Use bonds for rebate on capital gains tax on gifted property

I am going to sell land that I inherited. The market value of the land is higher than the guideline value for registration. Will there be any problem if I register the property at market value that I realise so that the amount received as consideration is accounted? — Ramesh

From the point of view of income-tax, there can be absolutely no problem that would arise if the property is registered for a value that is more than the guideline value and the entire consideration received is offered in computing the capital gains. This, in fact, would be the correct method to be adopted, as the whole consideration received is offered as income.

What will be the tax liability if a land is acquired by an urban development authority — where the compensation is paid by the authority? If I deposit the consideration in a bank account, will the interest be tax free? — Manoj Singh

The capital gains arising out of the compulsory acquisition of the land by the urban development authority will be taxable unless of course the land is an agricultural land . The interest income accruing on the consideration deposited in the bank account will also be taxable in your hands as income from other sources.

I purchased a house in 1976 for Rs 50,000. The market value of the house is now around Rs 1 crore. I am proposing to gift this property to my two sons. Are they eligible to sell the property and claim exemption on the capital gains tax arising from the sale of the house property? — A. Ramanathan

Though capital gains will be chargeable to tax when your sons sell the property, it would be possible for them to claim an exemption either under section 54 or under section 54EC

Under section 54 an exemption is available on transfer of one residential house and on reinvestment in another residential house subject to satisfying the following conditions: The assessee is an individual or HUF; the gain arises from the transfer of a residential house being a long term capital asset; 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; and if the amount invested is less than the capital gain then to the extent invested.

Exemption under section 54EC is available to the same extent as in section 54 subject to the asset transferred is a long-term capital asset; the investment is in bonds of the National Highways Authority of India or the Rural Electrification Corporation. If the exemption is claimed under sections 54EC, the investment should have be made before the expiry of six months from the date of transfer of the capital asset.

I had raised a query earlier stating that I am a senior citizen and that the total income including the short-term capital gains on which the Securities Transaction Tax (STT) has been paid at the time of sale is less than the maximum amount not chargeable to tax.

You have clarified through this column that there will be no tax liability in my hands in such a case. In this connection, I would like to seek a further clarification: On what would be the effect if my total income including short-term capital gains is Rs 3,40,000 and where I have made investments which qualify for deduction under section 80C of Rs 1,00,000? — Subhalakshmi

Being a senior citizen, you will be eligible for a basic exemption. This would mean that if your income including the short-term capital gain is Rs 2,40,000 or lesser, there would be no tax. The benefit of deduction under Section 80C is not available for short-term capital gains which have suffered STT at the time of sale. Though no deduction under section 80C can be allowed, it may not alter the benefit which will be available under section 80C in most circumstances.

For example, where the income is Rs 3,40,000 comprising of STT suffered short-term capital gains of Rs 1,20,000 and other incomes excluding such short-term capital gains of Rs 2,20,000, the deduction under section 80C of Rs 1,00,000 can be claimed against the other incomes of Rs 2,20,000. Thus the other income gets reduced to Rs 1,20,000.

The available basic exemption of Rs 2,40,000 can be utilised against the balance other income of Rs 1,20,000 and the STT paid short-term capital gains of Rs 1,20,000. This means that there would be no further income beyond the basic exemption which would be chargeable to tax.

If your other income is Rs 50,000 and your short-term capital gains on which STT is paid at the time of sale is Rs 2,90,000, your deduction under section 80C will be restricted to Rs 50,000 and Rs 2,40,000 being the basic exemption can be entirely reduced from the short-term capital gains thereby leaving a balance of Rs 50,000 of short-term capital gains which will suffer tax at 15 per cent.

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