Capital Gains on Property Sold in India: Reader Question

Ans: In case of gift, date of acquisition and cost will be of the previous owner. Thus, in my view, date of acquisition and cost will be of original owner who spent money in acquiring the asset. If original owner acquired before 1.4.2001, FMV as on 1.4.2001 will be cost.

Ans: If property is registered in your as well as in the name of your wife, both will be liable to pay tax. Also in case of gift, period of holding starts from previous owner, so it will be LTCG.

NEC bonds are not covered in 54EC. Following bonds are eligible:

Rural Electrification Corporation Limited or REC bonds,
National Highway Authority of India or NHAI bonds,
Power Finance Corporation Limited or PFC bonds,
Indian Railway Finance Corporation Limited or IRFC bonds

Ans: Calculating the capital gains tax on your property sale requires careful consideration of various factors, such as the use of indexation. You acquired the property in 1992-93, and it has appreciated in value, so calculating your indexed cost of acquisition will help you determine the tax liability accurately.

Key Points for Calculating LTCG Tax:

Indexed Cost of Acquisition: Use indexation to adjust the purchase price to reflect inflation. This can significantly reduce your taxable gains. With indexation, you’ll apply the Cost Inflation Index (CII) from the purchase year (1992-93) to the sale year (2024-25). This will be based on the CII values for the years in question.

Indexed Cost of Improvements: The Rs 80,000 spent on upkeep can also be indexed. Indexing both acquisition and improvement costs helps lower your LTCG.

Capital Gains Tax Rate: The LTCG on real estate is taxed at 20%. However, understanding your indexed gain will be key in calculating your exact tax liability.

Exploring Options to Save on LTCG Tax

Since you prefer liquidity and are not interested in reinvesting in real estate, there are other avenues to save tax while keeping your funds accessible.

Investment in Government-Approved Infrastructure Bonds (Section 54EC)

Tax-Saving Advantage: Section 54EC allows tax exemption by investing in bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC).

Investment Limits: You can invest up to Rs 50 lakh within six months of the sale to claim the exemption.

Lock-In Period: The bonds have a lock-in period of five years. After this, they become liquid, and the principal is returned.

Returns: These bonds provide a fixed interest rate but are lower compared to other investment avenues. The focus here is on tax savings and capital preservation.

Direct Payment of Capital Gains Tax

If tax savings aren’t the priority, consider directly paying the LTCG tax. Calculating your LTCG liability after indexation will give you a clear figure, allowing you to keep the remainder liquid for future financial needs.

Final Tax Amount: After calculating the indexed gains, you’ll apply the 20% LTCG tax rate to arrive at your liability. Paying the tax and investing the remainder in high-liquidity instruments, like debt funds, could be beneficial.

Alternative Investment Options for Better Returns

For liquidity and regular returns, consider alternatives outside of real estate and infrastructure bonds:

Debt Mutual Funds

Suitable for Senior Citizens: Debt funds are suitable for those seeking steady returns without high market exposure.

Liquidity: Unlike bonds, debt funds offer better liquidity, allowing you to withdraw your funds if needed.

Tax Efficiency: Debt mutual funds held for over three years also benefit from indexation, lowering your tax liability.

Important Note: For debt mutual funds, gains are taxed according to your income tax slab rate, so consider the overall tax impact.

Senior Citizen Savings Scheme (SCSS)

Guaranteed Returns: SCSS provides fixed returns and is specifically tailored for senior citizens.

Liquidity: While there’s a five-year lock-in, premature withdrawal is allowed with some penalty.

Taxation: The interest earned is taxable, but there’s no capital gains implication. SCSS is ideal if you seek stability with limited flexibility.

Final Insights

Calculating LTCG on real estate involves understanding the impact of indexation. While bonds provide tax benefits, they may not meet your need for liquidity. Debt mutual funds and SCSS offer an alternative route, with SCSS giving stability and debt funds offering flexibility.

If you have further questions or would like help with precise calculations, consult a certified financial planner.

Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment