While selling property, many are confronted with the problem of how or where to invest the money from the sale. Financial experts say that besides buying another property to save capital gains, one can even invest in bonds. SHAlINI SAKSENA brings you a report on some tax-saving tips
When 72-year-old Sunita Sharma sold her house after her husband’s death, she didn’t know whether she wanted to buy another property or invest in funds and bonds that would give her a regular monthly income. Friends felt that in order to pay long-term capital gain, the best option would be to invest in a property. But, there was a catch there. The property that she buys should be one where she gets possession within three years of the sale of the house. And, she can’t invest in a commercial property. A residential property has to be bought in lieu of a residential home sold.
Experts say that though one can sell a residential house in Mumbai and buy another residential property in Delhi to save tax, one can’t sell residential property, buy commercial and save tax. However, there are some riders to sale of property in India and property purchased abroad.
So, how can one claim exemption under long-term capital gain (lTCG)IJ “Depending upon the kind of lGCG, a person can either invest in 54EC bonds and /or invest in residential property. However, when it comes to bonds, one can invest up to Rs 50 lakh per financial year but the investment in these bonds needs to be made within six months of the sale of property. An investment in residential property can be either a year before or two years after sale. In the case of construction, the time-limit is three years,” Sandeep Shanbhag, a Mumbai-based Chartered Accountant and director of Wonderland Consultants, a tax and investment advisory firm, says.
And what’s CGAS and how does opening this account helpIJ “For investing in property (to save lTCG), the taxpayer has two to three years from date of sale. If the property hasn’t been purchased prior to the due date of filing return, the unutilised portion needs to be invested in a deposit called CGAS. Any withdrawals from CGAS can only be for payment related to the new property,” Shanbhag explains.
What about capital gain structureIJ Experts tell you that for property, indexed cost has to be reduced from sale consideration. The long-term capital gain is 20.6 per cent of the balance. The short-term capital gain is added to normal income.
And what role does Cost Inflation Index playIJ According to another Mumbai-based financial planner while calculating taxable long-term capital gains, the cost of acquisition and the cost of improvement are linked to a cost inflation index.
As a result, the indexed cost of acquisition is deducted from the sale consideration received, to arrive at the capital gain. “Indexation is a technique to adjust payments by means of a price index, in order to maintain the purchasing power of the public after inflation. Prices, in general, also rises, so the actual purchase price of capital asset should not be used while computing the capital gain, rather it should be indexed as per Inflation in the country, so that people can get the real value from sale of their assets.
“For example, if property purchased in 1995-96 for a lakh is now sold at Rs 10,00,000, the capital gain chargeable to tax will not be Rs 9,00,000. Instead, purchase price of Rs 1,00,000 will be indexed to current inflation and then capital gain will be worked out,” Sailesh Multani, chief financial officer with Edelweiss Financial Planning, tells you.
“However, if a property is inherited or accepted as a gift from a relative, there would not be any tax. However, when the same property is sold, tax on profit earned is to be calculated and paid accordingly. But if one purchase of another residential house property, invests in bonds under section 54EC or avails CGAS, one can save tax,” Multani concludes.
TIPS TO KEEP IN MIND