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Capital Gain arises when any capital asset is sold off by a taxpayer. Taxpayer is required to pay tax on capital gain in the year in which the transfer of the asset takes place. Asset is considered Long Term Capital Asset if held for more than 36 months prior to sale and if not than it will be considered as Short Term Capital Asset. In case of shares, debentures, units of UTI and equity oriented mutual funds, zero coupon bonds if held for more than 12 months than Long Term Capital Asset otherwise Short Term Capital Asset.
Calculation of capital gain is different in case of Long Term Capital Asset and Short term Capital Asset. In case of Long Term Capital Asset you get the benefit of Indexation on cost of acquisition as well as cost of improvement. Whereas in case of Short Term Capital Asset no benefit of indexation is allowed and you can only deduct actual cost of acquisition and actual cost of improvement.
Let’s take a scenario where you have a primary residence in your name and you are thinking about putting it up for the sale to buy a new residential house. Primary residence is the one in which you are currently residing with your family:
Meera lives in an apartment with her parents. She bought the apartment in 2010 for Rs. 29.60 Lakh. She is thinking about putting her home for sale. She has also got a buyer who is willing to take the house for 50 Lakh.
Since Meera has held the house for more than 36 months, she’ll incur long term capital gains on sale of the apartment. If she sells the apartment, the capital gains will be calculated as follows:
Particulars
Amount (in Rs.)
Total sales consideration
80,00,000
(-) Transfer expenses & Brokerage
(2,00,000)
Net Sales Consideration (A)
78,00,000
Index cost of acquisition (B)
29,60,000 x 1081 (cost inflation index for 2015-16)
711 (Cost inflation index for 2010-11)
45,00,000
(rounded off for simplicity)
Long term capital Gains (A – B)
33,00,000
Now Meera has two options:
Either she buys another residential property and claim the exemption from the long term capital gains or
Pay long term capital gains tax @ 20%
In case of Option 1: you get dual benefits. You get to buy a new house and also claim exemption under section 54. Meera can claim exemption under section 54 of the income tax act. The exemption is available when a purchase another residential house property against sale of a residential house property. You can buy a new home before one year or after two years from the sale of the original home. In case of construction of the home, the period is three years after the sale of original home.
Amount of exemption under section 54 will be lover of capital gains or the amount invested in the new house property.
So if Meera buys a new property for Rs. 30,00,000 then she will be allowed the exemption for the lower of Rs. 30,00,000 (investment amount) or Rs. 33,00,000 (capital gains). So the exemption amount will be Rs. 30,00,000
If Meera buys a new property for Rs. 60,00,000 then she will be allowed the exemption for the lower of Rs. 60,00,000 (investment amount) or Rs. 33,00,000 (capital gains). So the exemption amount will be Rs. 33,00,000
Meera also has an option to claim the exemption upto maximum of Rs. 50,00,000 under section 54EC which is allowed if you investment in bonds of National Highway Authority of India or Rural Electrification Corporation within six months from the sale of the property.
In case of Option 2: If Meera does not wish to buy a new residential property, than she will have to pay tax on her Long Term Capital Gain which comes to Rs. 6,60,000 (Rs. 33,00,000 x 20%). There are no exemptions available if you invest in properties other than residential house against sale of a residential house. The only benefit I see in case of Option 2 is that you can you can pay the tax on the capital gains and then you can use the money the way you wish to. You can either invest it in your business or invest in securities or buy a commercial property, whatever suits you best.
Liability to pay tax on capital gains
Please keep in mind that capital gains tax will have to be paid in the year in which the property is sold. Let’s say Meera sold her house on 15th March 2016. So she will be liable to pay capital gains tax by 31st March 2016 to avoid the interest penalty. The only way to avoid paying capital gains tax is to invest in a new residential property. But 15 days time may not be enough for Meera to close the deal and claim the exemption under section 54. So in such a situation, she can deposit the amount in Capital GainsAccounts Scheme before the due date to file the return for financial year 2015-16 i.e 31st July, 2016. Yes, She doesn’t have to deposit the amount before 31st March, 2016. She has time till 31st, July 2016 to deposit the money to avoid the payment for capital gains tax.
