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Qurey Corner: Tax
April, 20th 2010

My husband had got ESOP, which was encashed in Jan this year. When checked with tax consultant, we were advised to pay tax@20%, else to save it. We have purchased a flat 2 years ago, hence even if we invest in home it will not be exempted from tax, is this true?  Madhuri

Assuming that the shares obtained through ESOP scheme were held for more than a year ago, the sale would give rise to long-term capital gains. If the shares so sold were issued by Indian company and STT was paid at the time of sale of such shares then long-term capital gains would be exempt from tax. If the shares so sold were issued by a foreign company then the gains are taxed at 20.6%.

In such case, you can claim exemption under Section 54F by reinvesting the amount of sale proceeds for purchase of a residential house within 2 years from the date of sale or for construction of residential house within 3 years from the date of sale. If you did not own more than one house at the time of sale of shares obtained under ESOP scheme, you would be eligible to claim exemption under Section 54F. Another option would be to claim exemption under Section 54EC by investing in REC/NHAI bonds within 6 months from the date of sale. The amount of long-term capital gains would then be exempt to the extent of such investment. Note that investment in REC/NHAI bonds cannot exceed Rs 50,00,000 per financial year. Interest earned on such investments is taxable.

I booked a flat in 2005. I have not yet taken possession of the flat. If I were to sell the flat and reinvest the entire sale proceeds into another flat, will there be any capital gains tax payable?

If you sell the flat before it gets ready, you can argue that you are actually selling a right in the flat (and not the flat itself as its still not ready ) which you acquired in 2005. And since the right was held for more than 3 years, the gain arising from sale thereof is in the nature of long-term capital gains.

Reinvestment of sale proceeds of this right into another residential house would qualify for tax exemption under Section 54F as long as you meet all the conditions prescribed therein. If you sell the flat after taking possession but before completion of three years from the date of possession, then it may be considered that the asset you are selling was held by you for less than three years and hence the gains arising from the sale thereof may be considered as short-term capital gains and no exemption from such gains are available on reinvestment. Counter arguments, though possible, may be avoided if option a) is feasible.

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