Your Taxes

My father-in-law, aged about 64 years, is selling his house for about ₹30 lakh (the property is his own, not from ancestors). The property is located in Harihar, Karnataka. Details are as follows: land purchased for ₹10,000; 50 per cent of the house was constructed in 1987 with an approximate cost of ₹1 lakh; the rest was extended in 1997 with an approximate cost of ₹2.5 lakh. How should he calculate his tax liability? Can he consider house maintenance cost while calculating LTCG? Is there any tax-saving method such as NHAI/REC bonds? He never filed ITR as he didn’t come under the tax bracket. Now, he is a pensioner with an approximate annual income of ₹1 lakh. Kindly advice.

Mohan Vishwaroop

As per the provisions of the Income Tax Act, 1961, the residential house property held by your father-in-law will qualify as a long-term capital asset (as it has been held for more than two years). Any gain/loss arising from transfer of this property will be chargeable or claimable as long-term capital gain (LTCG) or long-term capital loss (LTCL).

Any gain/loss on sale of a long-term capital asset is calculated as the difference between the net sales consideration and the indexed cost of acquisition and the indexed cost of improvement. House maintenance cost/expenses will not be considered while calculating capital gains, if any.

As the acquisition of land, construction cost and subsequent extension/improvement were incurred over multiple years, the cost of acquisition/improvement shall be adjusted based on the defined cost inflation index. The Finance Act, 2017, has changed the base year for calculating cost of acquisition for assets acquired before April 2001. Capital gains on assets acquired before April 1, 2001, is calculated using fair market value as of 2001.

In your case, since the land and the subsequent constructions were done prior to April 1, 2001, the cost of acquisition (including improvements made in 1997) will be the fair market value of the property as of April 1, 2001. Also, such cost shall be adjusted for the cost inflation index to arrive at the indexed cost. LTCG, if any, (net sales consideration minus indexed cost of acquisition) shall be taxable at 20 per cent (plus surcharge and cess, as applicable). It is also important to note that no deduction under Sections 80C to 80U can be claimed against LTCG.

However, exemption benefits can be claimed availed under Section 54 (investment in a residential house property) or Section 54EC (purchase of specified bonds viz. NHAI/ REC/ other notified bonds) of the Act, subject to the specified conditions under the respective sections.

For the purpose of claiming benefit under Section 54EC (maximum eligible exemption is ₹50 lakh), the taxpayer should invest the whole or any part of the capital gain (arising from transfer of land or building, or both) within six months from the date of transfer of the long-term specified asset.

In case the pension income along with the LTCG exceeds the maximum amount not chargeable to tax (₹2.5 lakh ), he has to file the tax returns as per the specified due dates under Section 139 of the Act (July 31 following the close of the financial year, in case of only pension and LTCG incomes).

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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