Tax, Capital gains related to realty deals in FY13
By Subhash Lakhotia, Tax and Investment Consultant, Tax Guru : CNBC Awaaz
All those persons who have carried out real estate transactions during the financial year 2012-13 should carefully consider income-tax aspects connected with these transactions. In the case of all those tax payers who have just purchased the property during the year, for them nothing special is required to be done and that they should claim deduction in respect of interest paid on self occupied house property. However, during the financial year if you have made payment for purchase of the property and the construction is incomplete, whereby possession has not been received by you, in that situation please do not claim tax deduction in respect of interest on housing loan. It may also be noted here for the benefit of all those who have taken housing loan that in case of self occupied house property, the possession of which has been received but due to any reason even if you have not actually paid interest on the said housing loan, even then tax deduction would be permissible to you.
When we talk of income-tax aspects relating to capital gains on your real estate, the first and most important point which we have to consider is the period of holding of your property which has been sold by you during the financial year 2012-13. Tax payers may kindly note that the holding period of the property is very important to find out the impact of income tax payment on your property, It may also be noted that in case the property is held by you for more than three years, then the capital gains arising on sale of such property will become long term capital gains and would be subjected to lower incidence of income tax. Reversely, if you have sold your property by holding it for a period of less than 36 months, in that situation whatever profit you derive on selling your real estate assets, such profit will be treated as short term capital gains.
Let us first deal with the tax aspects connected with selling real estate during the financial year 2012-13 and deriving short term capital gains. The short term capital gains of the year will be added with the other income of the tax payer and income tax will be payable on the total income as per the slab rate. For all those taxpayers who are deriving short term capital gain, there is no scope for any tax planning to be adopted by them. The simple formula for computing short term capital gain is to deduct cost price from the sale price of the property and the resultant amount will be the short term capital gain.
Now coming to the tax treatment for all those tax payers who are deriving long term capital gain on selling real estate assets, such persons should carefully screen and take advantage of the provisions contained in sections 54 and 54E of the Income-tax Act 1961. Generally speaking, a person selling his residential house and investing the capital gain amount in buying another residential house will be able to save income tax. For such tax payers who are not selling residential house but are selling commercial properties or land or jewellery etc. etc. deriving long term capital gain, then for such tax payers also it is possible to save long term capital gain by investing the entire sale proceeds in another residential house. In case the person deriving long term capital is not interested to invest in residential house property, then he can choose to make payment of the capital gains tax which will be calculated at the rate of 20 per cent only. It is also possible to take advantage of the provision of section 54EC and make investment in certain capital gain bonds and still save income tax. However, the maximum amount which can be invested in these bonds so as to save income tax is Rs. 50 lakhs in a year. Presently the Investment in bonds issued by National Highways Authority of India and Rural Electrification Corporation Ltd. are the only available options for the purpose of investment in capital gain bonds.
Persons deriving long term capital gains should also take advantage of the provisions contained in the Income to tax law relating to cost inflation index so that the tax burden can be reduced in respect of the property transactions
Another very important point which must be always be taken Into consideration by persons deriving capital gains relates to advance payment of tax. Hence, all those tax payers who are deriving long term or short term capital gain during the financial year 2012-13 must ensure that they should make payment of the applicable advance tax within the stipulated time period.
Finally, while dealing with the transactions relating to selling real estate assets during the financial year 2012-13, the first important point is to sit down and calculate the impact of income tax on these transactions and thereafter to start the process of adopting legal available options to save capital gains or in the alternative to make payment of applicable tax so as to have smooth sailing in respect of such transactions which have been carried out by you during the financial year 2012-13.
As per the Finance Act, 2012 a new section 54GB has been added in the Income-tax Act which provides relief from re-investment of sale consideration in the equity of a new start-up SME company in the manufacturing sector which is utilized by the company for the purchase of new plant and machinery. Some of the important conditions to avail this benefit are as under :-
- The amount of net consideration is used by the individual or HUF before the due date of furnishing of return of income under sub-section (1) of section 139, for subscription in equity shares in the SME company in which he holds more than 50% share capital or more than 50% voting rights.
- The amount of subscription as share capital is to be utilized by the SME company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares.
- If the amount of net consideration subscribed as equity shares in the SME company is not utilized by the SME Company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited under a deposit scheme to be prescribed in this behalf.
- Suitable safeguards so as to restrict the transfer of the shares of the company, and of the plant and machinery for a period of 5 years are proposed to be provided to prevent diversion of these funds. Further, capital gains would be subject to taxation in case any of the conditions are violated.
- The relief would be available in case of any transfer of residential property made on or before 31st March, 2017.
The above mentioned tax benefit is applicable only in respect of long-term Capital Gains arising on sale of a residential property, namely a house or a plot of land by an Individual or a Hindu Undivided Family.
The author is Tax and Investment Consultant at