Sunday, May 12, 2013

WANT TO INVEST THE MONEY FROM SALE OF “AGRICULTURAL LAND & PLOT” FOR PURCHASE OF “A READYMADE HOUSE”: INCOME TAX SAVING


TAX TALK-13.05.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

WANT TO INVEST THE MONEY FROM SALE OF “AGRICULTURAL LAND & PLOT”  FOR PURCHASE OF “A READYMADE HOUSE”: INCOME TAX SAVING

Query 1]
I am in Government job and purchased an agriculture land for total amount of Rs. 4.00 Lacs  in the year 2008 and a plot in city area for total amount of Rs. 6.50 Lacs in the year 2011 (through loan & self saving). I want to sell these properties in the FY 2013-14. Please provide following information:
1.      Tax liability on capital gain;
2.      Presently, I do not own any house and want to invest above money to purchase a readymade house (new or old). What would be tax liability in FY 2013-14 or onwards if house is purchased after 2013-14?;and
3.      Till investment in readymade house, I want to do investment in Fixed deposit/ Bonds of Government owned bank/ company, Post office certificates etc. What would be tax saving as per Income Tax Act? [Dilip Singh-om1950lal@yahoo.co.in]
Opinion:
Tax Liability on Sale of Agricultural Land:
1.      In normal course, any income from transfer of agricultural land, which is being used for agricultural purpose, shall be tax free if the agricultural land is not situated in any area within the distance (measured aerially) of not more than:
a] 2 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
 b] 6 kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
c] 8 kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
2.      If the agricultural land is situated within the radius of 2 kms/ 6 kms / 8 kms as mentioned above, then depending upon the period of holding, the profit arising on sale of agricultural land will be taxable as Long Term or Short Term Capital Gain.
3.      In your specific case, if the agricultural land is not covered in the situation mentioned in (1) above then the profit arising on sale of agricultural land would be taxable as Long term Capital Gain as the agricultural land is having a holding period of more than 36 months. In absence of the exact reference of the date/financial year of acquisition in the query, Stamp Duty valuation of the land at the time of sale & also the non availability of the Cost Inflation Index (CII) for the FY 2013-14, the amount of Long Term Capital Gain could not be worked out. The CII for the FY 2013-14 has not yet been notified by the CBDT & it is expected that the same may be notified in this month itself.

Tax Liability on Sale of Plot:
1.      The plot was purchased by you in 2011 and you are planning to sell it in the FY 2013-14. The profit on sale of plot would be a Long Term Capital Gain if it is sold after a holding period of more than 36 months. If the plot is sold within a period of 36 months, the profit would be treated as Short Term Capital Gain and for tax purpose, would be treated like your other regular income. It would be taxable as per the applicable tax slab to your income. Since you are ultimately planning to utilize sale proceeds for purchase of a residential house property, it is advisable to sell the plot after completing the holding period of 36 months so as to claim tax benefit conferred by section 54F.
2.      In absence of the exact reference of the date/financial year of acquisition in the query, Stamp Duty valuation of the plot at the time of sale etc, the amount of Capital Gain could not be worked out.

Tax Liability if the Sale proceeds is utilized for purchase of a Residential House property:
Subject to various other terms / stipulations, Tax on Long Term Capital Gain (LTCG) arising from the transfer of plot or urban agricultural land can be saved u/s 54F if the sale consideration is used for purchase of a residential house property within a prescribed period. The time limit prescribed for the purpose is:
a] For purchase:
One year before or two years from the date of Transfer.
b] For Constructions:
Three years from the date of Transfer.

It may be noted that although section 54F offers the time period of 2 years for purchase & 3 years for construction, the return of income is required to be filed before the specified date which is much shorter than the time period granted by Section 54F. If investment for purchase/ construction is not done by the tax payer before the due date of return filing, the amount need to be isolated by depositing it in the Capital Gain Deposit Accounts Scheme-1988 (CGDAS). Readers who wish to claim an exemption u/s 54F may note that if the amount is not invested for purchase/construction before the DUE DATE of furnishing the return of income, then it should be deposited under the CGDAS, before the DUE DATE of furnishing the return. After Deposit, the amount already utilized by the tax payer for purchase/ constructions of the new house along with the amount so deposited, shall be eligible for exemption under section 54F in the year in which LTCG has arisen.

[Consequence where the amount deposited in the capital gain deposit account scheme is not utilized for the purchase or the construction of a residential house property within the specified period:
In this case, the amount not so utilized shall be charged as capital gain of the year in which the period of 3 years from the date of LTCG expires and it will be taxable as LTCG of that year. The assessee then shall be eligible to withdraw the amount from the scheme. As per scheme, he is required to submit an application in Form G after getting the approval of the Assessing Officer.]

With above basic idea, it may be noted that temporary parking of the funds in fixed deposits/ bonds / post office certificates after the due date of furnishing the return of income, may obstructs your exemption claim u/s 54F. If you have to claim an exemption u/s 54F, you have to choose CGDAS as an investment tool for temporary investments of the funds.




Saturday, May 4, 2013

“CLOSING ONE HOUSING LOAN ACCOUNT AND AVAILING ANOTHER HOUSING LOAN FOR CONSTRUCTION: INCOME TAX IMPLICATIONS”


TAX TALK-06.05.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

“CLOSING ONE HOUSING LOAN ACCOUNT AND AVAILING ANOTHER HOUSING LOAN FOR CONSTRUCTION: INCOME TAX IMPLICATIONS”
Query 1]
With regard to personal taxation, please clarify the following.
My Bank has permitted me to avail Leased Accommodation facility at Bangalore, to enable my family to continue to stay there. Our Bank is also deducting Monthly Lease Rent, as per our Pay Scale, which is about Rs. 400/- pm. However, I am also paying monthly rent of Rs. 5,000/- for my accommodation at Nagpur. Please inform me, whether I can claim deduction for House Rent paid by me as I am also paying tax for the Leased Accommodation provided by my employer.  [Sivaram.G-sivaram.ganeshan@sbm.co.in]
Opinion:
You are provided with the leased accommodation by your employer and probably you may not be receiving the House Rent Allowance (HRA).
For the mass benefit, I am elaborating the provision related to availability of deduction to the salaried assessee towards the rent payment.
1.      Assessee receiving HRA from Employer:
Salaried Assessees who are in receipt of HRA from an employer can claim an exemption u/s 10(13A) of the Income Tax Act-1961 read with Rule 2A of the Income Tax Rules, 1962. The least of following can be claimed as deduction u/s 10(13A):-
a.       An amount equal to 50% of salary, where the residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where residential house is situated at any other place;
b.      House rent allowance received by the employee in respect of the period during which the rental accommodation is occupied by the employee during the previous year; or
c.      The excess of rent paid over 10% of salary.
Following points need to be taken in to consideration while calculating the amount of HRA admissible as exemption u/s 10(13A):
i.        “Salary” for the purpose of computation of exemptions u/s 10(13A) means Basic Salary and includes Dearness Allowance if terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per the terms of contract of employment AND EXCLUDES ALL OTHER ALLOWANCE & PERQUISITE.
ii.     Exemption is not available where an employee lives in his own house, or in a house for which he doesn’t pay any rent.

2.      Assessee not receiving HRA:
Any individual who is not in receipt of HRA from the employer can claim deduction towards rent payment for residential accommodation u/s. 80GG of the Income Tax Act.
The condition precedents for deduction u/s 80GG are as under:-
a] He has to prepare a declaration in Form No.10BA.
b] He or his minor child, spouse or HUF of which he is a member, should not be owner of a house at the place where he ordinarily resides or performs his duties; or he should not be owner of any house at any other place, the income therefrom is to be determined under section 23(2) (a) or, as the case may be, under section 23(4) (a) (i.e., income from self-occupied house property).

3.      Subject to compliance of the other stipulations mentioned above, you can claim deduction towards the rent paid for residential accommodation in Nagpur.

Query 2]
I have taken Housing Loan for purchase of a flat. I have taken another loan from our employees’ society for purchase of a plot. Now, I wish to close the housing loan taken for Flat & to take another housing loan for construction of house on the plot. Please Guide me whether another housing loan taken for construction of house will be eligible for Income Tax Benefit though I am owner of a flat? [Ravi Bagade- brmgr241@mahabank.co.in]
Opinion:
Regularly, I am getting numerous queries about the tax benefit & tax implications in respect of the second house property. It may be cautiously noted that the housing loan benefit & tax implications for the second house property is not similar/ same as applicable to the first house property.
The second house property has a different tax treatment under the Income Tax Act-1961.
For the mass benefit, I am elaborating the tax issues involved in the second house property as under:
1.             The income from house property is taxable on the basis of its “Annual Value”.
(The term “Annual value” is elaborated at point No. 5 hereunder.)
2.             One house used by the tax payer for his/her own residence is exempt from tax as its annual value is treated as Nil.
3.             Where the assessee owns only one house property and it cannot actually be occupied by him because it is situated at a place other than a place where he is employed or carries on business or profession, in such a case also the annual value of the property is taken as nil provided the property is not actually let out.
4.             If taxpayers have two or more houses which are used for own residence, then assessee have the option to choose one of the house (according to his own choice) as self-occupied house, for which an assessee would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether not actually let out].
5.             What is Annual Value of house property and how it is determined?
The annual value means the amount for which the property might reasonably be expected to be let out from year to year. However, if the actual rent received or receivable in respect of any let out property is higher, it shall be treated as its Annual Value. The annual value is always taken to be NIL in case of one self-occupied property.
6.             How to calculate annual value/taxable value of property:
Annual value of property is considered as higher of the following:
(i) Actual rent received a year;
(ii) Reasonable expected rent of the property.
[ The reasonable expected rent is deemed to be the sum for which the property might reasonable be expected to be let out from year to year and is normally higher of  (a) municipal value; (b) fair rent. However, if the property is covered by a Rent Control Act, then the amount so computed cannot exceed the Standard Rent determinable under the Rent Control Act.]
As mentioned earlier, the assessee has the option to choose only one house as self-occupied property. Rests of the properties are assessable to income tax on the basis of its annual value.
7.             Deductions:
From the annual value the following deductions are available under the Income Tax Act: -
a] Municipal Tax paid.
b] 30% of the net annual value of the house property towards Repair & Maintenance charges (Deduction is fixed @ 30% whether assessee incurs more or less amount on repair and maintenance of the house).
c] Actual Interest paid on housing loan whether house is actually let
out or is deemed to be let-out.
d] For self-occupied property, maximum interest on housing load is restricted to Rs. 1,50,000 p.a., subject to certain other stipulations.
8.             Effectively, if Assessee owns more than one house property & is kept for own use,
a] one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
b] Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above.
In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit.
However, for the second house property, no deduction is available for repayment towards the
principal portion of housing loan under section 80C as clause ( xviii)
to section 80C of the I T Act reads as under: -
"(xviii) for the purposes of purchase or construction of ‘ a’ residential house property the income from .....".