Save taxes by investing in NHAI bonds

I had earned a sum of Rs 29.10 lakh as long term capital gain (LTCG) on sale of land in Kolkata corp area and a flat in city. The sale value of the both stands at Rs 42.5 lakh . LTCG is calculated according to the Index. Both sales were made during the financial year (FY) 2010-11

How much amount should I to invest (minimum) to purchase new properties –flat, shop, land to save the capital gain tax?

— Swarajya Bhatia

Provisions under the Income tax Act, 1961 (“the Act”) for claiming exemption from tax in respect of LTCGs from sale of land is separate from the sale of residential house property. Though in both the cases, exemption from tax in respect of LTCG can be claimed by investing the sales proceeds or capital gains, as the case may be, in a new residential house. However, the calculation methodology of both the exemptions is separate and amount to be claimed as exemption should be calculated separately.

LTCGs from sale of land: Under Section 54F of the Act, you could claim LTCG arising from sale of land as exempt from tax by investing in a new residential house subject to the prescribed conditions.

Where the cost of new house exceeds the net sale proceeds, entire LTCG should be exempt from tax. However, where the cost of new house is lower than the net sale proceeds, LTCG is exempt from tax in proportion of cost of new house to the net sale proceeds.

However, the exemption under Section 54F of the Act could be availed subject to fulfilment of prescribed conditions. Once of the condition categorically requires that at the time of claiming an exemption under Section 54F of the Act, you should not own more than one house (other than the new house), on the date of sale. While investing the sale proceeds, you need to ensure compliance with the said provision.

Further, you should not purchase or construct any residential house (other than the new house) within a period of one year or three years, respectively, after the date of sale.

Alternatively, you may consider claiming exemption from tax under Section 54EC of the Act by investing the sale proceeds in specified bonds issued by National Highways Authority of India or Rural Electrification Corporation Ltd within six months from the sale date up to cap of Rs 50, 00,000 during any financial year (FY).

LTCG from sale of residential property: Under Section 54 of the Act, you could claim LTCGs arising from transfer of residential flat as exempt from tax by investing in new residential house. The exemption is capped to lower of the amount invested in the new house or the capital gains arising from the transfer of the old house.

Alternatively, as mentioned above, you could invest the sale proceeds during the FY in specified Bonds and claimed deduction under Section 54EC of the Act.

Under the provisions of both section 54 and 54F of the Act, the new residential house should be purchased within one year before or two years after the sale date.

In case of construction of new house, the same needs to be completed within three years from the sale date.

Also, in order to claim parallel exemption under Section 54 and 54F of the Act, conditions prescribed under both the sections must be met.

However, if one is unable to make the new investment either partly/entirely by the due date of filing your personal tax return, then the unutilised money could be deposited in the “Capital Gain Account Scheme” prior to due date of filing of personal tax return subject to prescribed conditions.

I am a Resident Indian and work for a company in Chennai, which is a wholly owned subsidiary of the parent company in the Netherlands (unlisted company). In August 2007, all the employees in all countries were allotted "free shares /Certificates worth €500".

In September 2011, my company was sold out to a Sweden company (Listed company in Sweden) and our shares are paid out. We received "€10,725 equivalent to Rs 6, 95,000 after forex conversion" in our salary account. I am not sure if €10,725 paid to us is after paying tax in the Netherlands (or) not.

1) Do I have to pay any tax on this amount which I received in INR?

2) If I have to pay tax, how do I show it in tax returns next year?

— Y. Suresh

We understand that the actual shares were allotted to you on August 2007. During the FY 2007-08, the Fringe benefit tax law (FBT) was applicable, whereby the employers were required to pay FBT at the time of allotment of shares to the employees according to prescribed provisions in this respect.

In your case, if actual shares were allotted to you in 2007, the employer must have complied with the erstwhile FBT tax provisions at the time of allotment of shares in August 2007 and paid FBT in India.

Assuming, now the shares are sold and net proceeds are paid, you would be taxable in respect of the capital gains arising from the sale of shares. The capital gains would be computed as difference between the sale proceeds and cost of shares.

Where FBT has been paid by the employer at the time of allotment of shares, the cost for the purpose of capital gain calculation shall be the Fair Market Value as on date of vesting/allotment of shares, which is considered by the employer for the purpose of payment of FBT.

Further, as you have held the shares for more than 12 months from the date of allotment, the capital gains would be termed as LTCG. Since the shares are of foreign company, we understand that the Securities transaction tax would not have been paid. Therefore, LTCG would be taxable at 20.9 per cent (including education cess).

You could pay the taxes by way of advance tax if paid before 15 March, 2012 or by way of self assessment tax if paid after 31 March, 2012. Alternatively, you could disclose the capital gains to your employer through prescribed form for deduction of tax purpose. In case any taxes have been deducted and paid by your employer at the time of payment of sale proceeds in the Netherlands (NL), you may be eligible to claim a foreign tax credit subject to fulfilment of prescribed conditions under the Act and the India and NL Double Tax Avoidance Agreement.

However, you should specifically check with your employer whether the FBT was paid in India at the time of allotment of shares and whether any taxes have been paid in NL. In case, FBT is not paid by the employer, the entire sale proceeds arising from sale of shares should be taxable in your hands.

(The author is Executive Director, Tax, KPMG.)

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