My son recently sold his flat after possessing it for 15 years. The long-term capital gain (LTCG) works out to ₹11 lakh. Can he get income-tax exemption if he purchases a plot of land (not for house construction) instead of purchasing a flat/house? Assume he is spending more than ₹11 lakh. (ii) If the entire LTCG is invested in NHAI or REC bonds for three years, will it be exempt from tax?

Raveendran Nair PR

As per the provisions of the Income Tax Act, residential house property is considered a capital asset, and gains arising on sale of such property is subject to tax as capital gains. Further, if the flat is sold after being held for a period of more than 24 months during or after FY2017-18 (36 months till FY2016-17), the gains from such sale is treated as LTCG. Else, it is considered as short-term capital gain.

There is no exemption available under the I-T Act in case the proceeds from the sale of flat are invested in purchase of a plot of land. But, if the entire LTCG is invested for purchase of NHAI or REC bonds or any other bond notified by the government, your son shall be eligible to claim exemption u/s 54EC (maximum eligible exemption is ₹50 lakh). However, such investment should be made within six months from the date of sale of the flat. Also, there will be a lock-in period of five years for such bonds, i.e., if the bonds are sold within five years (three years till FY2017-18) from the date of purchase, the exemption will be disallowed and the entire capital gain shall become taxable. Similar exemption is available u/s 54EE wherein the LTCG may be invested in units of specified funds to claim exemption.

In the case of cumulative fixed income investments such as five-year bank deposits, do we need to declare the interest accrued in each year in that year itself for tax payment purposes? Or, can we declare the cumulative interest received over all the years in the year the investment matures in?

Rajesh A

As per the provisions of Section 145 on Method of Accounting read with Income Computation and Disclosure Standards (ICDS) 4, which deals with revenue recognition, interest shall accrue on time basis (i.e., on accrual basis), determined based on the amount outstanding at the rate applicable. Accordingly, interest incomes shall be declared for tax purposes on accrual basis. For example, if you have a fixed deposit of ₹5 lakh with interest rate of 8 per cent p.a. simple interest (with interest reinvestment), the interest accrued on the fixed deposit on annual basis — ₹40,000 — should be considered taxable each year.

In the above context, it is important to note that bankers are also required to deduct tax on interest payments to an individual (under Section 194A or 195 of the I-T Act) at the time of credit (i.e., accrual) or payment of interest (whichever is earlier), subject to specified thresholds.

The author is a practising chartered accountant. Send tour queries to taxtalk@thehindu.co.in

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