The term ‘capital asset’ is defined to include property of any kind: Fixed, circulating, moveable, immoveable, tangible, intangible.
Any profit arising from the transfer of a capital asset during a financial year is taxable under the head ‘Capital Gains’ under Section 45 of the Income tax Act, 1961. Capital Gain tax liability arises only if the below mentioned conditions are satisfied:
1. There should be a capital asset
2. It is transferred by the assessee
3. Transfer takes place during the previous financial year
4. Any profit or gain accrues/arises as a result of transfer
5. Such profit or gain is not exempted from tax under relevant exemptions mentioned under Section 54 of the Act
There are two types of capital assets. A short-term capital asset is one where the holding period of an immoveable property is not more than 36 months. If the holding period exceeds 36 months, it becomes a long-term capital asset.
Computing capital gain
Short-term capital gain is an income derived from the sale of a capital asset and it is directly added to the assessee’s income during the previous financial year.
It is calculated as follows: Sale consideration minus the cost of acquisition, cost of improvement, expenses incurred in connection with the sale of the property, interest paid on amount borrowed for the purpose of investment in the capital asset.
Exemptions under Sec. 54
While calculating long-term capital gains, indexation benefit (inflation adjusted revised cost) is allowed for cost of acquisition and cost of improvement. They are taxed at 20 per cent. This benefit is not available for short-term gains.
If the sale consideration amount is less than the guideline value or prevailing Government-approved rate, these rates will be taken into account as per section 50C of the Act. Under such circumstances, it is the onus of the seller of the property to appeal to the income tax authorities, and if the valuation officer is convinced that the property which was sold at less than the prevailing guideline value or that the circle rate is reasonable, then capital gains shall be computed based on the sale consideration value that is less than the prevailing guideline value .
Avoiding capital tax
Buy a new property
One way to get an exemption on long-term capital gains is to buy a new residential property within the stipulated time period. The purchase must be made within a period of one year prior to, or two years from the date of transfer of the original property.
Construct a new property
For under-construction properties, the construction needs to be completed within three years from the date of transfer of the original house. If one does not plan to construct, then he/she can book a residential under-construction house to avail this exemption. If, however, one fails to buy or construct a new house within the stipulated period, the entire sale consideration arising from the sale of the property shall be treated as capital gains and he/she will have to pay tax on it.
If the capital gains amount is less than Rs.50 lakhs, you will still be eligible to get a tax exemption if you invest the sale consideration amount in central government notified bonds that fall under section 54EC of the Income Tax Act. You must hold these bonds for at least three years. These bonds shall yield a return of 5.5 per cent interest per annum.
To avail the exemption, one should invest in these bonds within a period of six months after the date of such transfer. The maximum amount which can be invested in Section 54EC Bonds is fixed at Rs.50 lakh.
The writer is a Chennai-based advocate and author of ‘Property Registration, Land Records and Building Approval Procedures Followed in