Capital Gain Tax is explained in general in this edition due to the complex nature of taxation on the capital gain. Considering exemptions available are varied based on the type of property, readers are requested to send your queries to firstname.lastname@example.org to get answers to your specific queries on this subject.
This topic is addressed based on the queries received from various readers.
1) What is the rate at which the gain on sale of a property is taxed?
The gain on sale of the property is taxed based on whether such property is considered to be long term or short term. If the taxpayer is holding a property (not shares/ securities) for more than 36 months then it is long-term in nature. Else it is short term. For a long-term property, the tax rate is 20% excluding cess. Short term property is taxed based on the individual slab rates.
2) Whether indexation is available for every sale of the capital asset?
Indexation benefit is available only for the long-term capital asset. It is optional. The taxpayer can choose to avail. By availing the benefit the taxpayer is adjusting the cost of the asset for inflation which results in a lesser capital gain.
3) I am having a house purchased in 2004 and I am planning to sell this year. What is the tax implication?
Since the house is purchased in 2004, it is clearly a long-term asset. You can choose to avail indexation benefit. The gain arising on sale of the house is taxed at 20% excluding cess. You have the option of saving the tax by investing the proceeds by
Purchasing another residential house property
Constructing another residential house property
Investing in NHAI or REC bonds
By depositing the money in capital gain account scheme.
If you are purchasing the property, you can purchase the property within 2 years from the date of sale.
If you are constructing the property, you have to construct within 3 years from the date of sale.
If you are planning to invest in bonds, then you have to invest within 6 months from the date of sale.
If you have not decided or you have not found the right property or the investment in the new property is less than the capital gains amount before the end of the financial year then, deposit the money in capital gain account scheme to avail the exemption. But the deposit in the scheme has to be made before the due date of filing the income tax return.
The minimum amount of investment to avail exemption is the amount of capital gain. This is only in case of sale of the residential house. The minimum amount of investment for sale of property which is not residential house property is different.
The maximum amount of investment that can be made in bonds is Rs.50 Lakhs.
It is often mistaken that at the time of reinvestment, by merely purchasing the land with the intention to construct, the capital gain exemption can be availed. This is incorrect. If the land is purchased with the intention to construct, the exemption can be availed only if the balance amount required to avail exemption is deposited in capital gain account scheme the exemption can be availed.
The taxpayer can choose to invest a portion of the proceeds on another property and balance in Bonds specified for this purpose. The exemption can be availed by investing in both the property as well as in bonds.
4) I have deposited the money in capital gain accounts scheme, but I have not used the money for any construction or purchase. What is the tax impact?
The money remaining unutilized in the Capital gain account scheme will be offered for tax in the 4th year. The amount can be withdrawn only if the tax is paid and challan is produced before the assessing officer. It will be taxed at the rate of 20% excluding cess in the 4th year. The bank will permit you to withdraw the money from this account only if you submit the document received from your assessing officer.
It is suggested to seek the help of tax professionals even before the sale happens especially with respect to the sale of an asset. It is often seen that taxpayers either miss the timeline to re-invest or re-invest in modes which are not eligible for exemption resulting in paying tax when the income tax act itself allows an opportunity to save tax.