Selling old house

You need to compute long term capital gains on the house proposed to be sold by you.

If you have purchased the house during 1984-85 (i.e., from 1st April 1984 to 31st March 1985), the cost of inflation index is 125 and if it was purchased during 1985-86 (i.e., from 1st April 1985 to 31st March 1986), the cost of inflation index is 133. The present cost of inflation index is 1125. Thus, if you bought the house in 1984-85 for say Rs 1 Lakh, the indexed cost of acquisition today will be Rs. 9 Lakhs (i.e., Rs 1,00,000*1125/125). Thus the present indexed cost property will be roughly by 9 times the cost of your acquisition in 1985. The long term capital gains will be the present sale value of Rs. 1.5Cr less the indexed cost of acquisition, on which you need to pay long term capital gains @ 20.6%, assuming that your total income is less than Rs 1 Cr.

Now when you buy new house for Rs 25 L, you will get exemption u/s 54 proportionately to the capital gains. You will not get exemption in respect of other payments /investments.

Hi,

First of all, I will require the cost of acquisition to calculate the Capital Gains. This will help in answering your query in a much better way.

There's nothing illegal in what you have planned provided you pay the Capital Gains Tax.

To save Capital Gains Tax, you can proceed with Construction of another house for your residence. This will enable you to claim proportionate exemption u/s 54. Instead of investing the Rs. 50 Lakhs in Fixed deposits, I suggest you to invest the same in REC / NHAI Bonds within 6 months from the date of sale of old house to claim Capital Gain exemption u/s 54EC. The bonds have a lock-in period of 3 years. You are free to withdraw the same after 3 years and make a FD or do whatever you wish from that money.

Hi,

there are three ways in which you can get capital gain exemption

if you planning to purchase another property or have already purchased one year back from the sale of the property then

under section 54:

The exemption under this section is only available to persons that satisfy the following conditions:

An individual or Hindu Undivided Family (HUF) that legally maintains ownership of the house property;

The house property is used only for residential purposes;

The house property is a long term capital asset, and was not transferred or sold within the first three years after the initial date of purchase or construction.

To claim the exemption, one must invest the proceeds derived from the sale of the house property into another residential house either within two years from the date of the sale or one year prior to sale, or one must invest in the construction of a new house within three years of the sale.

The exemption amount will be:

Equal to the amount of the capital gains if the cost of the new house property is greater than the capital gains; or

Equal to the cost of the new house property if the cost is less than the capital gains.

Meanwhile you can park your capital gain (full amount or utilized amount) in CGAS (Capital Gain Account Scheme)

This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.

The deposited money can be used only to buy or construct a residential house within the prescribed time frame.

If you withdraw funds from this account, they have to be used within 60 days.

If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.

The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.

You can invest the capital gain amount in bonds under section 54EC:

Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset.

These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.

The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.

These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property.

You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).

You can invest a maximum of Rs 50 lakh during a financial year in these bonds as per Budget 2015-16.

So , as mentioned above, if cost of construction of the house is Rs 25 Lakhs then what ever the amount of capital gain arrives after deducting from sale proceeds the indexed cost of acquisition, would get reduced by Rs 25 lakhs. Upto Rs50 lakhs can be invested in capital gain bonds.

First you are required to calculate capital gain and then accordingly need to invest in construction of house and/ or capital gain bonds and rest will be taxable. Amount paid to your son after paying tax on capital gain or investing in any of above mentioned sections will not be taxable in your son's hand

Hello Sir,

You will not be in a position to save taxes through this mechanism. In order to save up on taxes, you will have to invest the entire Capital gains in another house property or you may invest the same in Capital gain tax saving Bonds.

or else you shall be taxed @ 20% on the amount of capital gains.

Trust this clarifies your query.

Feel free to call / get back in case of further clarifications.

Thanking You.

Regards,

Rohit R Sharma

BCOM, ACA, LLB-GEN, CERT. FAFP

Hi,

First of all the REC/NHAI Bonds are not Tax Free. The Interest Income from the Bonds are taxable just like FDs.

Yes. They allow up to Rs. 50 Lakhs per year. But that doesn't mean you can invest up to Rs. 1 Crore in these Bonds.

This was a grey area earlier due to the drafting error. However, the matter is settled unambigously by the Finance (No.2) Act, 2014, which has, w.e.f 1-Apr-2015, inserted second proviso in Section 54EC by limiting the overall investment in these Bonds to Rs. 50 Lakhs even if the period of 6 months falls under two different Financial Years.

Sir,

You need to invest only amount of capital gain to remove tax effect on this transaction.

Sir,

First you need to calculate Capital gain amount. As your sale proceeds is Rs 1.5 crore. your capital gain will be less then that.

suppose your capital gain amounts to Rs 1.2 crore then you can park rs 50 Lakhs in this Financial 2016-17 and Remaining Rs 50 Lakhs in FY 2017-18, but two financials years should fall in with span of six months of sale proceeds.

balance Rs 20 -25 Lakhs you can keep for construction of house.

if you have any doubts you can call me at 9538801976

You can invest in capital gains bonds upto Rs 50 L u/s 54EC and another Rs 50 L in specified units u/s 54EE

Hello Sir,

Yes, there is a Cap of 50 Lac rupees, so for the balance you can invest in another house property.

Trust this clarifies your query.

Feel free to call / get back in case of further clarifications.

Thanking You.

Regards,

Rohit R Sharma

BCOM, ACA, LLB-GEN, CERT. FAFP

Dear Sir,

You will not be able to save taxes through the structuring provided by you in your question.In order to save up on taxes, you will have to invest the entire Capital gains amount in another residential house property under section 54 or you may invest the same in NHAI/REC bonds u/s 54EC.

Conditions for section 54

The exemption under this section is only available to persons that satisfy the following conditions:

1. An individual or Hindu Undivided Family (HUF) that legally maintains ownership of the house property;

2. The house property is used only for residential purposes;

3. The house property is a long term capital asset, and was not transferred or sold within the first three years after the initial date of purchase or construction.

Conditions for section 54EC

1.These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property.

2.You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).

3. You can invest a maximum of Rs 50 lakh.

Please feel free to call/revert in case of any doubts

Thanks and Regards

Abhishek Dugar

CA CS B.Com

The capital gains amount you invest in construction is exempted. First we need to calculate the capital gains