My father bought a land 0f of 5000 sft for Rs Rs 3500 in 1959.He constructed a 1500sft house on the land in 1967 for Rs 30000 . He passed away in 1986.Self and mother became owner.Mother passed away in 2011and Ibecame the owner. The building and land together was given to a builder in 2015 for construction of flats.As per the agreement I have received 4 flats and construction was completed on 27.11.2021 and handed over to me. Now I have sold one flat (out of four)for 18 lakhs. I want to know whether it will be short or long term capital gain ? I do not want to re invest in property and want to pay appropriate amount of tax .Kindly guide me with procedure.Whether I need to open a separate account in bank and park this money till I pay tax? Thanks. s guha.

Ans: There is a grey area in tax law even today considering the period of holding of an under-construction property.

You can register the property but wait for 2 years before selling it, so that you are absolutely safe and make your asset long term.

If you require the money then you may sell otherwise not.

Please take your CAs advice before moving ahead.

Ans: You sold a property in June 2024 for Rs 30 lakh. It was bought for Rs 1,15,000 in 1994. Let's evaluate if there's a capital gain.

Indexed Cost of Acquisition

The property purchase cost will be adjusted for inflation. This is called the Indexed Cost of Acquisition (ICA). The ICA is calculated using the Cost Inflation Index (CII) provided by the Income Tax Department.

Calculating Indexed Cost

Calculate the ICA to understand your capital gain. Since we won't use specific formulas here, you can consult a Certified Financial Planner to get the precise ICA value. This helps in determining the exact capital gain.

Long-Term Capital Gains (LTCG)

Since you held the property for more than 24 months, it is classified as a long-term asset. The profit from the sale, after adjusting for the ICA, is your Long-Term Capital Gain (LTCG).

Tax on LTCG

LTCG is taxed at 20% with indexation benefits. However, there are ways to save on this tax.

Investing in Another Property

You can save on capital gains tax by investing in another residential property. This is covered under Section 54 of the Income Tax Act. If you buy a residential house within two years or construct one within three years, you can claim exemption.

Investing in Capital Gains Bonds

Another option is to invest in Capital Gains Bonds under Section 54EC. These bonds have a lock-in period of five years and provide tax exemption on the gains. The maximum investment limit in these bonds is Rs 50 lakh.

Purchasing a Shop

Buying a shop will not provide capital gains tax exemption under Section 54. The exemption is only for residential properties. If you sell a residential property, you must reinvest in a residential property to save on capital gains tax.

Other Options to Save Tax

Residential Property: Invest in another residential property within two years.

Construction: Construct a new house within three years.

Capital Gains Bonds: Invest in these bonds within six months of the sale.

Final Insights

To save on capital gains tax, reinvest in a residential property or Capital Gains Bonds. Purchasing a shop will not help in saving tax on capital gains. Consulting a Certified Financial Planner can help you navigate these options efficiently.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: 1. Calculation of Long-Term Capital Gains
Step 1: Determine the Sale Price
Sale Price: Rs 85 lakhs (amount for which the property was sold)
Step 2: Determine the Cost of Acquisition
Initial Purchase Price: Rs 27 lakhs (as per registered document)
Step 3: Adjust for Inflation
To calculate LTCG, the cost of acquisition is adjusted for inflation. This adjustment is done using the Cost Inflation Index (CII) provided by the Income Tax Department.

CII for the Year of Purchase (2010): Refer to the index published by the government for the year 2010.
CII for the Year of Sale (2023): Refer to the index for 2023.
Step 4: Calculate Indexed Cost of Acquisition
Use the formula:


Step 5: Calculate the Long-Term Capital Gains
LTCG
=
Sale Price
−
Indexed Cost of Acquisition
LTCG=Sale Price−Indexed Cost of Acquisition

2. Tax Implications
As it is sold before July 2024, the long-term capital gains are taxed at 20% with indexation benefits. Additional tax benefits may apply depending on the investment options you choose.

3. Saving on Long-Term Capital Gains Tax
Investment in Residential Property
If you reinvest the gains into another residential property, you can claim an exemption under Section 54 of the Income Tax Act.

Conditions: The new property must be purchased within two years of selling the old property or constructed within three years. The exemption is applicable on the amount of capital gains reinvested.
Investment in Capital Gains Bonds
You can invest up to Rs 50 lakhs of capital gains in specified bonds under Section 54EC to claim an exemption. These bonds must be held for a minimum period of five years.

Eligible Bonds: The bonds are issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
Investment in Rural Development Bonds
Under Section 54EC, you can also invest in rural development bonds. These bonds also have a lock-in period of five years.

Reinvestment in Residential Property
To fully utilize the exemption, reinvest the entire long-term capital gains amount into a new residential property. Ensure compliance with the time limits mentioned.

4. Final Insights
Here’s a summary of actions you can take:

Calculate Indexed Cost: Use the CII to adjust the cost of acquisition for inflation.
Calculate LTCG: Determine the gain by subtracting the indexed cost from the sale price.
Explore Exemptions: Consider reinvesting the gains in a new residential property or capital gains bonds to reduce or eliminate tax liability.
Implement these strategies to manage your tax liability effectively. Always ensure you comply with the conditions specified under the Income Tax Act for exemptions.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Hello;

I suppose this was a residential property and the property proposed to be purchased is also residential property and you do not own more then 2 houses at this time.

In this case you should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. In case you are constructing a house, then you have an extended time, ie. you will have to construct the residential house within 3 years from the date of sale/transfer.

Best wishes;