Reinvest your way out of capital gains burden

I had purchased a flat for Rs 15 lakh in 2003. Now I propose to sell the flat for Rs 1 crore.

What are the tax implications that would arise on sale of the flat?

Are there any avenues available to reduce my tax liability on the profit from sale of the flat? — Rajeev

As the asset has been held by you for over 36 months, the gain arising will be long-term capital gain.

From the full value of consideration deduct expenditure incurred wholly and exclusively in connection with the transfer to get net consideration (call it C). Deduct indexed cost of acquisition and indexed cost of improvement from C to arrive at D. The difference between C and D is long-term capital gains.

Section 50C provides that where the consideration in case of transfer of land or building or both is less than the value assessed or assessable by any authority of the State Government for stamp duty, the value so assessed or assessable will be deemed as the full value of consideration unless the assessee claims before the Assessing Officer that the value adopted or assessed or assessable by the Stamp Valuation Authority exceeds the fair market value or where the value adopted or assessed or assessable by the Stamp Valuation Authority is disputed in appeal or revision or reference before any authority, Court or the High Court.

In a case where the assessee claims before the Assessing Officer that the value adopted by the Stamp Valuation Authority exceeds the fair market value, the Assessing Officer may refer the valuation to a Valuation Officer and the value determined by such Valuation Officer would bind the Assessing Officer.

If the value is disputed before any authority, Court or High Court the value as determined by such authority or Court will be taken as the full value of consideration.

Cost of improvement is the expenditure of a capital nature incurred by the assessee or where the asset is acquired by way of gift, will, inheritance and so on also incurred by the previous owner on or after April 1 1981.

Indexed cost of improvement is to be computed by multiplying the Cost of Improvement by the Cost Inflation Index of the financial year of transfer and dividing it by the Cost Inflation Index of the financial year in which the improvement took place.

You may note that the cost inflation index for 2002-03, 2003-04 and 2010-11 are 447, 463 and 711 respectively.

As regards reducing the tax liability on the long-term capital gains, the same can be done by reinvesting the capital gain. Under section 54 an exemption is available on transfer of one residential house and on reinvestment in another residential house.

This exemption is available if the assessee is an individual or HUF; the gain from the transfer of a residential house is long-term capital asset; and the income from such asset is chargeable to tax under the head income from house property.

The exemption would be available to the following extent: If the amount invested is more than or equal to the capital gain, the whole of the capital gain; if the amount invested is less than the capital gain then to the extent invested.

Exemption may also be claimed by reinvestment under section 54EC. The exemption u/s 54EC is available subject to satisfying the following conditions: The asset transferred is a long-term capital asset; the investment is in the bonds of National Highway Authority of India or Rural Electrification Corporation; the bonds are redeemable after three years.

If the exemption should be claimed under section 54EC, the investment should be made before the expiry of six months from the date of transfer of the capital asset and cannot exceed Rs 50 lakh in a financial year.

A listed company registered in Hyderabad has appointed an employee in Kenya for its branch operations in that country. The company pays a salary to the employee outside of India.

What will be the TDS implications u/s 192 or u/s 195? — K.V.R. Acharya

In case of payment of salary, the provisions of section 195 will not apply. If at all an obligation to deduct tax at source arises, it would arise only u/s 192. For an obligation to deduct tax at source to arise, it is necessary that the income received by the recipient is taxable in India.

It is presumed that the employee is not a resident in India u/s 6 of the Income Tax Act. If this is so, the salary would not be taxable in India and, therefore, there would be no requirement to deduct tax at source.

The salary would not be taxable in India since under section 9(1)(ii) income from Salary is deemed to accrue or arise in India if the salary is earned in India or where the service is rendered in India.

If on the other hand the employee is a resident in India u/s 6 of the Income Tax Act or if the salary is received in India, the income will be taxable in India and therefore the requirement to deduct tax at source u/s 192 may arise.

>taxtalk@thehindu.co.in or by post to ‘Tax Talk’, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002

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