Monday, December 23, 2013

“SAVING TAX ON LONG TERM CAPITAL GAIN- ISSUES INVOLVED”




TAX TALK-23.12.2013-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“SAVING TAX ON LONG TERM CAPITAL GAIN- ISSUES INVOLVED”

Query 1]
I am presently residing in a house purchased from DDA in 1986 in the joint names of self and wife by also taking loan from the Bank. A case regarding my father’s residential property was decided by the Court in March, 2005 and property was divided by court in  3 equal shares – 1/3rd for my brother, 1/3rd for myself and 1/3rd for my father as my sisters relinquished their right in favor of my father. 1/3rd share of my brother was disposed off by him and after sale expired as well. My father who was residing with me has made a Registered Will of his 1/3rd share in my favor. My mother expired in 2002 and father in March, 2010. In this way, I became owner of 2/3rd share of that house (1/3rd mine share and 1/3rd my Father’s share by virtue of Will).
Now, I have sold this 2/3rd portion of house for Rs. 29.99 Lacs with area approx. 50 sq. mts. and Sale Deed was executed on September 22, 2013. I have deposited the above sale proceeds in S.B. Prudent Scheme A/c  (where interest is paid more than Savings Bank but at lower rate as compared to Fixed Deposit) in a Nationalized Bank in the joint names of self and wife. Please give your valuable advise in regard to following queries to deal with the sale proceeds so as to avoid Capital Gain Tax by purchasing another residential house/ opening of Capital Gain A/c / Investing in Govt. Funds:
1.      How capital gain amount will be calculated in respect of above property as Conveyance Deed of above property was got executed by my Father in the year 1965 and at the time sale by me on 22nd September, 2013, it was very old structure.  It was situated in old Delhi’s Deputy Ganj /Bahadur Garh Road Area (Circle Rate of the area at the time of sale was Rs. 58,800/- per Sq. Meter and in earlier years there were no Circle Rates notified by the Municipal Corporation of Delhi).  Please also inform me exact amount of Capital Gain.
2.      Whether the Capital Gain amount of my father’s share and my share will be different?
3.      I am looking for a residential house but want to know what is last date for me:
a] For purchasing a new residential house/plot? Whether last date for registering Sale/Purchase Deed is 21st March, 2014 or before due date of filing return for income?
b] Can I purchase two properties e.g. for Rs. 20 Lacs + Rs. 9.99 Lacs with different Municipal Numbers?
c] Whether Registry Charges/Stamp Duty/Brokerage of dealer or other expenses can be added for arriving at Capital Gain Amount i.e. Rs. 29.99 Lacs or exact amount calculated by you?
d] If I go for a plot/house for Rs. 20.00 Lacs then what other alternatives are left to me to deal with the remaining amount of Rs. 9.99 Lacs to save Capital Gain Tax?
e] Can I go for booking a developer’s flat in which case payment is to be made in installments for a period of say 2 years (certain date of possession is also not informed by developer)?
f] Whether I can purchase new house in the names of self and wife jointly?
g] If I could not materialize the purchase of residential house by the date/period advised by you then what I should do to avoid Capital Gain Tax and within what time frame? [B.K. Khurana-
iadrevaudit@pnb.co.in]
Opinion:
1.      The property sold by you is an old property which is acquired originally before 01.04.1981. The purchase price of the property could be replaced by the Fair Market Value (FMV) of the property as on 01.04.1981 while computing the amount of Long Term Capital Gain (LTCG). You can obtain the Valuation report from the Government approved valuer in support of FMV as on 01.04.1981. The FMV would be multiplied by 9.39 to arrive at the indexed cost of the house property. Further, if any expenditure/addition is done in the property after 01.04.1981, same could also be indexed and would be deductible while working out LTCG. The difference between the sale consideration and 2/3rd share of indexed cost of acquisition (& improvement also) would be the amount of LTCG. Since the circle rate of the plot (i.e., Rs. 58,800/- * 50 sq.mtr = Rs. 29.40 Lacs) is lower than the actual sale price (i.e., Rs. 29.99 Lacs), the LTCG would be computed by considering the amount of Rs. 29.99 Lacs only. In the absence of FMV/ Improvement/Addition, exact amount of LTCG could not be worked out.
2.      After the death of your father, you become the owner of his 1/3rd share in the property by virtue of his will. Entire LTCG on sale of this 2/3rd share of the property is assessable in your hands only. There is o need to segregate the capital gain on your share & your father’s share.
3.      Tax on Long Term Capital Gain (LTCG) on sale of any residential house property can be saved (U/s 54 of the Income Tax Act-1961) if the LTCG is invested within a prescribed time for purchase/ construction of a house property. The exemption u/s 54 would be available even if the taxpayer already owns another residential house property (i.e., exemption would be admissible even if second house property is purchased). Another option to save LTCG tax could be by investing the amount of LTCG within a period of 6 months from the date of transfer in the specified bonds issued by Rural Electrical Corporation (REC) or National Highway Authority of India (NHAI).
a] Time limit to Purchase the Property: Exemption u/s 54 is available if the taxpayer invests the amount of LTCG for purchase/construction of a house property. The time period within which investment should be done is as under:
a] For Purchase: Within O
ne year before or two years after the date of transfer; or
b] For construction: Within a period of three years from the date of transfer.
If you are planning to purchase a flat, you have to complete the transaction of purchase before 21.09.2015. Mere investment in plot is not sufficient for claiming an exemption u/s 54. However, if the house is constructed thereon then the cost of the plot would also be eligible for exemption u/s 54 along with construction cost. 
Scheme of Deposits:
Even though u/s 54, taxpayer is allowed 2 years for purchase and 3 years for construction of the house property, the capital gain tax on such transfer is taxable in the previous year in which transfer took place. The return of income of that previous year has to be filed before the specified date i.e., due date. Hence, the tax payer has to take a decision for purchase/ construction of the house property before the date of furnishing of the return otherwise the capital gain would be taxable. To cope up with such situation, Income Tax Act has specified an alternative in the form of Deposit under the Capital Gain Deposit Accounts Scheme-1988 (CGDAS) for earmarking the amount for purchase/construction within specified time limit. The amount of LTCG which is not utilized by the taxpayer for purchase or constructions of the new house till due date has to be deposited under the CGDAS before the DUE DATE of furnishing the return of income. After deposits, the amount already utilized by the taxpayer for purchase/ constructions of the new house till due date, along with unutilized LTCG so deposited, shall be eligible for exemption u/s 54 in the year in which LTCG has arisen. Later on, whenever taxpayer purchase/ constructs the house property within a specified time slot, he can make payment from the CGDAS.
b] Exemption u/s 54 is available if the assessee invests the amount of LTCG for purchase of “a” residential house property. Interpretation of the word “a” is a matter of controversy. To be on a safer side, you are advised to invest the amount of LTCG in one house property only. You may further note that, for claiming an exemption u/s 54, you are required to invest the amount of LTCG only (not entire sale consideration of Rs. 29.99 Lacs).
c]
Registry Charges/Stamp Duty/Brokerage etc can be added to the cost of new flat for arriving at the amount of exemption u/s 54.
d]
If you are not able to utilize entire LTCG for new house property, you can invest balance LTCG in the specified bonds issued by NHAI/REC. Exemption U/s 54 & U/s 54EC can be claimed simultaneously as well. If you are planning to invest in specified bonds, ensure to make the investment within a period of 6 months i.e., before 21.03.2014.
e] You can claim an exemption u/s 54 by booking a flat & making the payment in installment to the developer. After considering the amount paid to developer till due date of filing the return of income, ensure to deposit the balance of LTCG in CGDAS. Subsequent installment can be paid to the developer from CGDAS.
f] You can incorporate the name of your wife also in the sale deed for the name sake. Ensure to make the payment through your account only so that you would be able to prove that your wife don’t have any ownership stake in the property & her name is incorporated in the sale deed for the convenience only.
g] If you are not sure of investing LTCG for purchase or construction, you can safely & timely think of claiming an exemption u/s 54EC by investing it in the specified bonds issued by NHAI/REC.


[The author is a practicing Chartered Accountant and is a partner of M/s. SSRPN & Co., Nagpur. Readers may send there queries at cassrpn@gmail.com.  If you wish to unsubscribe from the mailing list, please reply back “unsubscribe” on the same email id]

Sunday, December 15, 2013

“AMOUNT RECEIVED ON SURRENDER OF TENANCY RIGHT IS TAXABLE !”



TAX TALK-16.12.2013-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“AMOUNT RECEIVED ON SURRENDER OF TENANCY RIGHT IS TAXABLE !”

Query 1]
A mother of my friend who is a widow seeks clarification/advice from you regarding income from ancestral property. As per the tax law, income received through disposal of ancestral property comes under Capital Gain Tax & to avoid Capital Gain Tax amount received through disposal of property should be utilized in purchasing of house or in construction of house. Her share after disposal is so small that no house can be purchased or can be constructed. Then,
1.      How  to  save  Capital  Gain  Tax  on  such  amount ?
2.      Can amount be invested in regular fixed deposits in Bank?
3.      Can  whole  amount  or  part  of  it  can be  gifted  to  her son or  daughter?
4.      Can  amount be utilized  by  her  for  day  to  day requirements  of  life?
5.      If it is done so, then what will be the tax implication? She is a housewife & not coming under the bracket of tax limit.  [Vinod Hande -vkh0811@gmail.com]
Opinion:
1.      Apart from investment in purchase/ construction of house property, tax on Long Term Capital Gain (LTCG) can be saved U/s 54EC by investing the amount of LTCG in the specified bonds issued by Rural Electrical Corporation (REC) or National Highway Authority of India (NHAI). The investment has to be done within a period of 6 months from the date of transfer. The application form for subscription is available at www.recindia.nic.in or at www.nhai.org. As her other income is below the basic exemption limit, the unused basic exemption limit can be reduced from the amount of LTCG and she would be required to invest the balance amount only u/s 54EC, for saving tax.
2.      The investment in fixed deposits with banks won’t help her in saving LTCG Tax. However, she can just invest the amount of taxable LTCG (as reduced by the unutilized basic exemption limit) only in the specified bonds u/s 54EC and the balance of the sale consideration can be used as per her convenience. The same can be invested in Bank FDR as it could provide her with better liquidity and returns.
3.      Gift by mother to her son or daughter is tax neutral and don’t have any tax repercussion.
4.      There is no bar in the using the funds for household or any other purposes.
5.      If she don’t wish to claim an exemption either by purchasing or constructing the house property or by investing in the specified bonds u/s 54EC, she would be liable for LTCG tax @ 20% on the amount of taxable income [i.e., on LTCG Less the amount of unutilized basic exemption limit].

Query 2]
I am a partner in a firm with my elder brother. A property was taken on rent by my forefathers some 60 years back. In family partition, the said property was given to me and my brother. The rent agreement is in name of firm. Now I want to surrender my portion. I will get approx Rs. 80 Lacs for surrendering my portion to the landlord. My brother will continue existing business in other half. I request you to please enlighten on the taxability of above Rs. 80 Lacs. Further, I have also learnt that if benefit of indexation is not availed long term capital gain is taxable @ 10%. Can I divide this income between myself, my wife and son as we got these rights through our forefathers? Also suggest tax saving tools for the same. Partnership deed is registered between me and my brother. [V***********]
Opinion:
1.      The tenancy right is a capital assets and surrender of tenancy right for Rs. 80 Lacs would yield Long Term Capital Gain (LTCG).
2.      The benefit of 10% tax rate without indexation is available only on transfer of listed securities or unit or zero coupon bonds. The benefit is not available to LTCG arising from transfer of tenancy right or any other capital assets.
3.      The important question that remains here is about the taxability of such amount.
Taxability, tax saving options & other implication would depend upon multiple factors and documents. Apparently, it appears that the amount would be taxable in the hands of the firm as the tenancy right belongs to firm.

Query 3]
I have made registered agreement for purchase of plot at Nagpur in December, 2009 by paying whole amount of plot i.e., Rs. 3 Lacs (Market value of said plot was Rs. 2.94 Lacs). Expenditure on registry was also borne by me. As the plot is not having town planning sanction, hence till date, sale dead of plot is not executed. I have requested land developer to return my money and cancelled the agreement; he is also ready to return my money Rs. 3 Lacs plus registry amount of Rs. 10,000/-. Let me know that are there any Income tax liabilities on me? Today market value of said plot is Rs. 8.80 Lacs. [Shailendra Kuralkar- svkuralkar@rediffmail.com]
Opinion:
Taxability on the cancellation transaction would depend upon the clauses incorporated in the agreement to sale. More particularly, it would be dependant on the clause incorporated in relation to “possession” of the plot. In normal course, the amount received back on cancellation of agreement to sale may not be taxable on the basis of prevailing Stamp Duty valuation.

Query 4]
My wife is unemployed. She has a PAN card. Last financial year, while starting an FD in Union Bank, Raipur, she could not mention her PAN number. Therefore, TDS has been deducted @ 20% by the Bank from the interest she earned. This fact has come to know only at the time of maturity of FD. As we have not mention the PAN number, the Bank is not issuing the TDS. Please let me know whether any way to get the TDS from the Bank and claim for a refund from IT Deptt. [mohandas1956@sify.com]
Opinion:
She can get the income tax refund after filing the income tax returns only. However, in the absence of TDS certificate being issued or TDS amount reflected in 26AS of the taxpayer, getting a refund would be a difficult task. You can write a letter to the bank intimating the PAN of the depositor and can ask them for issue of the TDS certificate. They can issue the TDS certificate by filing a corrected TDS return. After filing the corrected TDS return, the TDS amount would also be reflected in the 26AS statement of the taxpayer.

[The author is a practicing Chartered Accountant and is a partner of M/s. SSRPN & Co., Nagpur. Readers may send there queries at cassrpn@gmail.com.  If you wish to unsubscribe from the mailing list, please reply back “unsubscribe” on the same email id]