Tax liability on relinquishing share in property

S.C. Vasudeva.

Q.My grandparents are no more. My uncle (chachaji) and my father are living in a property that is in the name of my late grandfather.  Now my uncle wants the whole house and has offered my father Rs 20 lakh in lieu of his share in the property and for vacating the house. What will be the tax implications and remedies in this case? —Harish Rajpal

A.It is presumed that your grandfather had acquired the residential property more than three years back. The reply to your query is therefore based on this presumption.

Your father will be liable to pay tax on the long-term capital gain arising on the relinquishment of his share in the property in favour of his brother. The amount of tax will be computed by indexing the cost of the residential property which was acquired by your grandfather. In case the property was acquired before 1.4.81 your father will have an option to adopt fair market value of his share in the residential property  as on 1.4.81.  In such a case the fair market value so arrived at shall be indexed. Your father can, in case he wants to save tax on the amount of capital gain so arising, utilise the amount of capital gain for purchasing tax saving bonds which have a lock in period of three years. These bonds have to be purchased within six month of the date of relinquishing his share in the property.  He also has an option to utilise the amount of capital gain for purchase of a residential house within one year before or two years after the relinquishment of his share in the old residential house or construct a new residential house within three years after the date of relinquishment of his share. The amount of capital gain not utilised by the due date of  filing the tax return is required to be deposited in a bank under the capital gain scheme account.  The amount so deposited is required to be utilized for purchase or construction of the residential house within prescribed time schedule.

Can I register plot at lower price?

Q.I had purchased a plot in Mohali at the rate of Rs 16,000 per sq yd. I got its possession two years ago but did not register due to lack of funds. Then the collector rates of that area were also around Rs 16,000.

Now the collector rates of that area have been revised down to Rs 12,000. But the company is insisting that I will have to register @ Rs 16,000, the price at which I was allotted the plot. Those who are purchasing the plots now, in resale or otherwise, are offered to register @ Rs 12,000.

Kindly let me know whether I can register at the rate of Rs 12,000 or not. If not, then is there any way to get it done, like by transferring the allotment to any of my relatives (parents/daughter etc. My wife is already a co-allottee with me). —Raminder Singh Ghuman

A.It has been clarified in your query that you have purchased a plot in Mohali at the rate of Rs 16,000 per sq. yd.  The sale deed would reflect the amount of total consideration towards the purchase of the plot on the basis of the rate of Rs 16,000 per sq. yd.  The stamp duty, therefore, will have to be paid on the basis of the consideration payable to the seller. In your case the circle rate of Rs 12,000 per sq. yd. fixed by the collector would not be applicable as the consideration payable by you is more than the circle rate. In my opinion transfer of allotment letter to any of the relatives may also not help as the consideration would not be reduced from Rs 16,000 per sq. yd to Rs 12,000 per sq. yd.

Computing capital gain on sale proceeds of a plot 

Q.I have some queries regarding the capital gain tax on selling the old residential plot, which was purchased approximately five years ago. 

• Can I purchase a new residential plot after selling the old residential plot?
• What is the time period within which I have to purchase new residential plot after selling the old residential plot? (Within 6 months or within 2 years?) Please confirm.
• What to do if I am unable to purchase the new plot within specified time?
• Can I buy the new residential plot after selling the old plot or I have to buy the new house/flat.

The purchase cost of old residential plot was approximately Rs 1.5 lakh. The selling price of the plot is approximately Rs 5 lakh. What would be the capital gain amount and tax on it? — S. Verma

A.Your queries are replied hereunder:

You can purchase a new residential plot after selling the old residential plot but you will not be entitled to claim any exemption in respect of the tax payable on capital gain arising on the sale of the old residential plot.

There is no time limit for the transaction referred to in (a) above since no exemption is allowable in respect of the tax payable on the amount of capital gain arising on the sale of the old residential plot.

You will have to pay tax on the amount of capital gain arising on the sale of the old residential plot in accordance with the requirements of the Income Tax Act, 1961 (The Act). The provisions of advance  tax are also applicable in respect of the amount of capital gain so arising.  You can save the amount of tax payable on the sale of the old residential plot provided the amount of net consideration (consideration accruing on the sale of plot less expenditure, if any incurred wholly and exclusively in connection with the sale of the plot) is utilised for purchase or construction of a residential house. The purchase of residential house  has to be made one year before or two years after the date of sale of old residential plot.  The construction is  required to be completed within three years after the date of sale of  old residential plot to save tax on the amount of capital gain arising on the sale of the residential plot.

The amount of capital gain on the basis of the figures given in the query would be Rs 2,62,658.

The amount of capital gain is computed by taking into account the indexed cost of the capital asset which has been transferred. The same is deducted from the amount of net consideration and the balance amount is referred to as the capital gain.  In case the capital asset is held for less than three years, it is treated as short term capital asset and the gain arising on the sale thereof is taxable as part of the total income (in case capital asset is other than equity shares) and taxed at the rate/rates applicable to total income. Such a gain is referred to as short-term capital gain. In case the capital asset is held for more than three years, it is treated as a long-term capital asset and the gain arising on the sale thereof is taxable @20 per cent plus education cess of 3 per cent thereon. Such a gain is referred to as long-term capital gain.

How much tax should I pay on sale of house?

Q.I purchased a house property in 2000 for Rs 20,000 and in 2015-16 I sold that house for Rs 3,00,000. What will be tax liability on me? —Abhishek

A.The indexed cost on the basis of the cost inflation index for the year 2000-01 being Rs 406 and for financial year 2015-16 being Rs 1081, indexed cost would work out at Rs 53,251.  The amount of capital gain would thus be Rs 2,46,748.  The amount of tax payable thereon would be Rs 50,830 computed @20.6 per cent on the amount of capital gain.

Can maintenance charges be deducted from rental income?

Q.Kindly clarify that if annual income from a rented accommodation is Rs 1.20 lakh  and the owner of the accommodation  pays  Rs 4000+service tax to government department or  local authorities (municipal committee) on account of maintenance  of common portion and common services (i.e  as  annual  maintenamce charges as levied by  deptt/MC for all residents). Should these annual maintenance charges be deducted from the annual rental income for the purpose of income tax?  —T.K.Sharma

A.Income from house property is required to be computed in accordance with the provisions of Section 23 and 24 of the Act. Section 24 of the Act provides for a deduction from the annual value of the property which has been let out, to the extent of 30 per cent of the annual value. Such deduction is allowable to cover expenses of similar nature which have been mentioned by you in the query. No other deduction is permissible under the aforesaid Section from the annual value of the property. Therefore, you would not be entitled to claim deduction of the maintenance charges payable to department or  mumicipal committee.