Managing capital gains tax liability on sale of property

Managing capital gains tax liability on sale of property

THE Income-Tax Act, 1961 (IT Act) provides specific relief to an individual and Hindu undivided family (HUF) from long-term gains realised from the sale of a property that has been held for 36 months or more. The following five facts can be kept in mind to minimise tax liability on such gains.

Indexation benefit: In order to take care of inflation over a period of time, IT Act allows indexation of the purchase cost to bring it at par with the current rates. Indexation rates are notified at the beginning of each finan cial year. The base year for this purpose is 1981-82 and indexation rate for that year was set at 100. The indexation rate for the current tax year 2012 13 is set at 852. The in dexed cost of the property dexed cost of the can be calculated as: Indexed cost = Original cost X (Indexation rate for year of sale / Indexation rate for the year of purchase) Long term capital gains (LTCG) is calculated by reducing the indexed cost of acquisition of the house property from the sale value. You should ensure that benefit of indexation is taken into account while calculating LTCG from sale of property because this helps in reducing the gains liable to tax. The benefit of indexation is not available to a non-resident.

Purchase of residential house property: In order to claim tax exemption, an individual or HUF can purchase a residential house property within a period of two years after the date of sale of property or one year before the date of sale. In such a case, the taxable LTCG would be reduced by the amount invested in the new residential property.

Construction of residential house property: An individual or HUF can also get tax exemption through construction of a resi dential house property, provided con struction is completed within three years from the date of sale of original house property. The date of commencement of con struction is not relevant and construction can start earlier also. However, it should get completed within three years from the date of sale.

Capital gains account scheme: It is possible that the capital gains realised may not be invested im mediately after the sale of the property. In such cases, in order to remain eligible for tax exemption, the amount can be deposited in capital gains account scheme (CGAS) with specified banks before the due date of filing income-tax return of the year in which property is sold. The amount deposited is then to be utilised within a period of two years for purchase and three years for construction of residential property. In case, the amount is not fully utilised, the balance shall become chargeable to tax.

Withdrawal of tax exemption

: It is important to keep in mind that in case the newly purchased / constructed property is sold within 36 months, the tax exemption is withdrawn. For the purpose of computing capital gain in such cases, the cost of the residential property shall be reduced by the amount of exemption claimed in earlier years.

 

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