TRUST PROPERTYAND LEGAL IMPLICATIONS

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Holding of property by a trustee involves various obligations and duties on the parties to a trust deed and these are enumerated in the Indian Trust Act 1882, which regulates the formation, and function of the trusts, powers and duties of trusties in dealing with trust properties.

Parties to a Trust

Trust is an obligation attached to the property thereby indicating how the property is to be used and who are the beneficiaries of the trust Property. It is an agreement between the Author of the Trust and the Trustee i.e. the manager of the trust property and the owner of the trust property. A trust may be formed by any person competent to contract, or with the permission of the court by a minor or on behalf of minor. A trust consists of more than one person that is at least two persons. The person that is the owner of the property, who reposes the confidence in another to manage the property is called author of the Trust or a settler. The person who manages the property as per the directions of the author of the trust is a trustee. Both the parties, i.e. the author of the Trust, and the trustee are parties to the document called a trust deed, which defines the objectives and functions of the Trust. The institution is called the Trust. Apart from the author of the Trust, and the Trustee, the third party who is entitled to the benefits is called the beneficiary, who is not a party to the Trust Deed. The beneficiary has the right to insist that the trust property can be used for their benefits although they are not a party to the said trust deed. Any person capable of holding the property can be trustee but not the government of India. Likewise a government servant cannot be a trustee of mosque, temple, church or other religious institutions.

Ingredients of a Trust:

The important ingredients of a trust are -

the objectives must be certain, the beneficiaries must be certain and clear and definition of the trust property must be clear and identifiable. The trust cannot be created orally, must be in writing duly signed by the Author and it can also be created by a Will. The Trusts are of many types. A private trust, where the beneficiaries are the legal heirs of the author, or a group of individual. A public trust is one where the beneficiaries are whole lot of public. The trust may be partly public and partly private. A charitable trust is created for relief, advancement of education, religion and other purposes beneficial to the community at large.

A trust cannot be created for the following purposes

1. Purpose, which is forbidden by law.

2. The purpose if permitted would defeat the provisions of law.

3. Fraudulent purpose.

4. Involves or implies in injury to the person, property of another.

5. The court regards the purpose as immoral or opposed to the public policy.

Creation of Trust:

A trust may be created only by a non-testamentary document that is a Trust Deed. The Trust Deed is compulsorily registerable under section 17(b) of Indian Registration Act 1908. The stamp duty payable on Trust Deed is governed by the Indian Stamp Act 1899, and falls under the powers of the States hence the stamp duty varies from State to State. It is created by a deed, it is to be registered if the value-exceeds Rs. 100. The trust act does not apply to public or private religions endowments. Section 18 of Transfer of Property Act 1882 relaxes all restrictions, in case of properties transferred for benefit of public like advancement of knowledge, religion, commerce, health and other allied objectives. A trustee cannot delegate his duties to another, except clerical duties and must have the final control over such delegation.

Bailment and Trust:

Often bailment and trust are confused. In bailment, there is delivery of goods from one person to another person for some purpose and on completion of such purpose; the goods have to be returned. In case of Trust, the property is transferred in favour of Trustee for the benefit of another person. In bailment, the person who received the goods is not the legal owner, but the trustee is a legal owner of the property.

Rights and obligations of Trustee:

The duties of the Trustee shall be well defined; he should comply with the terms of the Trust Deed, as per the directions of the author of the trust. He has to get acquainted with the property of the Trust and take required care about the genuinety and recoverability of the investments of the Trust money. The Trustee should, protect the title of the Trust property, if necessary by instituting legal proceedings. He should not set up any title adverse to the beneficiary. He has to exercise proper care and be impartial and should prevent wastage and convert any perishable property to permanent or profitable in nature. He has to maintain proper accounts and adopt proper investment strategies. The trustees cannot commit any breach of trust, cannot set off the loss occurred because of breach of trust in one portion of the trust property against profit of another portion of trust property. When a breach of trust is committed by one trustee, all the trustees are liable to the beneficiary for the whole loss sustained. Like-wise, the trustee has certain rights, like possession of the trust deed, title deeds of the trust property, reimbursement of expenses, right to settlement of accounts, right to seek the opinion of the court.

Maintenance of Trust Properties:

The trustee may lease the Trust property for a period not exceeding 21 years without the permission of the court, may sell the property in lots, by public auction, or by a private contract. He may also sell under special conditions, and buy and resell. He has powers to make the investment of the trust property, which must be in securities listed in trust act. Any variations in investment other than listed securities must be with the written consent of the beneficiary. He may apply the property of the minor for maintenance of minor with proper care and discretion. After he accepts a trust he cannot renounce it except with the permission of the court, or with the consent of all the beneficiaries. Trust property cannot be used for his own benefit, and any benefit must be transferred to the trust. It is to be noted that, the trustee cannot purchase the trust property in respect of which he is trustee for sale. Even his agents cannot buy the same. Further, trustee or his agent, cannot buy the beneficiaries interest and cannot be a mortgagee, lessee of the trust property without court permission. Similarly co-trustees cannot lend among themselves. If trustee wrongfully sells the trust property, the beneficiaries have a right to follow to so long it is traced notwithstanding the intermediate ownership except in case of bonafide sale for value without the notice of the trust.

THE RIGHT TO PROPERTY OF HINDU WOMEN’S UNDER HINDU LAW

Advocate Selvakumar | property advocates in Bangalore | property lawyer Bangalore

The Constitution of India provides that every person is entitled for Equality before Law and Equal Protection of Laws and there by prohibits discrimination on the basis of Caste, Creed and Sex. The discrimination on the basis of Sex is permissible only as protective measures to the female citizens as there is need to empower women who have suffered gender discrimination for centuries. Now so far as property is concerned, the daughter shall be given every right to inherit immovable and movable property equal to that of male members. We will examine how far this right to property of daughter has been recognized in the laws relating to Hindus.

Rights of women in Co-parcenary property:

Prior to, Hindu Women’s Right to Properties Act 1937 the woman was totally excluded from taking share in the Joint Family Property. The succession to the property of male member was governed by rule of survivorship. The rule of survivorship means on the death of a member of joint and undivided family his share in the joint family property passes to the surviving male members called as coparceners. Mulla defines coparceners as ‘The three generations next to the holder in unbroken male descent.” If a man has sons, grandsons and great-grandsons living, all of these constitute a single coparcenaries with him. Coparceners jointly inherit property and have unity of possession. The co-heirs and their heirs are also called coparceners so long unity of possession continues. Co-parcenary is different from joint family. Co-parcenary is limited to three generations next to holder; the joint family has no such limitation. It includes all the generations of the holder. To understand the position of Hindu daughter in the law of succession, it is worthwhile to know important features of Co-parcenary property. There are two different laws followed by Hindus in respect of property. Mithakshara is widely followed in India, except in West Bengal; Dayabhaga is followed in West Bengal.

Co-parcenary property:

1. Unity of ownership that is the ownership of property is vested in the whole body of the co-parceners.
2. In determinability of shares i.e. the interest of a Coparcener member in the property is a fluctuating interest capable of being enlarged by deaths in the family and liable to be diminished by births in the family.
3. Community of interest i.e. no co-parcener is entitled to any special interest in the co-parcenary property nor is he entitled to exclusive possession of any part of the property. His right is that of an undivided interest.
4. Exclusion of females i.e. females are excluded from inheriting co-parcenary property though wife was entitled to maintenance out of her husbands property.
5. Rights by birth, co-parcenary members acquire interest in the property by birth.
6. Devolution of survivorship, one of the interesting features of Mithakshara Co-parcenary is that on the death of a Co-parcener his interest in the property passes by survivorship (the members who are alive) to other Co-parceners. In Dayabhaga, the property devolves on the death of the holder. Nobody inherits any interest by birth.

However Women’s Right to Properties Act:

However the Hindu women’s right To Properties Act 1937 gave a death blow to the doctrine of survivorship, because under this act the widow of a deceased co-parcener in a Mitakshara undivided family will have in the joint family property the same interest which her husband had while he was alive.  It may be noted that the widow has right to claim a partition as a male owner even if there is male issues, but the widow was not in a position to hold the property as absolute owner.  Only with the passing of the Hindu Succession Act the position of widow and daughter came to be improved.  Before going further into the Act of 1956 it is worthwhile to examine the concept of coparcenary property.  Generally speaking coparcenary property is one in which all the coparceners have community of interest and joint possession.  Such property consists of

1. Ancestral property.
2. Property jointly acquired by the members of the joint family
3. Separate property of a member ‘” thrown into the common stock” with the intention of abandoning all separate claims on it, which becomes the property of joint family.
4. Property acquired by all or any of the coparceners with the aid of joint family funds.

Ancestral Property:

Ancestral property means that property which descends from father, father’s father or father’s father.  The Privy Council has held that the ancestral property is confined to property inherited from the three immediate paternal ancestors and the property inherited from a maternal grandfather is the absolute property of the inheritor in which his son does not acquire any interest by birth, and that it is not ancestral.

Hindu Succession Act 1956:

For the purpose of succession to property by Hindu daughter the Hindu succession Act, divides the property into four categories they are,

1. Coparcenary property,
2. Property of male Hindu,
3. Property of female Hindu and
4. Dwelling house.

The provision relating to Co-parcenary property in the Hindu succession Act 1956 is Sec.6 which provides that if a male Hindu dies leaving behind his share in Mithakshara Co-parcenary property, such property will pass on to his sons, son’s, son’s son by survivorship, on surviving members.  In case there are female relatives like daughter, Widow, mother, daughter of pre-deceased son daughter of predeceased daughter widow of pre-deceased son, widow of pre-deceased son of a predeceased son, then the interest of the deceased co-parcenary will pass on to his heirs by succession and not by survivorship.

Example:  If ‘c’ dies leaving behind his two sons only, and no female heirs of class I then property of ‘C’ passes to his sons by survivorship since there are no female relatives like daughter or any other member specified in the class I of first schedule.  In case ‘C’ dies leaving behind two sons and three daughters, then property of ‘C’ will pass on to his sons and daughters by succession in the following manner.

Firstly property of ‘C’ is divided among ‘C’ and his two sons.  The shares of ‘C’ and his two sons are C –1/3, each son 1/3 .

The sons are entitled to the equal share of the property along with the father. But the daughters are entitled to the share in the share of the deceased “C” along with other sons. So the sons will get 1/3 of the property and a share, which is 1/5 in the share of deceased “C”.

Son 1 – 1/3+1/15

Son 2 – 1/3+1/15

Daughter 1 – 1/15

Daughter 2 – 1/15

Daughter 3 – 1/15

Even under the Hindu Succession Act the daughter does not take equal share with the son. In this regard Karnataka State has gone further and amended sec. 6, to give equal rights to daughter in co-parcenary property. This amendment was made by Karnataka State in the year 1990 as Hindu Succession (Karnataka Amendment) Act 1990 which received the assent of the President on 28/07/1994 and is published as Karnataka Act No. 23 of 1994. Under this amendment if a partition takes place in the co-parcenary property among sons and daughters then daughter shall be given share equal to that of son. By this amendment so for property rights in coparcency property is concerned no distinction is made between son and daughter. However it may be noted that this benefit is not available to daughter married prior to or to a partition, which had been effected before the commencement of Hindu Succession (Karnataka Amendment) Act 1990, 30/07/1994. This exclusion is mainly to avoid unnecessary litigation, which may spoil cordial relations. The union government has proposed to amend the section 6 of the Hindu Succession Act, to remedy the injustice meted out to the women, to allow equal shares to women.

Succession to the property of male Hindu

(self acquired property) (sec 8 to 10)

The nature of the property held by male Hindu U/S 8, is self acquired property. So far as self-acquired property is concerned the owner of such property can dispose of by sale, Will, or gift without any restrictions. In case the owner dies without disposing the property then other members get right to inherit the property by succession. After the death of owner of the self-acquired property, widow, or widows will take one share. To be more clear all the widows, if the deceased had more than one wife, together take one share only, as though only one wife. The surviving sons and daughters and the mother shall each take one share. In the case of self acquired property the daughter takes share equal to that of son unlike in coparcenary property.

Succession to the property of female Hindu

(sec 14,15,16)

For the first time in the Indian History U/S 14 of the Hindu Succession Act 1956, female Hindu is given absolute ownership over the property acquired by Will, sale or by any other lawful means, So far as succession to property of female Hindu is concerned the daughter, son, and the husband takes equal share by succession, which means while she is living no member can demand partition of the property. She can dispose the property either by will or by sale, if she dies without disposing the property then members gets right to inherit the property by succession. Section 15 of the Hindu Succession Act deals with the devolution of the property owned by Hindu female.

If the Hindu female has inherited any property form her father or mother, such property devolves upon the heirs of her father, if there are no legal heirs which are specified in section 15, like son, daughter, children of predeceased son or daughter. Likewise if the Hindu female has inherited any property from her husband or father in law, such property will devolve on the heirs of her husband if there no legal heirs like son, daughter, children of predeceased son or daughter.

Dwelling House:

But in case of dwelling house, the daughter U/S 23 of the Hindu Succession Act 1956, cannot claim any share by partition until male members choose to divide the share in the dwelling house. In case the daughter is unmarried, she is entitled to a right of residence there in.

The daughter may loose her right to share in the property in any of the following circumstances:

Sec (26) – if daughter ceases to be a Hindu by converting to another religion.

Sec (25) – if daughter commits murder or abets the commission of murder of a person whose property she could have inherited.

However she will not be disqualified to inherit the property only by reason of any disease, defect or deformity.

THE IMPORTANCE OF ENCUMBRANCE CERTIFICATE FOR PROPERTY BUYING

   Advocate S Selvakumar | Advocate at Koramangala | Advocate at HSR

Encumbrance in general parlance means difficulties faced by some one in moving easily or hurdles or impediments or obstacles.

In legal parlance it means the charges or liabilities created on a property.  In simple words, the property in question may be alienated, subject to the terms and conditions contained in the agreement / document, whereby it is held as a security for any debt or obligation of its owner which has not been discharged as on date.

Public in general frequently use encumbrance certificates in property transactions as the sole evidence of free title / ownership.  They are under the impression that the encumbrance certificate would disclose all the encumbrances   that a property may have; however, the truth is that there may be several types of encumbrances, which will not be reflected in the said encumbrances certificate.

It is very important that the period for which the encumbrance certificate is required, the detailed description of the property, its measurements, and boundaries are clearly mentioned in the application for encumbrance in order to get a proper and valid certificate.

The prescribed application form for obtaining an encumbrance certificate is form No. 22.  The full details of the property, the period and the person who is applying should be disclosed in the said application.  The encumbrance year commences from April 1 of a calendar and closes on March 31, of the next calendar year.

Any fraction of the said encumbrance year attracts fee for the full year:  The application has to be submitted at the jurisdictional Sub-Registrar’s office under whose jurisdiction the said property falls.    A central record room is established in Bangalore at Seshadripuram, where records are available up to 31-3-2004.  The copies of records from 1-4-2004 are available at respective Sub-Registrar’s Office.  The fee prescribed is for single property and per individual application form, however, if there is more than one property belonging to a single individual or jointly owned by more than one individual or under single survey number / village, no extra fees need to be paid.

The encumbrance certificates are issued in Form No.  15 or 16.  If the property does not have any encumbrance during the said period, Form 16 will be issued i.e., certificate of Nil Encumbrance.  If the property has any encumbrance registered during the said period form No. 15 will be issued.  The certificate in form 15 discloses the documentsregistered in respect of the property, the parties to the deed, nature of the encumbrance, amounts secured or transacted in the said deed, the registered number of the document, Book No., Volume No., date-wise.  The encumbrance certificate, issued always will be in the language in which indexes are prepared in particular Registrar or Sub-Registrar’s Office.  If the indexes are not in English and the applicant wants certificate to be prepared in English, this request will be complied to the extent possible.

Limitations

Though encumbrance certificates discloses all registered encumbrances on a particular property for the specified period, it has certain limitations and public should not completely rely on the certificates issued by the Registrar or Sub-Registrar office for tracing the clear title of the said property.

The encumbrances disclosed in the certificate are for the period for which certificate is issued and any encumbrance created at a prior date or at a later date are not included in the said certificate.

Omission and commission

The encumbrance certificate is issued in respect of the property whose detail is furnished in the application form and not as per the registered documents in respect of the said property.  Thus, if the description of the property in any of the registered documents does not match the details of the property described in the application, such documents are not reflected in the said certificates.  The issuing office also makes it very clear that, though search in the records for any given period is made with due diligence, the issuing office is not responsible for any omissions and commissions committed by it in issuing the said certificate.

The encumbrance’s certificate discloses the encumbrances created by the documents, which are registered in the particular office.  In other words it is an extract of the register and any document by which the change is created but not registered does not find place in the certificate.

Optional documents:

There are various documents for which registration is not compulsory and only optional.  Most important is an equitable mortgage or mortgage created by deposit of title deeds a mode of mortgage utilized by banks to finance loans against deposit of the original documents.  The borrower or guarantor delivers to bank the original title documents of the property.  This creates a valid mortgage, which need not be registered.  The document creating lease for a period of not exceeding one year is not compulsorily Registerable.  Any decree or order of a court, any award need not be registered.  Testamentary documents will, also need not be registered.  Such documents, which are not registered do not find place in Encumbrance certificate.

Therefore, it is always advisable to inspect the property personally and to verify and confirm that the original title documents are available with property owner.  Some additional safeguards like paper notification, searching in jurisdictional courts for any pending cases would be useful.

Agricultural Land:

In case of agricultural lands, they are generally inherited.  The change of ownership is recorded in revenue records, mutation register of village panchayath.  Such changes of ownership are not registered.  As such encumbrance certificates does not reflect the true nature of the agricultural land.  R.T.C, Mutation extracts give complete details of change of ownership, the details of possession, the conversion of agricultural lane to non-agricultural purposes.  As such it is better to insist and rely on RTC and mutation extracts in addition to the encumbrance certificates in case of agricultural lands.

            It is always prudent to verify the encumbrance certificates for a minimum period of 43 years, because the maximum limitation period of 30 years and adverse possessory rights.  Always verify that the encumbrance certificate  are issued as per your requirement  in respect of the period, and that it contains the boundaries and the measurements of the property, the signature of registering authority and the office stamp apart from disclosing the names and the signatures of the persons who have searched and verified the records of the property.

TAX IMPLICATIONS ON SALE OF IMMOVABLE PROPERTY

Advocate at south Bangalore | Leading advocate in Bangalore | property lawyers

 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:

1. Gross Total Income = A+B+C+D+E = Total Income
2. Gross Total Income – Deductions under Chapter VI A = Taxable income
3. 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 1^st 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 on or after 01.04.2002.

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 31^st 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 1^st 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