If asset is held for less than 36 months from date of
purchase, gains from sale is termed as STCG.
Shyamal Banerjee/Mint
My wife and I have booked a flat in Pune with my wife as the primary owner. Its registration was done on 19 June 2010, the agreement is dated 14 May 2010 and the booking amount date was 28 January 2010. While the flat is ready for possession, I am yet to take possession. If I sell it in January or February 2013, what will be the tax implications? Are there any saving avenues? If I sell the property after three years from the agreement date (without taking possession till that date) then will long-term capital gains be applicable?
—Anil Bilawala
Determining the date of purchase of an under-construction property
has been a matter of debate, particularly in the light of various real estate
arrangements prevalent in the market. There are conflicting views on the
subject. One view possible is that the date of purchase of property shall be the
date of issue of letter of allotment (presumably 28 January 2010 in your case)
for the under-construction property. But this would happen only if the said
letter specifies the details about allotment of flat in the proposed building,
which means if the said letter in a way irrevocably binds you as the purchaser
of the property or gives you an unconditional right to dispose the property.
However, there are contrary judicial precedents, which have held
that the date of executing the purchase agreement with the builder (in your
case, 14 May 2010) could be construed from the date of execution of the said
agreement and subsequent date of registration or possession is not
relevant.
Even if your wife is the primary owner, if the apartment has been
entirely funded by you, then the gains, if any, shall be taxable in your hands.
However, if the apartment was funded by both of you, then the gains would be
considered as income in your and your wife’s hand proportionately.
The actual paperwork needs to be examined to verify if the sale of
the asset is that of the “flat” or “the right to secure a flat”. A crystallized
right to receive an asset is also an asset for the purpose of calculating
capital gains tax. Accordingly, the period of holding has to be calculated.
If the asset is held by you for less than 36 months from the date
of acquisition, the same shall be termed as short-term capital asset and gains
arising from the sale of the asset shall be termed as short-term capital gains
(STCG). Since there is no mechanism whereby an exemption from STCG could be
availed, the entire STCG shall be taxable as per the applicable tax slab rate.
If the asset is held for more than 36 months from the date of
acquisition, it shall be classified as a long-term capital asset and the gains
shall be termed as long-term capital gains (LTCG). Exemption from LTCG tax could
be availed by reinvesting LTGC into a new residential apartment as per section
54 of the Income-tax Act (in case the asset transferred is a flat).
The investment in a new apartment should be made either within one
year prior to the sale date or two years from the sale date or within three
years for an under-construction property. If you propose to invest the entire
LTCG in a new residential apartment for tax exemption but are unable to invest
before the due date (31 July) of filing tax returns, you could deposit the
unutilized LTCG amount into the Capital Gains Account Scheme (CGAS) as per the
provisions of the Act and claim exemption in the year of the asset’s sale.
However, you should invest the amount deposited into CGAS towards purchase or
construction of a new residential apartment within the aforesaid investment time
frames (within two years if the new property is acquired or within three years
if the property is constructed).
If the asset transferred is a “right to secure a flat”, then the
exemption from LTCG tax could be availed by re-investing the net sales proceeds
into a new residential apartment as per provisions of section 54F of the Act
subject to prescribed conditions. One of the condition categorically requires
that at the time of claiming an exemption under section 54F, you should not own
more than one house (other than the new house/apartment) on the date of sale.
Further, the aforesaid time frames in respect of re-investment shall also be
applicable.
Alternatively, you could invest the LTCG arising from sale of asset
in specified bonds issued by the National Highways Authority of India or Rural
Electric Corp. Ltd within a period of six months from the date of transfer of
old asset up to Rs.50 lakh per fiscal.
Please note that if the new apartment purchased/constructed as per
the provisions of section 54 or 54F is sold or the investment in bonds made as
per section 54EC are converted into cash within three years, the exemption
claimed from LTCG in respect of the old asset (the flat or right to secure a
flat) shall be revoked.
The amount invested in a new residential apartment or specified
bonds as per the aforesaid provisions of the Act shall be claimed as exempt from
tax and the balance amount, if any, should be offered to tax at 20.6% (including
education cess). While calculating the LTCG, the cost of acquisition and
improvement, if any, should be inflated/adjusted by applying the cost inflation
index notified by the tax authorities.
In case you own more than two residential properties, the
income-tax and wealth tax implications will need to be separately examined.
Queries and views at mintmoney@livemint.com
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