Tax Talk

By selling my present flat (my own and not inherited) if I stand to gain Rs 50 lakh, can I invest that amount by buying two flats of Rs 25 lakh each, to offset and save on capital gains tax? My accountant thinks buying one property against sale of one property is okay but buying two properties in lieu of one sold may not be so. I don't own any other property. — Revathi Raghavan

Assuming that you will sell the flat after holding for three years from the date of acquisition, the resultant long term capital gains of Rs 50 lakh could be claimed as exempt from tax under Section 54 of the Income-Tax Act, 1961 by investing in a new residential house subject to the fulfilment of conditions. The quantum of exemption would restrict to lower of capital gains arising from sale of old flat or investment in a new residential house.

The language used in Section 54 of the Act is “a residential house” or a “new asset.” Various judicial rulings have held that the exemption under that Section would be available only in respect of investment in one residential house. However, there are judicial precedents wherein the exemption was allowed in respect of investment in two residential properties having regard to the finding that two flats could be treated as one house if both flats have been combined to make one residential unit. Therefore, claiming an exemption under Section 54 in respect of re-investment in two properties could be litigious.

The exemption is allowed if you purchase a new house within one year before or two years after the date of transfer of the old flat. In case of an under-construction house, the construction needs to be completed within three years from the date of transfer of the old flat.

In case you are unable to make the new investment by the due date of filing the tax return (i.e., July 31), you should deposit the money in the capital gain account scheme with a prescribed nationalised bank to be able to claim this exemption. Also, ensure that the new flats are not sold within three years, else the exemption claimed gets revoked.

What are the rules for the tax treatment of US pension received by an Indian on return to India. Does citizenship make a difference? —Muthukumar

Taxability of income in India would depend on your tax-residential status during the financial year. Residential status is in turn determined by the presence of the person in India during the fiscal and immediately preceding seven fiscals. It is important to determine your residential status in India on a yearly basis to ascertain the taxability of income in India. There are three categories of residential status in India: non-resident (NR); not ordinarily resident (NOR); and ordinarily resident (OR).

Depending on your stay in India, in case you qualify as either an NR or an NOR during the fiscal, you shall be taxable in India only on India-sourced income. Accordingly, income which you have earned and directly received outside India (i.e., in the US) would not be taxable in India.

However, if you qualify as an OR in India in any of the fiscals, your global income should be taxable in India irrespective of source or place of receipt of such income. According to the provisions of the applicable Act, the US pension would be taxable in India. Further, the benefits under the double-tax avoidance agreement between India and the US have to be examined separately.

Therefore, in your case, for commenting on taxability of US pension, determining your residential status in India in each of the fiscals and further examination of your residential status in the US would be required. Also, it would be necessary to examine the nature of pension received as the tax treaty has specific taxation provisions depending on the nature of pension. From an Indian tax perspective, citizenship would not be relevant.

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

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