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Selling flat? Tax axe falls on you
November, 13th 2006

Real estate prices may be booming but it may not be the best time to sell your house unless you have spotted the new apartment you want to buy or you are willing to pay tax. With the government unlikely to grant capital gains tax exemption to new bond issues this year, a large number of people who encashed on the housing boom would have to pay more tax to the government.

Earlier, if you had bought an apartment for, say, Rs 15 lakh and sold it off for Rs 30 lakh, you could have avoided paying the 22% capital gains tax capital tax if the profit (Rs 15 lakh) was used for buying a new house within three years of sale. Alternatively, you could have invested it in bonds issued by the likes of National Housing Bank, National Highways Authority of India, Nabard or Rural Electrification Corporation, which were earlier available for avoiding capital gains tax.

But this year onwards, finance minister P Chidambaram decided to restrict the benefit to investment in NHAI and REC bonds and also fixed a Rs 6,500 crore cap. And with investors having already used up the bonds, the government which earlier said it was considering raising the ceiling is not expected to raise the bar this year.

Finance ministry officials contend it is difficult for NHAI and REC to absorb more funds since they have completed their borrowing for the year. What about NHB and others which earlier received the benefit? That would require a change in the Finance Act and cannot be done without parliamentary nod, the officials say.

Now, the best course of action is to keep aside the money in a separate account and use it to build a new house over the next three years or wait for the next installment of bonds thats if FM does not withdraw the exemption. To tide over the problem, some people have invested in mutual funds to ensure that the higher returns cover the tax liability.

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