Provision of Capital Gain Tax in respect of selling a House or Flat

Generally, people have a good understanding about capital gain taxes. However, when it comes to the actual transaction, they seek professional help. Broadly, the scope of capital gain tax is covered in this article. Hope this helps

Illustration – Mr.Ramdas has sold a flat at Bangalore at 20th April 2015 for a sale price of Rs.95 lakhs. He does not know the capital gain tax payable on such sale.

Scenario A – The above information is insufficient to calculate capital gain tax. One has to know when the property was purchased. Suppose, the property was purchased on or after 20th April, 2012 i.e., within 36 months prior to the sale, then the flat is considered as Short Term Capital Asset.

Tax on Short Term capital Asset – If Mr. Ramdas had purchased the flat for Rs.60 Lakhs in January 2013, then the capital gain is equal to (a) Sale price less cost of purchase price. So, the income tax is on Rs.35 Lakhs (i.e., Rs.95 Lakhs Less Rs.60 Lakhs) at the rate applicable as per tax slabs. (Means the basic exemption limit is allowed to be taken while paying short term capital gain)

Deduction under chapter VIA such as investment u/s 80 C, 80D etc. – The taxpayer is allowed to take the benefit u/s 80c, 80D, 80E etc., from the short tax capital gain earned during the year through sale of property. Suppose, Mr. Ramdas invests Rs.1,50,000 in ELSS mutual fund or 5 year Fixed Deposit in a bank, out of the taxable income of Rs.35 Lakhs, he can reduce Rs.1.50 Lakhs towards investments and then compute applicable taxes.

Scenario B – If Mr. Ramdas had purchased the flat prior to 20th April 2012 i.e., holding property over 36 months, then it is classified as Long Term Capital Gain (LTCG). In this case, the tax is computed as (a) Sale Price Less (b) Indexed cost of purchases. Even the tax rate is less for Long Term Capital Gain, currently it is at 20.6%

What is the indexed cost? As the cost of acquisition is historical value, one has to adjust it with the impact of inflation on the value. So, if the purchase price is adjusted with the inflation rate, it helps to counter the erosion in the value of the asset over a period of time.
Where to find inflation index (or indexed cost)? It is notified by the Central Government every year taking 1981-82 as base year. For example, the cost inflation index for 2011-12 is 785 and for 2014-15 is 1024.
Deduction u/s 80C – Like in the case of Short term Capital Gain, can one claim the deduction u/s 80C, 80D, etc., from LTCG? NO. Deduction under Chapter VI A will not be available in respect of long term capital gains.

What about basic exemption limit? Yes. Only a resident individual/HUF can adjust the exemption limit against LTCG. Thus, a non-resident individual and non-resident HUF cannot adjust the exemption limit against LTCG.

Is there any way, payment of tax on Long Term Capital Gain (LTCG) can be avoided or reduced? Yes. There is an option

Option – A: Reinvestment in another property: Where gain from one house property is reinvested in another house property, to the extent of investment, the capital gain tax is exempt. (Section 54) The points to be noted are –

• The property transferred must be a long-term capital asset
• Purchased 1 residential house in India within one year before the date of sale or
• Within 2 years after the date of sale or
• Construct one residential house within 3 years after the date of transfer.

Option – B: Investment in Bonds: Any long term capital gain shall be exempt if the whole of the amount of such capital gain is invested in long term specified Capital Gain Bonds (Section 54EC). This facility is in addition to reinvestment u/s 54. (Which means, one can avail both benefits together/concurrently)