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Selling inherited old house: How will it impact my tax? (Mihir's case)

Ramalingam Kalirajan |7097 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 01, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Jul 25, 2024Hindi

Hi Mihir- I have to sell an inherited old house made before 1987. The price at that point may be 7 Lakhs. The valuer gave a report of value of 32 L in 2001 and indexed cost of 1.15 CR in 2024. I am planning to sell at 5 CR registration value? How will we calculate the LTCG on the sale proceeds? How can we utilize the LTCG. How many flats can we buy from the amount - is there a limit? I have 2 properties in my name. Also, I have loans pending Upto 3 CR. Can I pay them back? Two loans were taken last October 2023. What will be the tax implications if I don’t invest ? What are the best ways to invest and save on LtCG accrued basis the sale. Thanks for your response

Ans: The biggest change is that the benefit of indexation gets withdrawn. In simple terms, now you cannot adjust the purchase cost of the property for inflation to bring down your taxable capital gains.

Flat Tax Rate: The LTCG from property shall now be taxed at a single 12.5% plus applicable cess.

The base year for computation of capital gains in respect of properties acquired before April 1, 2001, has now been shifted from 1981-82 to 2001-02.

Point to Note:
Fair Market Value (FMV) as on April 1, 2001: You may opt to consider the FMV of the property as on April 1, 2001, as your cost of acquisition for the purpose of computing capital gains.

Assuming you opt for FMV as on April 1, 2001:

FMV as on April 1, 2001: Rs. 32 Lakhs (as per your valuation report)
Sale Price: Rs. 5 Crores
Capital Gain: Rs. 5 Crores - Rs. 32 Lakhs = Rs. 4.68 Crores
Tax: Rs. 4.68 Crores * 12.5% = Rs. 58.5 Lakhs
Availing LTCG
1. Section 54EC Bonds:

Invest the amount of LTCG in bonds issued by NHAI, REC, IRFC, or PFC within 6 months from the date of sale.
You can claim full exemption from tax on LTCG.

2. Section 54F:

Invest in a new residential house within 2 years from the date of sale.
You can claim exemption from LTCG tax to the extent of the cost of a new house.

3. Capital Gains Account Scheme:

Deposit the amount of LTCG in a Capital Gains Account Scheme within 6 months from the date of sale.
You get 3 years to invest in a new residential house.
If invested within 3 years, no LTCG tax is payable.

Flats Purchase
There is no specific limit as to how many flats one can purchase from the sale proceeds. However, if you are investing the amount to claim exemption under Section 54F, the property should be for self-occupation.

Loans and Tax Implications
You can use the sale proceeds to repay your loans, including the ones taken in October 2023. But it will not qualify for LTCG exemption. In case you fail to invest the LTCG amount to claim exemption, then you will have to pay tax on the LTCG as computed above. However, the property purchased on October 2023 can be considered for LTCG exemption. Please consult a tax advisor one on one to get clarity on this.

Best Ways to Invest and Save on LTCG
Prioritize Section 54EC bonds for full exemption.
If you plan to buy a new house, consider Section 54F or CGAS.
Consult a tax professional for other possible ways of saving taxes that might pertain to you.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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