Personal Finance

Invest in a house for capital gains relief

PARIZAD SIRWALLA | Updated on May 14, 2011 Published on May 14, 2011

I purchased a 1BHK flat in Pune in 1993. In 2002 I was able to buy a 2BHK flat which is now self-occupied. I now intend to sell the first flat and invest the entire proceeds in buying another house (with balance amount as loan from bank), which may be self-occupied.

The 2BHK may be rented out. Will the capital gains received on the sale of the first house be fully exempt from tax and also under DTC if sold after April 1, 2012?

You can claim deduction from taxable income for capital gains arising on account of transfer of residential property by investing in new residential house.

The deduction is restricted to the lower of the amount invested in new house or capital gains arising from transfer of the old residential house. But you should have purchased the new house within one year before or within two years after the date of transfer of the old house. If unable to meet the deadline, deposit the money in the Capital Gain Account Scheme with a prescribed nationalised bank to claim the deduction.

Ensure that the new house is not sold within three years, else the deduction gets revoked.

Under the Direct Taxed Code the deduction from capital gains will be in proportion to investment in new property to the net sales consideration. Further, you cannot own more than one residential house other than the new house, on the date of transfer of the original asset vis-à-vis the existing provisions, which is more restrictive. In case the property is sold after April 1. 2012, and you own more than one property as on the date of transfer other than the new property, the deduction from capital gains may not be available.

I urchased shares of Chicago Pneumatic Tools Ltd in public issue in 1984 for Rs 1,750. The company was merged with Atlas Copco Ltd and I received 72 shares. Recently Atlas Copco brought back the shares for delisting and I was paid Rs 1,98,000 for the shares.

Please advice: Do I have to pay any tax on the amount received or can I claim I-T exemption under Rs 2,00,000 a year. I am a housewife not filing any return. My yearly income from deposits, agricultural is less than Rs 1,00,000.

The gains arising on account of buy back of shares by Atlas Copco Ltd is taxable as capital gains. The capital gains are long-term here as the holding was for over 12 months.

Capital gains will be computed as difference between the consideration received by you from Atlas and the ‘indexed cost of acquisition' of the shares originally acquired by you.

In case, the long-term capital gains are within the threshold of basic exemption limit, you would not be liable to pay taxes. For a resident woman of 60 years and below, the basic exemption limit is Rs 1,90,000. Agricultural income is exempt from tax.

Can you please provide legal guidelines to manage my father-in-law's retirement corpus?

My father-in-law is a retired Government servant. His retirement corpus is 50 lakh.

He would like to open two MIS senior citizen account (Rs 15 lakh each) at post office — one for himself and the other for his wife. My mother-in-law is a housewife. She has a PAN number. This is to save tax on interest income from post office. Please let us know if this is possible or not.

With the remaining Rs 20 lakh, my father-in-law would like to pay home loan, putting some money in FD. He will buy a health insurance cover for Rs 5 lakh.

In computing income of an individual, any income arising to the spouse on account of transfer of assets directly or indirectly without adequate consideration is clubbed in the hands of the individual. In view of this provision, any interest earned by your mother-in-law on the MIS senior citizen account needs to be included in the income of your father-in-law and accordingly tax needs to be paid by him as the funds belong to him.

Principal repaid towards loan taken for purchase or construction of a residential house from specified lenders is eligible for a deduction under Section 80C of the Act. This is subject to the overall ceiling of Rs 1,00,000 per annum of the said section.

Interest earned on fixed deposits would be taxable in the hands of the individual. Premium paid to keep in force insurance of senior citizen is eligible for deduction of Rs 20,000 under section 80D.

Our comments are only from a tax perspective, and it is advisable to take note of the legal perspective also.

(The author is Executive Director, Tax, KPMG)

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