Income tax is a tax on specified
incomes. Income from sale of immovable assets like House, etc. is called
capital gains. It is taxable.
Types of Income
Income for income tax purpose is categorized
into five different heads
a. Salaries.
b.
Income
from House Property.
c.
Profit
and gains on business and profession.
d.
Capital
Gains.
e.
Income
from other sources.
Computation of Income
Income Tax Act 1961 and Income Tax Rules have separate
provisions to compute the income from each head. If the income falls under one
head it can be computed under another head.
The taxation process is as follows:
- Gross
Total Income = A+B+C+D+E = Total Income
- Gross
Total Income – Deductions under Chapter VI A = Taxable income
- Tax
on taxable income – Rebates and Relief under Chapter VIII = Tax Payable
Capital Gains
Capital Gain presupposes three important
ingredients: Capital asset, transfer of capital asset, and the resultant profit
or gain out of the transfer of capital asset.
Capital Asset
Capital Asset means property of any kind except stock
in trade held for business or profession, personal effects like wearing
apparel, furniture, motor vehicles held for the personal use of the taxpayer or
his family members.
It is to be noted, that jewellery for personal
use is a capital asset; Agricultural Land situated within the
Jurisdiction of certain notified areas is a capital asset.
The following transactions are not regarded as
Transfer
A.
Distribution
of capital asset on partition of Hindu undivided family either total or
partial.
B.
Transfer
of capital asset under a Gift, a Will and an irrevocable transfer
Profit or Gain
4.1 The profit or gain out of the transfer of an
immovable property is the difference between the amount spent on acquisition of
immovable property, the amount spent on improvement of the property and the
consideration received on transfer of the immovable property. The excess over
the amount spent is the capital gain.
The incidence of tax on capital gains is related to
the period for which the capital asset/immovable property is held by the seller
before sale.
Types of Capital Gains:
If the period of holding the immovable property is for
three years (36 months) or less; the immovable property is called as “Short
term capital asset”.
The profit from transfer of such short term capital
asset is Short Term Capital Gain. If the period of holding the immovable
property exceeds three year (36 months) the property is called long-term
capital asset and profit made out of the transfer of such Long-term capital
asset is Long Term Capital Gain.
Factors
Relevant to Compute Capital Gains
Full value of Consideration:
This is the amount received which is reflected in the
transfer document, that is, Sale Deed. It may be purely money or money’s worth
or includes both.
If the transfer is by way of exchange of capital
assets, fair market value of the asset is the full consideration. If the
consideration is both cash and kind; the aggregate of the fair market value of
kind and cash is the full consideration.
There are cases, where the agreed consideration is
less than the guidance value fixed by the state government for paying the Stampduty and registration charges. In such cases, the guidance rates fixed by the
government for stamp duty and registration charges will be the consideration
though the said consideration is less.
This has been introduced through the finance bill 2002 under a new
section 50 (C).
Cost of
Acquisition
Apart from the purchase amount paid, one has to incur
various expenditures to get the title transferred to him. They include, stampduty, registration charges, legal charges and brokerage paid.
These expenses including the consideration amount paid
are the cost of acquisition.
When the property is acquired by way of partition of
Hindu Undivided Family, Gift, Will and Inheritance, the cost of acquisition is
the cost at which the previous owner acquired the property. If the previous
owner or the present transferor has spent any amount on the improvement of the
property; such costs are to be included in the cost of acquisition.
In case of properties acquired before 1st
April 1981, the assessee/seller may opt for any one of the following as cost of
acquisition:
a. Cost of acquisition to the previous owner. or Cost of
acquisition to the assessee/seller.
b. Fair market value as on 01.04.1981.
Cost of
Improvement
This includes expenditure incurred on the improvement
of capital nature of the property, like additions or alterations developments
to the property
Cost of
Transfer
The assessee/seller may have to incur certain
expenditure to transfer the property like payment of brokerage, inserting
advertisements, commission to auctioneers, charges paid in preparing documents.
These are categorized as cost of transfer.
Short
Term Capital Gains
Short term capital gains are profits from the transfer
of short term capital asset and it is calculated as follows:
The total expenditure incurred by the seller in
getting the title transferred to him and the cost of improvement are deducted
from the full consideration amount received by him. The balance amount is short
term capital gain.
Short term capital gain = Full Value consideration –
Cost of acquisition – Cost of improvement – Cost of transfer.
It is to be noted that the short term capital gains
are added to the other income of the party and tax is charged on slab basis
based on the income. There are no exemptions for short term capital gains. The
deductions under Chapter VI A and Rebates under section 88 are allowed.
Long Term
Capital Gains
As stated earlier, if the property is held for more
than 36 months it is treated as Long Term Capital Asset and gains from transfer
of such Long Term Capital Asset is Long Term Capital Gains.
Cost
Inflation Index: In case of long term capital gain, the assessee has
the benefit of cost inflation index in respect of consideration amount and the
amount spent on improvement.
This is mainly to offset the inflation. The worth of
money is being eroded gradually because of inflation.
It would not be proper to tax the assesse on the basis
of amounts spent by him without accounting for inflation. Hence the income tax
department has taken financial year 1981 as base and has assigned points for
inflation. This is called cost inflation index. The year 1981 is assigned 100
points which goes on increasing every year.
To arrive at the indexed cost of the acquisition,
indexed cost of improvement, the cost of acquisition/cost of improvement is
multiplied by the cost of inflation index of the year of transfer and then
divided by cost of inflation index of the year of acquisition/improvement.
Indexed Cost
of Cost of inflation
Cost of Acquisition X index for the
year
Acquisition = of
sale
 |
Cost
of inflation
Index
of the year of purchase.
Indexed = Cost
of Cost of inflation index
Cost of improvement X of the year of transfer
Improvement
Cost of
the inflation index
Of year
of improvement
The long term capital gain is charged at 20% flat.
Factors
relevant to compute the Long Term Capital Gains
A. The
Long term capital gains are considered separately and not added to the other
income of the assessee
B. Deductions
available under Chapter VI A are not allowed
C. Rebates
under section 88 are not allowed.
D. If
the total income under long term capital gain is less than Zero slab (Rs.
50,000/-) the Long term Capital gain over zero slab only attracts tax.
E. The
rate of the tax on long term capital gains is 20%.
Exemption
available for long term capital gains
A.
Investment of LTCG on residential unit in a new residential unit.
a.
When one residential house is transferred and another residential house is
purchased or constructed the long term capital arising out of the sale of the
residential house is exempted.
b.
The exemption is available is available only to individual or Hindu undivided
family.
c.
Both the properties must be residential house properties. If any one of them is
commercial the exemption is not available.
d.
The residential house should be purchased within one year before or within two
years after the date of transfer.
e.
The residential house may be constructed within three years after the date of
transfer.
f.
The house so purchased or constructed
should not be transferred within three years after the purchase or
construction.
g.
Quantum of exemption will be the amount invested in the new property or the
long term capital gain whichever is less.
h.
The assessee has to deposit the amount of long term capital gain in capital
gains account. This should be done before the due date for filing the return of
income. The proof of such investment should be enclosed with the return of
income. Capital gains account are available in branches of designated banks,
public sector banks.
The
amount required for construction/purchase may be withdrawn from capital gain
account and utilised for construction/purchase within three/two years.
The house
purchased/constructed should be independent residential unit.
However
with regard to purchase of flats, the assessee may purchase more than ONE flat
in the SAME BUILDING and claim the exemption of the aggregate cost of flats
purchased. (K.G. Vyas V Seventh ITO (1986) L6 ITD 195 (BOM). In this case the
exemption was allowed towards purchase of four flats, two flats on first floor
and one each on second and third floors.
In case
of residential properties got constructed through self-financing schemes, e.g.
Development institutions like Housing Board Co-operative Societies; the
acquisition is treated as construction not purchase.
B.
Investment in specified Securities
The Tax
on long term capital gain is exempted if the long term capital gain is
deposited in certain specified bonds subject to following conditions.
a.
The long term capital gain has to be invested within
six months from the date of transfer. The investment may be full capital gain
or a part of it. The exemption is available only up to the amount invested.
b.
The specified bonds eligible for long term capital
gain exemption are-
Any bond
redeemable after three years issued by NABARD or National Highway Authority of
India or any bond redeemable after three years issued by Rural Electrification
Corporation Limited issued on or after 01.04.2001.
Any bond
redeemable after three years issued by National Housing Bank and Small
Industries Development Bank of India
c.
The bonds should not be transferred or encashed within
three years from the date of investment.
d.
Even availing loan on the investment is deemed as transfer.
e.
Such investments are not eligible from tax rebate
under section 88 of Income Tax Act.
C.
Transfer
of any other capital asset other than residential house and investment in
residential house
This
facility is available to any individual or Hindu Undivided Family
The
Capital Asset must be a Long Term Capital Asset other than residential unit.
The
assessee either purchases a residential house within a period of one year
before or within a period of two years after the transfer or construct a
residential house within a period of three years from the date of transfer.
However
this exemption is not available in following cases
1. The
assessee owns more than one residential house other than the new asset on the
date of transfer
2. The
assessee purchases a second residential house within two years of transfer
3. The
assessee construct a new residential house within three years of transfer
The
assessee is also prohibited from transferring the residential house
acquired/constructed within a period of three years.
Tips on
Capital Gains
a.
The assessee has to hold the property for more then 36 months to categorize the
property a Long Term Capital Asset. So the holding period should be at least 36
months one day.
b.
The specified period for this purpose will end on the date of agreement and not
or the date of registration.
c.
Deposits in capital gains account attract very low interest. The dead line for
depositing the long term capital gain is before the due date for filing returns
which is in most cases is 31st July. The long term capital during
the intervening period must be invested in high yielding safe assets.
d.
Long term capital gains have the benefit of cost inflation index. This is on
ascending scale. So by proper timing of the transfer of the property one can
get better benefit. If the property is transferred on 1st April
2005, instead of on 31.03.2005, the indexation benefit will be more.
COST
INFLATION INDEX
Financial Cost
Inflation
Year Index
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-2000 389
2000-2001 406
2001-2002 426
2002-2003 427
2003-2004 463
2004-2005 480
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