No tax benefit available on short-term capital gains tax
December, 27th 2012
In the absence of complete facts, we have assumed that you have held the residential property for more than 36 months from the date of acquisition and accordingly, the gains shall be termed as long-term capital gains (LTCG). The LTCG could be claimed as exempt from tax by reinvesting the same in a new residential property within the specified time frames (within one year prior to sale date or two years from the sale date or within three years for an under-construction property) as per section 54 of the Income-tax Act, 1961. Alternatively, the LTCG could be invested in specified bonds issued by the National Highways Authority of India or Rural Electrification Corp. Ltd under section 54EC of the Act, within a period of six months from the date of transfer of the property, subject to a cap of Rs.50 lakh per financial year (FY).
The investment in new property or specified bonds has a lock-in period of three years. Accordingly, if the new property is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of old property shall be revoked. If you take any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash. We understand that you propose to utilize the entire money for your child’s education. In such a case, if you do not require the entire funds for the child’s education for the next three years, you could consider reinvesting the LTCG in the above assets.
The amount invested in a residential property or specified bonds as per the provisions of the Act shall be claim as exempt from tax and the balance amount, if any, shall be taxable at a flat rate of 20.6% (including education cess). While calculating the LTCG, the cost of acquisition and improvement shall be inflated/adjusted by applying the cost inflation index notified by the tax authorities.
Please note that if the property has been held for less than three months from the date of acquisition, the resulting gains shall be termed as short-term capital gains (STCG). Further, since there is no avenue whereby an exemption from STCG can be availed, the entire STCG shall be taxable as per the applicable tax slab rate.