INTRODUCTION
The
topic of taxation of capital gains on real estate transaction under
the income tax act is live and
ever
interesting topic from point of view of all concerned with such
taxation. This is one set of
provisions
in the Act which has raised maximum number of issues of
interpretation. In the recent
years
several amendments have been brought about in the income tax act
relating to computation
and
chargeability of capital gain. Frequent changes have only added to
the complexity of an already
complicated
subject.
REAL
ESTATE TRANSACTION
Capital
gain on real estate transaction is a broad topic, the term real
estate itself is a vast term but
same
is briefly categorized as under:
1.
Sales of Land
2.
Sales of Building.
3.
Sales of Inherited/Gifted Property.
4.
Property compulsorily acquired by the Government.
EXPLANATION
OF IMPORTANT TERMS:
1.
Long-term and Short-term capital asset:
Capital
asset is a asset defined under section
2(14) of the Act,
which says it to be property of
any
kind held by an assessee, whether or not connected with his business
or profession.
For
the purpose of computing capital gains , the capital asset is
bifurcated into two categories
on
the basis of the duration for which they have been held by the
assessee, namely:
i)
Short-term Capital Asset
ii)
Long-term Capital Asset
Generally,
Short-term Capital Asset means capital asset held by the assessee for
less than 36
months
immediately before the date of transfer, Thus Long-term Capital Asset
means a
capital
asset held for more than 36 months.
Profits
arising on a transfer of short-term capital asset are liable to tax
as any other income
On
the other hand; gains arising on transfer of long-term capital asset
are entitled to a
concessional
treatment. Thus classification of an asset as a long-term or
short-term asset is
therefore
of considerable importance.
2.
Cost of Acquisition (COA):
Cost
of Acquisition of an asset is the value for which it was acquired by
the assessee.
Expenses
of capital nature for completing or acquiring the title to the
property are includible
in
the cost of acquisition.
Section
55 of Act states that where the capital asset becomes the property of
the assessee
before
01-04-1981, the assessee has the option to either take the actual
cost of acquisition or
fair
market value as on 01-04-1981, whichever is more beneficial to the
assessee as the cost
of
the asset for computation of capital gains. Where the capital asset
becomes the property of
the
assessee by way of inheritance or gift and the previous owner of the
property has
acquired
the same before 01-04-1981, then the Cost of Acquisition for
computation of capital
gains
will be either the cost to the previous owner or the fair
market value of the asset as
on
01-04-1981, at
the option of the assessee.
For
the following flowchart please consider the following
o
Cost
of inflation index (CII) of the year in which property is transferred
(F.Y. 2011-12)
—-785.
o
In
case where the property is inherited or gifted then Cost of inflation
index (CII) of
the
year in which property was first held by the assessee (F.Y.
2007-08)—– 551.
o
In
case where the property is not inherited or gifted but the same is
purchased by the
assessee
(F.Y. 2006-07) CII—– 519.
*In
case of transfer of a long-term capital asset, the cost of
acquisition is required to be enhanced by a
factor
of Cost of Inflation Index. A Large portion of gains on sale of
capital asset is on account of
inflation
and does not represent a real profit. The benefit of indexation is
given in order to mitigate this
hardship.
3.
Cost of Improvement:
Cost
of improvement is a capital expenditure incurred by the assessee in
making any
additions/improvement
or adding/increasing the value of the asset.
For
calculation of indexed Cost of improvement, CII is to be taken of the
year in which
improvement
has taken place by the assessee or the previous owner. But in case
the assessee
exercises
the option of substituting the FMV as on 01-04-1981 as the COA, then
the expenses
incurred
for improvement will be added to the COA only to extent such expenses
are
incurred
after 01-04-1981.
4.
Full value of Consideration
The
starting point of computing the capital gains is ascertaining the
full value of
consideration
received or accrued. Where the transfer is strictly for money there
may not be
any
problem in determining the full value of consideration. However,
difficulties may arise in
cases
where consideration is received partly in cash and partly in kind. In
case consideration
is
partly or fully in kind, the market value of the asset received as
consideration together
with
cash amount received will be full value of consideration.
According
to section 50C of the Act, where Sale consideration is received on
transfer of land
or
building whether short-term or long-term is less than the Value
adopted by any authority
of
a state government for the purpose of payment of stamp duty than the
Value adopted by
Stamp
Duty authority is to be taken as Full value of consideration.
When
transfer of a capital asset is by way of Compulsory Acquisition under
any law then
Initial
Compensation received from the Legal body is taken as the full value
of consideration.
Here
one important thing to take note of is that normally capital gain is
taxed in the year in
which
asset is transferred but the case here is different because capital
gain will be
chargeable
to tax in the year in which compensation is received which can be
different from
the
year in which property is compulsorily taken over by legal body.
EXEMPTIONS
The
Income tax Act grants total or partial exemptions of Capital Gains,
but amount of exemption
cannot
exceed the quantum of capital gain. For the purpose of real estate
transaction the sections
which
can help us to get a exemption in respect of Capital gains are 54,
54EC and 54F. The following
table
represents the conditions to be fulfilled in order to get the
exemption.
Foot
note:
Revocation
u/s 54F is done when,
1.
Asset acquired is transferred within 3 years from its acquisition.
2.
The assessee acquires another residential house property within 2
years from the date of
original
asset.
3.
The assessee completes the construction of another residential house
property within 3
years
from the date of original asset.
TAXABILITY
Almost
everything use for personal or investment purposes is a capital
asset. When a capital asset is
sold,
the difference between the cost of the asset and the amount it is
sold for is a capital gain or a
capital
loss. However, not all capital gains are treated equally. The tax
rate can vary dramatically
between
short-term and long-term gain.
a)
Long
Term Capital Gain to be taxed at Flat Rate or Special Rate of 20 %.
b)
Short
Term Capital Gain to be taxed as any other income depending upon the
slab on
income
in which the assessee falls.
In
case of Long-term capital gain Deduction of u/s 80C to 80U is not
available.
Further
the benefit of the exemption limit i.e. maximum amount not chargeable
to tax is
available
to long-term capital gain, only if the said limit is not being
exhausted by other
income
other than long term capital gain i.e. other income including
short-term capital gain.
SET-OFF
AND CARRY FORWARD OF LOSSES
Loss
from transfer of a Short-term Capital Asset can be set off against
gain from transfer of
any
other capital asset (Long Term or Short Term) in the same year. Loss
from transfer of a
Long-
term Capital Asset can be set off against gain from transfer of any
other long term
Capital
Asset only in the same year.
If
there is a net loss under the head “Capital Gains” for an
assessment year, the same cannot
be
set off against any other head of income viz., Salaries, House
Property, Business or
Profession
or other sources. It has to be separated into Short term Capital Loss
(STCL) and long
term
capital loss (LTCL) and carried forward to next assessment year. In
the next year, the STCL
can
be set off against any gains from transfer of any capital asset (Long
term or Short term) and the
LTCL
can be set off against gains from transfer of long term capital asset
only. Any unabsorbed
loss
after such set off can be further carried forward to next assessment
year.
Capital
loss computed in an assessment year can be carried forward for eight
assessment years and
set
off as above.
Insertion
of Section 194-IA by Finance Act, 2013
The
Finance Bill 2013 has introduced a new section 194-IA
“TDS
on Immovable property”.
It
provides that any person, being a transferee, responsible for paying
to a resident transferor any
sum
by way of consideration for transfer of any immovable property (other
than agricultural land)
shall
deduct an amount equal to one per cent. of such sum as income-tax at
the time of credit of
such
sum to the account of the transferor or at the time of payment of
such sum in cash or by issue
of
cheque or draft or by any other mode, whichever is earlier.
It
is further provides that no deduction shall be made where
consideration for the transfer of an
immovable
property is less than 50,00,000/-.
Here”
immovable property” means any land (other than agricultural land)
or any building or part
of
a building
The
Tax so deducted is to be has to be deposited within 7 days from the
end of the month in which
the
tax was deducted. Tax is to be accompanied by a challan-cum-statement
in Form
26QB,
electronically,
within the specified time.
Every
person responsible for deduction of tax u/s 194IA shall furnish a
certificate of TDS in Form
16B
to
the payee within 15-days from the due date for furnishing the
challan-cum-statement in
form
26QB (i.e. within 22days of the end of the month in which the tax was
deducted)
No
TDS return is required to be filled.
This
amendment will take effect from 1st June, 2013.
CONCLUSION
Capital
Gain is one of the heads of income where maximum tax planning can be
done especially for such
real
estate transactions, in order to minimize the gain to the maximum
possible extent. But it is also one of
areas
of income tax where interpretations relating to sections differ a lot
and thus support of judicial
pronouncements
and decisions should be taken.
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