Tax Talk

I own a commercial shop at Vasai (E), Thane district, Maharashtra. I bought it in December 2007, and full payment was done by end of March 2008.

My queries are:

1) I wish to sell the property now. I am making a long term capital gain of Rs 8 lakh. Can I invest in a new commercial property so that I do not have to pay tax? Do I have to invest the entire sale amount or only the amount of capital gains for tax benefit?

2) Can I invest in a new residential property? Do I have to invest the entire sale amount?

3) Within how much time do I have to re-invest the amount to avoid tax?

4) Can I adjust the capital gains against losses in short-term speculation losses in equity market? Or against losses in short-term losses in sale of shares?

— Paresh Chandarana

According to the provisions of the tax laws, capital gains arising from the transfer of any long-term capital asset (being any long term asset other than house property), shall be exempt from tax if net sale consideration from the asset is invested in a new residential house, subject to the condition that the assessee should not own more than one residential house other than the new asset, on the date of transfer of the original asset or purchases or constructs any residential house, other than the new asset, within a period of two years or three years respectively after the date of transfer of the original asset. Please note that the exemption is not available if you invest the sale proceeds in a new commercial property.

The exemption shall be applicable to the extent the net sale consideration is invested in the cost of the new residential house. If the cost of the new asset is more than the net sale consideration in respect of the original asset, the whole of the capital gain shall be exempt, else only the proportioned amount will be exempt.

The individual has to purchase the new house, within a period of one year before or two years after the date on which the transfer took place. Alternatively, the individual can construct a new house within three years from the date of sale. Any amount that has not been used towards the purchase or construction of the house till the date of filing of return has to be deposited in the capital gains scheme account and used for purchase or construction within the stipulated time period.

Loss from transfer of a long term capital asset can only be set off against gain from transfer of any other long term capital asset in the same year. Hence, you will not be able to adjust the long term capital gains against short term capital losses in shares.

I have recently inherited a flat, originally bought for Rs 35 lakh in November 2009. I intend to sell it in a few months (more than 3 years after its purchase by the original buyer) and I expect to get around Rs 50 lakh for it. Could you advise me briefly on the capital gains or other tax liability, if any, on the sale proceeds of the flat? I am a retired senior citizen with other income only from annuities and interest on FDs totalling about Rs 2.5 lakh a year and file income tax returns regularly.

— Sukumar Arnold

(i) We understand that you inherited a flat originally purchased in November 2009 and will dispose the same in financial year 2012-13. Hence it qualifies as a long term capital asset (LTCA). According to the Income-tax Act, 1961, long term capital gains (LTCG) arising out of sale of LTCA shall be computed by deducting from the sale proceeds the indexed cost of acquisition/improvement and any expenditure incurred wholly and exclusively for the sale of flat.

According to the plain reading of the Act, the cost indexation benefit shall be available to the assessee from the year the asset was first held by him. However, reference can be drawn from various case laws to support the view that the benefit of cost indexation shall be available from the year in which such property was acquired by the previous owner. The resulting gain will be subject to tax at rate of 20.6 per cent (inclusive of Education Cess and Secondary and Higher Secondary Education Cess). You can claim exemption from paying tax on the said capital gains by investing in a residential house property or specified bonds subject to specified conditions.

Mail your queries to >taxtalk@thehindu.co.in

(The author is a practising chartered accountant)

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