IT rule for reinvesting the amount received after Sale of Property / Flat

Ans: There are two main Income Tax (IT) rules in India for reinvesting the amount received after selling a property/flat to save capital gains tax:

Section 54: This is the most common option for reinvesting capital gains from the sale of a residential property.

Here's what you need to know about Section 54:

Reinvestment option: You can reinvest the entire sale proceeds in one new residential property.
Time limit: The new property must be purchased within one year before the sale or two years after the sale of the old property.
Construction option: If you plan to construct a new residential property, the construction must be completed within three years from the sale date.
Partial reinvestment: If the new property costs less than the sale proceeds, the exemption is available only for the reinvested amount. You may need to pay capital gains tax on the remaining amount.
Section 54EC: This section offers an alternative for reinvesting capital gains from any type of property, not just residential.

Here's what you need to know about Section 54EC:

Reinvestment option: Invest in specific long-term capital gains bonds issued by the National Housing Bank (NHB) or other government bodies.
Time limit: You must invest the capital gains amount within six months of the sale date.
Investment limit: There is a maximum investment limit of Rs. 50 lakh per taxpayer.
Lock-in period: The bonds come with a lock-in period of at least 3 years.
Remember:

These are just the general highlights of the two sections. It's advisable to consult a chartered accountant (CA) or tax advisor for specific guidance based on your situation.
They can help you determine which section is more suitable for you and ensure you meet all the eligibility criteria to claim the exemption.

Ans: When you sell an ancestral property, you need to calculate the capital gains to determine your tax liability. Since your property was acquired in 1950, the cost of acquisition will be indexed for inflation, and you'll calculate the capital gains based on the fair market value (FMV) as of 1st April 2001.

1. How the Capital Gain Tax Will Be Computed?
Steps to Compute Capital Gains:

Fair Market Value (FMV) as of 1st April 2001: Since the property was purchased in 1950, you can choose the FMV as of 1st April 2001 as your cost of acquisition. This is crucial for calculating the capital gains accurately.

Indexed Cost of Acquisition: The FMV as of 1st April 2001 is adjusted for inflation using the Cost Inflation Index (CII) to arrive at the indexed cost of acquisition. The formula is:

Indexed Cost of Acquisition = (FMV as of 1st April 2001) x (CII of Year of Sale / CII of 2001-02)

Calculation of Capital Gains: The capital gains are calculated as:

Capital Gains = Sale Value - Indexed Cost of Acquisition - Any Expenses on Transfer

Tax Rate: Since the sale occurred in August 2024, the new capital gain tax rule applies at 12.5%. You cannot choose the old capital gain tax rule as it is not applicable to sales made after 1st April 2024.

Example:

Let's assume the FMV as of 1st April 2001 is Rs. 10 lakh, and the property was sold for Rs. 1 crore in August 2024. The CII for 2001-02 is 100, and the CII for 2024-25 is 348 (hypothetical for illustration).

Indexed Cost of Acquisition = Rs. 10 lakh x (348/100) = Rs. 34.8 lakh

Capital Gains = Rs. 1 crore - Rs. 34.8 lakh = Rs. 65.2 lakh

Capital Gains Tax = 12.5% of Rs. 65.2 lakh = Rs. 8.15 lakh approximately

2. Is It Mandatory to Get FMV as on 1.4.2001 from Govt Registered Valuer?
Importance of FMV from Registered Valuer:

Accuracy and Compliance: It is highly recommended to get the FMV as of 1st April 2001 from a government-registered valuer. This ensures that the FMV used in your capital gains calculation is accurate and in compliance with the Income Tax Department's guidelines.

Documentary Evidence: In case of any scrutiny by the Income Tax Department, a valuation report from a registered valuer will serve as strong documentary evidence, safeguarding you against any disputes regarding the FMV.

Mandatory?

Yes, for Precaution: While it may not be legally mandatory to get the FMV from a registered valuer, it is strongly advised to do so to avoid potential issues with tax authorities. Without it, the Income Tax Department may question the FMV you have used, leading to complications.
3. How to Claim 1% TDS Deducted on Sale Value?
Understanding TDS Deduction:

Section 194-IA: When a property is sold, the buyer is required to deduct 1% TDS on the sale value if the sale consideration exceeds Rs. 50 lakh. This TDS is deducted at the time of sale and deposited with the government.
Claiming TDS Credit:

Form 26AS: Ensure that the TDS deducted is reflected in your Form 26AS, which is a consolidated tax statement issued by the Income Tax Department. This form shows all TDS credited to your PAN.

Filing Income Tax Return (ITR): While filing your ITR, you can claim the TDS deducted against your total tax liability. The 1% TDS will be adjusted against your total tax liability, and if your total tax liability is less than the TDS, you can claim a refund.

TDS Certificate: The buyer should provide you with a TDS certificate (Form 16B) as proof of the TDS deducted. Ensure you have this certificate when claiming the TDS credit.

4. Can I Choose Between Old and New Capital Gain Tax Rule?
Applicability of Tax Rule:

New Capital Gain Tax Rule: Since your property was sold in August 2024, the new capital gain tax rule is applicable. The new rule imposes a flat rate of 12.5% on long-term capital gains for property sales made after 1st April 2024.

No Option to Choose: You do not have the option to choose the old capital gain tax rule, as it is only applicable to property sales made before 1st April 2024. The government has mandated the new tax rule for all property sales post this date.

Reinvestment to Save on Capital Gains Tax
Section 54:

Reinvestment in New Property: To save on capital gains tax, you can reinvest the capital gains in purchasing a new residential property. Under Section 54 of the Income Tax Act, if you reinvest the capital gains within two years from the date of sale, you can claim an exemption from capital gains tax.

Capital Gains Account Scheme (CGAS): If you are unable to reinvest the capital gains before the filing of your ITR, you can deposit the capital gains in a Capital Gains Account Scheme (CGAS) with a bank. This allows you to claim the exemption while you decide on the reinvestment.

Time Limits: You must reinvest the capital gains within two years (for buying) or three years (for constructing) a new property to avail of the exemption under Section 54.

Final Insights
Selling ancestral property involves various tax implications. By understanding how capital gains are calculated, getting an FMV from a registered valuer, and claiming TDS, you can efficiently manage your tax liability. While the new capital gain tax rule at 12.5% applies to your sale, you can reinvest the gains in a new property to claim an exemption under Section 54. Always consider consulting with a Certified Financial Planner to ensure all aspects are covered and compliance is maintained.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in