Cash in on capital

 The Bombay Chartered Accountants’ Society has plans to reach out to senior citizens in Mumbai. Rajesh Kothari explains concessional tax treatment with regard to capital gains earned by tax payers

Issues

Under  the   Income Tax Law of India, there is concessional tax treatment with regard to capital gains income earned by  a tax payer. Income which a person earns in his status as an investor is regarded as capital gains income.

For example, for a builder, the immovable property or residential unit may give rise to business income, whereas, for a normal citizen, surplus which he earns from sale of a residential house or his office constitutes capital gains income, and is taxed at NIL  or  concessional  rate. 

Capital gains income can be long-term or short-term. The most frequent transactions in the case of an individual are the transactions of sale or transfer of a residential house or financial assets such as shares, mutual funds units, etc.

Non  residents

Special rules may apply to taxation of capital gains of non-residents (including NRIs).

Year of  transfer

The capital gains income is taxed in the year in which the property is transferred by the tax payer. In case of an immovable property, the date on which possession is granted to the purchaser is normally considered. In case of moveable property, date of  delivery is considered to be date of transfer.

Once the transfer is complete, tax becomes payable. For example, if  a bungalow is sold to the purchaser such that money is agreed to be received over a period of 18 months, the tax liability will become payable in the year of the possession.

The law does not show any mercy on the ground that liquidity has not been   encashed by the seller. 

Computation of capital gains income from sale of residential house

The starting point for computation of chargeable capital gains income is the amount of sale consideration of the house. If the  sale value adopted by stamp duty authorities for levy of stamp duty is higher than the agreement value, such higher duty value is deemed to be the sale value. Brokerage and allied costs can be deducted to arrive at net sale consideration.

The next step is to claim reduction of the cost of acquisition and cost of improvement of residential house. Cost of acquisition refers to the purchase price and incidental costs such as stamp duty, registration fee, transfer premium to society, etc.  Cost   of   improvement   includes   capital expenditure on the house such as extensive renovation, etc.

In case the house is a long-term capital asset, you can claim enhanced reduction for the cost of acquisition / improvement by its inflated values, known as indexed cost of acquisition / improvement. Exemption by reinvesting proceeds in the purchase of residential house / notified bonds.

Advance tax
Generally, income tax is payable in advance in three installments during the financial year.

Accordingly, 30 per cent of the total estimated tax liability (net of tax to be deducted at source) is required to be deposited on or before September 15, 30 per cent on or before December 15 and the balance   40 per cent on or before March 15. 

In case of tax payable on capital gains arising between the due dates of two installments, there is a specified facility that allows past installment to be paid with the  next installment.

Recommendations             

Return  of  income: It is essential to file the return of income on or before the due date, which is July 31 following the financial year for individuals who are not required to get their accounts audited. Non-filing of return invites interest at 1 per cent per month on the  unpaid tax liability.         

Coordination of capital   gains income with other regular income: A doubt may arise in a peculiar situation where regular income like salary, interest, etc is below the threshold limit for  Income tax i.e. Rs1 lakh, and the individual has capital gains which is taxable at concessional rate.

For long-term assets: It is possible to save long-term capital gains tax arising from sale of residential house by making reinvestment of the sale proceeds or the amount of capital gains. The reinvestment could be in another residential house or in notified bonds.

Voices
If one wants to avail such exemptions, it is necessary to note that several conditions like time-limit for reinvestment, lock-in period, etc, attached to such exemptions, also need to be strictly complied with.
— VS Ambashtha, retired bank executive