Part III: De mystifying capital gains
Nov 14, 2013
Source : The Times of India

 

DELHI: Just as buying real estate is a big decision for investors, so is selling. The profits that one makes in real estate may seem lucrative, however, it brings along liabilities in the form of taxes. Since many end-up paying a large amount as taxes on property selling, a sound knowledge of capital gains and ways to save taxes may help buyers.

In case of a real estate asset, Long Term Capital Gains occur if you hold the property for period more than 3 years and you are then subjected to pay 20 per cent tax. However, in case you sell the property during a period which is less than three years from the date of purchase, then it would become short-term Capital Gain and the same would be to be taxed at the prevailing tax slab applicable to you depending on his/her other income.

Some of the taxation implications that one needs to be aware of while selling any property are -

1. If possible plan that the sale takes place in a manner that the asset becomes qualified to be classified as a long term capital asset i.e. the holding period is over 36 months. Once that happens then there are several benefits.

a. Tax on Long Term Capital Gain from selling a residential house property can be fully avoided or minimised by investing again in any residential house property within 1 year before the sale or within 2 years after the purchase. (Sec. 54)

b. Tax on Long Term Capital Gain from selling any property other than a residential house property can be avoided or minimized by investing in any residential property within a period of 1 year before the sale or 2 years after the date of sale. (Sec.54F).

c. If you do not want to invest in residential house you have an option to invest in specific bonds of National Highway Authority of India or Rural Electrification Corporation Limited (Sec. 54EC). However you can claim the benefit only up to Rs 50 lakh.

2. For the purpose of arriving at the capital gains, the value as per the Stamp duty purpose is taken for the purpose of working out the capital gains. In other words if the agreement is done at a value which is less than the value as per the stamp duty registration purposes then the value as per the stamp duty shall be taken as sales consideration in order to arrive at capital gains. This is to bring uniformity in taxation by the central and state governments.

3. Capital Gains indexation benefit is also available for long term capital gains. This means that instead of the actual cost of purchase an indexed cost of acquisition is taken into account to arrive at the long term capital gains. This provision is made to give effect to the inflationary trends and reduce the effect of inflation on the gains. So what gets taxed is the gain over the inflation and if the gain is less than the inflation then nothing is taxable as capital gains.

4. As per Section 54/54F, an inhabitable house would not be equated with a residential house. Thus all expenditure made on making the house habitable like flooring, painting, sanitary work etc would qualify for deductions while calculating the gains. The debate would arise where huge sums are incurred in interior decoration and whether this expenditure would strictly be incurred to make it habitable.

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