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Sold Your Immoveable Property? Here Are The Tax Implications... - Outside View by PersonalFN

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Sold Your Immoveable Property? Here Are The Tax Implications...
Jul 19, 2017

Prakash, 55, a creative director with an advertising agency desired to sell his immoveable property--a flat on the outskirts of Pune--in order to make provisions for his retirement. But little did he know the tax implications of this potential deal. He expected to receive the money and live a blissful retired life with his family--travelling, painting, nurturing his grandchildren, and spend his time among many other things---until he was corrected by his Certified Financial Guardian.

Selling an immoveable property is not as easy as it appears. It is an uphill, strenuous task. Primarily, because real estate as an asset class, to an extent, is illiquid in nature. And once you've sealed the deal and executed the sale transaction, there are a host of tax implications...

First, it is mandatory for the buyer of the property to deduct tax at source (TDS) @ 1% of the value of the property under Section 194IA of the Income-Tax Act, 1961 if the property purchased is more than Rs 50 lakh. This deduction is to be made before a payment is made to you, as a seller.

Furthermore, the amount that is deducted needs to be deposited by the buyer within 30 days (vide 'Form 26QB') from the end of the month in which the sale transaction was done.

Since the payment is made on behalf of you, the seller; it will be linked to your i.e. the seller's PAN (Permanent Account Number), and should reflect in your i.e. the seller's Form 26AS. And as the seller, you need to obtain a TDS certificate under 'Form 16B' from the buyer.

What about the Short Term or Long Term Capital Gain?

If the property is sold within a period of 24 months (or 2 years) from the date of acquisition at a gain, it will be classified as Short Term Capital Gain (STCG); which will be added to your total income and taxed as per your tax slab. So if you're placed in the highest tax bracket, this marks down 30% of the profit straight away (plus surcharge and education cess as applicable).

If the sale occurs after a period of 24 months (or 2 years) from the date of acquisition, the gains would be classified as Long Term Capital Gain (LTCG) - provided the property is sold after March 31, 2017. LTCG on your immoveable property is subject to 20% LTCG with an indexation benefit (which accounts for, or adjusts the inflation factor during the holding period in the cost of acquisition), thereby abetting to reduce the tax outgo.

The latest indexation table notified by the CBDT is as listed below and the base year for calculation of indexation benefit is shifted to 2001-02 from 1981-82 vide the Finance Act, 2017:

SI. No. Financial Year Cost of Inflation Index
1 2001-02 100
2 2002-03 105
3 2003-04 109
4 2004-05 113
5 2005-06 117
6 2006-07 122
7 2007-08 129
8 2008-09 137
9 2009-10 148
10 2010-11 167
11 2011-12 184
12 2012-13 200
13 2013-14 220
14 2014-15 240
15 2015-16 254
16 2016-17 264
17 2017-18 272
(Source: Ministry of Finance, CBDT)

Moreover, if you've sold the immoveable property within 5 years of the end of the financial year in which you had purchased, the Section 80C deduction in respect of principal amount for the property purchased taking a home loan, would get reversed; i.e. it'll be re-added to the 'return of total income' in the year the property is sold. However, there'll be no setback for the interest benefit under Section 24(b) already availed; meaning the deduction thereto will be left untouched.

Hence, when you're selling your immoveable property, make sure you're timing the sale right to deal with the tax implications deftly.

Is there any way to avoid capital gain tax legitimately?

Yes, there is; but the exemption is available only for LTCG.

LTCG tax can be exempt under Section 54 of the Income-Tax Act if the capital gains are invested in:

  • Purchase of another residential property within 1 year before or 2 years after the date of transfer of the property sold; and/or
  • Residential property is constructed within a period of 3 years from the date of transfer/sale of the property

The new residential property should be bought in the seller's name. The exemption is granted for joint-ownership purchases. But the new residential property purchased or constructed should not be transferred within a period of 3 years from the date of acquisition/purchase.

Remember, in case of purchase, the exemption is still granted even if the builder fails to handover possession within 3 years of purchasing the property.

If the capital gains so invested are equal to or less than cost of the new residential property, the entire capital gain is exempt. But if the amount of capital gain is greater than cost of the new residential property, then exemption shall be allowed only to the extent of the cost of the new residential property and rest will be liable to LTCG tax. But to avoid this, you can invest the balance in long term capital gain bonds in accordance to Section 54EC. Read on to know more about it...

What if I don't wish to buy another residential property?

Yes, there is a provision under the Income-Tax Act for such assessees too. You can invest within 6 months from the due date of transfer/sale of the property in long-term capital gain bonds viz. NHAI (National Highway Authority of India) bonds and REC (Rural Electrification Corporation Limited) for a minimum period of 3 years as per Section 54EC. The exemption is to the extent of the amount invested in such long term capital gain bonds, but subject to a maximum limit of Rs 50 lakh.

Now in case you sell / transfer or liquidate these long term capital gain bonds anytime within a period of 3 years from the date of acquisition/ purchase, the amount of capital gains shall be deemed to LTCG of the 'previous year' in which the long term capital asset is transferred or converted into money.

What if you're unable to invest the capital gain amount immediately?

Well, as a precaution you can deposit the amount in Capital Gain Account Scheme (CGAS) with 28 banks notified by the Government viz. State Bank of India, Central Bank of India, Syndicate Bank, Bank of Baroda, Corporation Bank, and so on.This scheme was started in 1988 to facilitate assesses who're not in a position to invest the LTCG proceeds as specified under Section 54, Section 54EC and Section 54F (where one can invest the proceeds of the sale of any other capital assets to purchase a residential property) on or before the due date of the filing of tax returns.

To open the capital gain account (Type A - Savings Account and/or Type B- Term Deposit Account), an application in 'Form A' is necessary along with necessary account opening documents.

The deposits in the CGAS can be made in cash, cheque, demand draft and can be done in lump sum or in a piecemeal, i.e. in instalments. Both, 'Type A account' and 'Type B account', earn interest as specified by the Reserve Bank of India (RBI) from time to time.

The withdrawals from this account are facilitated vide an application in 'Form C' for first withdrawal and 'Form D' for subsequent withdrawals. However, please note that for a 'Type B account', pre-mature withdrawal will attract penalty owing to the nature of the account. The withdrawals should be utilised within 60 days from the date of withdrawals and cannot be re-deposited into the account immediately.

Please note that the amount deposited in CGAS needs to be utilised for purchase or construction of residential property within 2 years or 3 years (as the case may be), from the sale of property to avail benefit under Section 54, 54EC and 54F. If this is not done, a LTCG tax will be levied in the financial year in which such deadline ends.

What happens if the sale transaction is done at loss?

As a seller, you can claim a refund of the TDS at the time of filing his tax returns by furnishing relevant details. Alternatively, you can obtain a certificate from the assessing officer specifying that no deductions should be deducted and present this to the buyer.

You have the option to set-off (or adjust) the losses, if any. But there are some restrictions. A Short Term Capital Loss (STCL) can be set-off (or adjusted) against LTCG and LTCG. But, a Long Term Capital Loss (LTCL) can be set-off only against the profits of any other long term capital gains. Listed below, here are certain conditions:

  • You must file your Income-Tax Returns within the due date prescribed under Section 139(1); and
  • The loss can be carried forward upto8 immediately succeeding 'assessment year' in the year in which the loss was incurred.

Summing it up...

When you're selling an immoveable property, it becomes imperative to recognise the intricate tax implications to avoid landing into hot water.

Therefore, in the sale transaction of an immoveable property, timing and time in the market, both are critical, so as to astutely save tax and earn return on real estate investments.

Further, it is always prudent to invest the capital gain in line with your investment objectives, risk profile, and asset allocation while you endeavour to achieve your financial goals.

Also to draft sale deeds / agreements, always seek the assistance of legal experts and you will avoid trouble, litigations later. After all, you want peace of mind; isn't it?

Follow an approach where thorough planning, research, and professional guidance is always at the core of your personal finances.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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