How to minimize taxes on my new flat purchase? (LTCG 5.5L, STCG 3.5L, Hanging Portfolio 1.65CR)

Ans: If rent and electricity is paid by the company, it is considered as perquisites. To save tax, you can invest additional 40k in NPS, you can pay additional mediclaim premium.

Ans: Dear Pramod KS,

Thank you for asking about the capital gains tax for your flat's sale. I'll try to simplify the explanation and give you an idea of the tax and how to reduce it. Keep in mind that the accuracy of the answer depends on the details you've provided.

You sold the flat for Rs 122 lakh in March 2023. You made staggered payments for it, totaling Rs 55 lakh, from 14/06/2010 to 25/06/2013. To find the capital gains, we need to adjust the purchase cost for inflation using the Cost Inflation Index (CII) for each payment year.

Since the payments were made over multiple years, we must adjust the purchase cost for each payment separately. For simplicity, let's assume you made equal payments of Rs 18,33,333 each in 2010, 2011, and 2013. The CII for 2010-11 is 167, for 2011-12 is 184, and for 2012-13 is 200. The CII for the year you sold the flat (2022-23) is 331.

We'll adjust each payment's purchase cost like this:
Adjusted Purchase Cost = (Payment * CII for the year of sale) / CII for the year of payment

For the 2010 payment:
Adjusted Purchase Cost = (18,33,333 * 331) / 167 = 36,19,278 (approximately)

For the 2011 payment:
Adjusted Purchase Cost = (18,33,333 * 331) / 184 = 32,94,804 (approximately)

For the 2013 payment:
Adjusted Purchase Cost = (18,33,333 * 331) / 200 = 30,18,000 (approximately)

Now, add up the adjusted purchase costs:
Total Adjusted Purchase Cost = 36,19,278 + 32,94,804 + 30,18,000 = 99,32,082 (approximately)

Now we can find the capital gain:
Capital Gain = Sale Price - Total Adjusted Purchase Cost
Capital Gain = 1,22,00,000 - 99,32,082 = 22,67,918 (approximately)

Since you owned the property for more than 36 months, this is a Long-Term Capital Gain (LTCG). The tax rate is 20% after considering inflation.

Capital Gain Tax Payable = 20% of Capital Gain
Capital Gain Tax Payable = 0.20 * 22,67,918 = 4,53,584 (approximately)

You and your spouse jointly own the property, so each of you will pay tax on your share of the capital gain, approximately Rs 2,26,792 each.

To reduce the capital gains tax, consider these options:

Invest the capital gain in special bonds under Section 54EC of the Income Tax Act. These have a 5-year lock-in period and must be invested within 6 months after selling the property.
If neither you nor your spouse owns more than one residential property at the time of the sale, you can use the capital gains to buy or build a new house within specific time limits under Section 54 of the Income Tax Act. You must buy the new property within 2 years or build it within 3 years from the sale date.
Remember that these options have certain rules and limits. It's a good idea to talk to a tax professional to discuss your specific situation, calculate the exact adjusted purchase costs and capital gains, and follow the correct rules. I hope this information helps.

If you need assistance with the exact calculations based on the specific payment amounts and dates, a tax professional can guide you through that process. They can also help you understand the various exemptions and investment options available to minimize your tax liability further.

I hope this information has been helpful in clarifying the capital gains tax and potential ways to reduce it.

Best regards,
Hardik Parikh

Ans: You can consider a home loan. I am assuming that this house will help you save Rs 18,700 in rent. (Rs 2.24Lpa). Vs this on the Rs 40L downpayment you will lose FD interest of Rs 3.2L pre tax (FD at 7% and Equity at 15% assumed) which works out to only Rs 2.29L post tax on the FD interest. Further you would now get tax deduction on your home loan of Rs 2L pa. You would lose HRA benefit. (You need to compute this based on various HRA conditions). You tax saving on home loan is definitely going to be higher.
Thus, the home loan is beneficial to you from a tax saving basis and based on your current circumstances. However, you need to consider other factors like your repayment capacity of your EMI on home loan and also its impact on your savings into stocks, MF, etc. for the future.

Ans: Investing wisely is crucial to ensuring a secure financial future. I understand you have several financial commitments and are looking for ways to optimize your investments and reduce your income tax. Let's address your concerns comprehensively.

Reducing Income Tax
Firstly, you mentioned that you are already maximizing your 80C investments and claiming housing loan interest. Here are some additional strategies to reduce your taxable income:

Utilize Section 80D: Under Section 80D, you can claim deductions for medical insurance premiums for yourself, your family, and your parents. The deduction is Rs 25,000 for yourself and your family and an additional Rs 25,000 (Rs 50,000 if parents are senior citizens) for your parents' insurance.

Claim House Rent Allowance (HRA): If you are paying rent and do not live in your own house, you can claim HRA exemptions under Section 10(13A). The exemption amount depends on your salary, rent paid, and city of residence.

Invest in National Pension System (NPS): Contributions to NPS under Section 80CCD(1B) provide an additional deduction of Rs 50,000 over and above the 80C limit of Rs 1.5 lakhs. This can help you save tax and build a retirement corpus.

Interest on Education Loan (Section 80E): If you have taken an education loan for yourself, your spouse, children, or a student for whom you are a legal guardian, you can claim a deduction on the interest paid on such loans.

Donations (Section 80G): Donations to specified charitable institutions qualify for deductions under Section 80G. Ensure the charity is eligible for deductions.

Section 24(b) - Interest on Housing Loan: Beyond your primary residence, if you have a loan on a second house, you can claim deductions for the interest paid without a cap under certain conditions.

Investment Options
Now, let’s discuss where to invest your money for good returns without a lock-in period:

Systematic Investment Plans (SIPs) in Mutual Funds: SIPs are ideal for disciplined investing. They allow you to invest a fixed amount monthly in mutual funds. Opt for equity mutual funds for potentially higher returns over five years. Diversify your portfolio by including large-cap, mid-cap, and balanced funds.

Debt Mutual Funds: For conservative investments, consider debt mutual funds. These invest in fixed-income securities and offer relatively stable returns. They are less volatile than equity funds and provide liquidity.

Liquid Funds: These are a type of debt mutual fund that invests in short-term instruments. Liquid funds provide high liquidity and better returns compared to savings accounts. They are suitable for short-term investments and emergencies.

Ultra-Short Duration Funds: Similar to liquid funds, but with slightly longer investment horizons. They offer better returns and maintain liquidity.

Your Real Estate Decision
You have two main options regarding your properties in Raipur and Bhubaneswar:

Option 1: Demolish and Rebuild in Raipur: Building a new house on your existing land can modernize the property and potentially increase its value. However, consider the cost (Rs 80 lakhs) and whether it will yield a good return on investment, especially if you plan to sell or rent it out.

Option 2: Settle in Bhubaneswar: Bhubaneswar offers a good rental yield and is your wife's preferred location. Purchasing a 3 BHK for Rs 1.5 crores can be a good investment, especially if the property appreciates and offers a steady rental income.

Analysis and Recommendation: Assess the potential returns, convenience, and personal preferences. Bhubaneswar seems more lucrative if it offers good rental income and aligns with your lifestyle. However, rebuilding in Raipur could be worthwhile if the property's location is prime and the new construction significantly increases its value.

Managing Loans
You currently have a car loan of Rs 15 lakhs and a housing loan of Rs 36 lakhs. Here are some strategies to manage and reduce your loan burden:

Prepay High-Interest Loans: Focus on repaying high-interest loans like the car loan first. Use any surplus funds to reduce this debt faster.

Balance Transfer for Home Loan: Consider transferring your home loan to another bank offering lower interest rates. This can reduce your EMI burden and total interest outgo.

Part-Payment of Home Loan: Use bonuses or other windfalls to make part-payments on your home loan. Reducing the principal amount can significantly lower your interest burden over time.

Creating an Emergency Fund
Ensure you have an emergency fund that covers at least 6 months of your expenses. This fund should be easily accessible and kept in a high-liquidity account like a savings account or liquid fund. It provides financial security in case of unforeseen circumstances like medical emergencies or job loss.

Financial Planning for the Future
Retirement Planning: With your home loan payable till the age of 70, it's essential to have a solid retirement plan. Continue contributing to NPS for a pension corpus. Also, consider other retirement-focused mutual funds or pension plans that offer steady returns.

Children’s Education: If you have children, start planning for their education expenses early. Invest in child education plans or equity mutual funds with a horizon aligned with your child’s age.

Regular Monitoring and Rebalancing: Regularly review your investment portfolio to ensure it aligns with your goals and risk tolerance. Rebalance your portfolio as needed to maintain the desired asset allocation.

Enhancing Financial Literacy
Improving your financial knowledge can empower you to make better decisions. Consider reading books on personal finance, attending workshops, or following credible financial blogs and news sources. Understanding basic financial concepts will help you navigate investments and tax planning more effectively.

Final Insights
Balancing your income, expenses, and investments is key to achieving financial stability. By strategically investing Rs 36,000 monthly, utilizing tax-saving options, managing your loans efficiently, and planning for the future, you can secure a robust financial foundation. Regularly monitor and adjust your plans to stay on track with your goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in