fees and construction/ reconstruction of RCC pillars will be considered from the FY of incurring such expenditure.
The full value of consideration will be the net sales proceeds that you receive. However, if the stamp duty value exceeds 1.05 times of the net sales proceeds received by you, such stamp duty value will be deemed to be the full value of consideration for computing capital gains.
You will be eligible to avail an exemption from taxes on the capital gain if the net sale proceeds is reinvested in a new residential property situated in India or the capital gain is reinvested in specified bonds under sections 54F and 54EC of the Act, respectively, depending on the conditions laid down in each of these sections.
If you are unable to reinvest the LTCG before the due date of filing your tax return for FY 2018-19 (typically due by 31 July 2019), the unutilized balance should be deposited into the Capital Gains Account Scheme (CGAS) in order to claim the tax exemption by that date. The amount deposited into the CGAS scheme can then be utilized to reinvest in the new asset within the timelines specified in sections 54F and 54EC. In case the amounts deposited are not utilized for this purpose, you would be liable to pay taxes at that time.
I bought a flat in 2008 when I was single and I am its sole owner. My wife and I are now planning to buy another flat but as co-owners (I will have 60% and my wife 40%). We will be taking a joint home loan with my wife as the main applicant. If I sell my old flat later and put that sale proceeds as part prepayment of this home loan, will I get tax benefit?
—Amritpal Singh
You will be liable to pay tax on capital gains arising from the sale of the flat whenever you decide to sell it. The gains are computed as the difference between the net sale proceeds and cost of acquisition and improvement. As the flat has been held by you for over 24 months, you will be eligible to claim indexation of the costs of acquisition/improvement and the gains would then be taxable as LTCG.
You can claim exemption from tax on such LTCG, where you reinvest the LTCG in a new residential property situated in India, within 1 year prior or 2 years after the sale date of the old house (if the property is acquired) or within 3 years (if the house is constructed), subject to other conditions laid down in Section 54 of the Income-tax Act, 1961.
The re-investment in the new flat (either by using the sale proceeds of the existing flat to purchase the new flat or using the sale proceeds of the existing flat to re-pay the home loan on the new flat) will need to take place within the above periods, in order to avail this tax exemption. There are judicial precedents where the claim for exemption has been allowed to a taxpayer where the sale proceeds from a property held in his name was invested to acquire a new property that was partly in the name of/not in the name of the taxpayer.
In case the sale proceeds are not completely utilized to fund the new property, the unutilized funds will need to be temporarily placed in a Capital Gains Accounts Scheme (CGAS) in order to claim the tax exemption. You will eventually have to purchase/construct a new residential property in India from the funds parked in CGAS to retain the tax exemption—else there could be a tax impact on withdrawal from CGAS/non-utilisation for purchase/construction of residential property in India.
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Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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