Sale of residential property and tax
Sep 27, 2013
Source : The Times of India


BANGALORE: A sale of property has tax implications. Before deciding on selling your property, you must analyse the tax implications as well. Capital gains tax is leviable when you sell a property. The gains arising out of the transfer of a property is the difference between the amount spent on its acquisition including the amount spent on improvement of the property, and the consideration received on its transfer. The excess over the amount spent is the capital gains.

The consideration amount is the sum received as reflected in the transfer document. It may be purely money or money’s worth, or both. If the transfer is through exchange of capital assets, fair market value of the asset is the full consideration. If the consideration is both cash and kind, the aggregate of the fair market value of kind and cash is the full consideration.

In case where the agreed consideration is less than the guidance value fixed by the State government for the purpose of paying stamp duty and registration charge, the guidance rates fixed will be the consideration irrespective of the fact that the actual consideration may be lesser.

Another significant constituent is the cost of acquisition. Cost of acquisition includes the purchase amount paid plus various expenditures to get the title transferred including stamp duty, registration charge, legal charge and brokerage. These expenses, including the consideration amount paid, is the cost of acquisition.

When a property is acquired through partition of a Hindu Undivided Family, gift, Will or inheritance, the cost of acquisition is the cost at which the previous owner acquired the property. If the previous owner or the present transferor has spent any amount on improvements of the property, the costs are to be included in the cost of acquisition.

In case of properties acquired before April 1, 1981, the seller may opt for any one of these as cost of acquisition – cost of acquisition to the previous owner or cost of acquisition to the seller, or fair market value as on April 1, 1981. The cost of improvement includes expenditure incurred on the improvement of the capital nature of the property like additions or alterations, developments to the property etc. The cost of transfer includes expenditure incurred by a seller on transfer of property like payment of brokerage, inserting advertisements, commission to auctioneers, charges paid in preparing documents etc.

Another important constituent is the Cost Inflation Index (CII). In case of longterm capital gains, you have the benefit of the CII in respect of consideration amount and the amount spent on improvement. The Income Tax Department has taken the financial year 1981 as the base and assigned 100 points which goes on increasing every year. In order to arrive at the indexed cost of acquisition or indexed cost of improvement, the cost of acquisition/cost of improvement is multiplied by the CII of the year of transfer and then divided by the CII of the year of acquisition or improvement.

It is to be noted that the incidence of tax on capital gains is related to the period for which the property is held by a seller before sale. If the period of holding is 36 months or lesser, the property is termed ‘short-term capital asset’. The gains from transfer of a short-term capital asset are short-term capital gains. In case the period of holding exceeds 36 months, the property is termed ‘long-term capital asset’ and gains made out of the transfer of a long-term capital asset are long-term capital gains. In case one residential house is transferred and another residential house is purchased or constructed, the long-term capital gains arising out of the sale of the residential house is exempted. The exemption is available only to individual or a Hindu Undivided Family. Both the properties must be residential houses. In case any one of them is a commercial one the exemption is not available.

 The house should be purchased within one year, or should have been purchased before two years, from the date of transfer. The house may be constructed within three years after the date of transfer too. The house so purchased or constructed should not be transferred within three years after the purchase or construction.

The amount of exemption will be the amount invested in the new property or the long-term capital gains whichever is lesser. You have to deposit the amount of long-term capital gains in a capital gains account in a branch of a designated bank before the due date for filing income tax returns. The amount required for construction or purchase of a new house may be withdrawn from the capital gains account and used for the construction or purchase of the new property.

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