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On January 24, 2018, we sold an apartment in Ernakulam for ₹41 lakh. The property was registered in the name of me and my wife. The details are given below:
The apartment was constructed in 2002 for ₹10 lakh with a loan of ₹8.5 lakh from HDFC. This was cleared by the end of 2008. The total amount, including land value was ₹14 lakh.
I am planning to purchase my family property in Kerala soon using this money. I have already paid for some expenses out of this sum — ₹2 lakh towards various expenses, including broker charges plus major maintenance charges of ₹1 lakh. Note that I was an NRI until 2013.
Please advise on the tax implications.
Ramakrishnan
According to the provisions of the Income Tax Act, 1961, any income arising on sale of capital assets is chargeable to income tax under the head capital gains. Capital assets as defined under the Act, includes house property. Assuming that the land was also acquired in 2002 and the apartment was constructed the same year, the property shall be treated as long-term capital asset and any gains arising on sale of such property shall be considered as a long-term capital gain (as the property has been held for more than 24 months before sale).
The long-term capital gain from the sale of such capital asset shall be taxed at 20 per cent (applicable rate for FY 2017-18) after adjusting the cost of acquisition and improvement by cost inflation index. Further, I understand that you have incurred certain brokerage expenses for selling the property. Such expenses shall be eligible to be reduced from the sales consideration to arrive at the net sales proceeds (to be considered for computing capital gains from such sale).
However, Section 54 of the Act provides for exemption against the long-term capital gain arising from the sale of a residential house (‘original asset’). This exemption is available where the amount of capital gain arising on account of such sale is either invested to purchase another residential house (‘new house’) within one year before or two years of the transfer of original asset or the same is invested to construct a residential house property within three years of the transfer of original asset. In case, the amount of capital gain is equal to or less than the value of the new house being purchased, the whole of the capital gain shall be exempt from tax. Else, the balance capital gain shall be taxable.
Thus, if you invest the capital gains for purchase of another property (family property at Kerala) within the aforementioned period, the amount of capital gain to the extent so invested shall be exempt from tax. Please note that your NRI status till 2013 does not have any impact on the taxability of the capital gains arising from a property situated in India.
In relation to the expenses incurred, I understand that after selling off the original asset, you have also incurred ₹1 lakh on major maintenance of the family property at Kerala. You may note that any expenses incurred as cost of improvement of the property (which enhances the value of property) shall be considered as deductible cost at the time of sale of the new asset.
The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in
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