How can own property be added to create HUF?

Q. What is the procedure to throw one’s individual property as corpus to create a unit of HUF and change the character of an individual property to that of belonging to the family without any consideration? — R.K. Jain

A. A Hindu family must satisfy the following two conditions:

a)The family must possess property and

b) There must be a Hindu co-parcenary.

Those members of the Hindu family who are entitled to claim the partition of the family or its properties and are also entitled to have a share as a result of such partition are called co-parceners.

Any male member (co-parcener) of Hindu family can convert his self-acquired property into Hindu undivided family property by throwing the same into common hotchpot (common stock) as being considered to be that of Hindu undivided family. Such a conversion can be made by word of mouth. It is, however, advisable to make such a declaration in writing in the form of an affidavit. However, presently Section 64(2) of the Income Tax Act, 1961 (The Act) provides that in case of such conversion through the act of impressing an individual property with the character of property belonging to the family without any consideration, the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly and the income derived from such converted property or any part there of shall be deemed to arise to the individual and not to the family.

In view of the above provisions, if the individual property is converted by you to a family property, the income from such property will continue to be taxable as your income.

The declaration referred to herein above can be made on a stamp paper which should be duly attested by Notary so as to have an evidence in this regard.

Apart from the declaration, there should be evidence that the intentions expressed in the declaration have been acted upon.

The change in law brought in w.e.f. assessment year 1971-72, as discussed above does not leave any option for creating a HUF without a consideration.

How can indexation cost be calculated?

Q. I had booked a flat worth Rs55 lakh in a multi-storeyed building by paying Rs11 lakh as the booking amount. The allotment letter was issued on 14-01-2013. The balance amount was to be paid in 16 bimonthly instalments of Rs2, 75,000 each starting from March 15, 2013. I paid the 15th instalment on May 15, 2015. The last instalment will be paid at the time of possession, which has not been given yet. Should I decide to sell this flat before taking possession for Rs76 lakh, then what would be the long-term capital gain (LTCG) liability? Clarify the following points:

1. Will it incur LTCG , if so then how much would it be?

2. Three years have passed since I got the allotment letter. Shall I get benefit of indexation? If yes, how to calculate indexation as the amount has been paid in instalments?

3. Since the property is under construction, it cannot be considered transfer of property, how to reflect this LTCG in tax return form? Since there cannot be Circle Rate for under- construction property, what to write in the income tax return in the column of Circle Rate?

4.Can I save tax by investing LTCG in new property or infrastructure bond?

5.Can this LTCG be adjusted against the amount paid during the past one year for another flat under-construction? Or will it be advisable to adjust it against the future instalments of this new flat?

— V. K. Kansal

A. On the basis of the facts given in the query it seems one instalment has been paid in financial year 2012-13 (March 15, 2013), 4 instalments of Rs2,75,000 have been paid in the financial year 2013-14, five each in financial year 2014-15 and financial year 2015-16 against the purchase of flat. Presuming that the flat was allotted to you on January 14, 2013, replies to your queries are given hereunder:

a) In case the flat is sold after three years of the date of allotment it should be possible to claim that the right in the flat has been held for more than three years. In such a case it should be possible to claim that it is a case of long-term capital asset and any profit arising on sale of such a right in property should be treated as a long-term capital gain. Taking into account the above presumption the indexed cost would be Rs58,37,456 and in case the flat is sold before March 31, 2016 and the amount of long-term capital gain would work out at Rs17,62,544.

b) The indexation would be allowable considering the cost inflation index notified for the financial year in which the instalment has been paid.

c) The property includes a right in property and therefore the sale of this right would be considered as a sale of property and should be shown in the same column of the income-tax return wherein the amount of long-term capital gain is required to be shown.

d) You can save the amount of tax payable on long-term capital gain provided the net consideration is utilised for purchase or construction of a residential house with the specified period. You can also save tax on the amount of capital gain in case the amount of capital gain is utilised for the purchase of tax-saving bonds within six months of the date of sale.

e) An assessee can save tax payable on long-term capital gain which arises on the sale of a capital asset other than the residential house by utilising the amount of net consideration for the purchase of a residential house within one year before or within two years after the date of sale of the capital asset. In case it is possible to prove that the entire net consideration has been utilized within one year before the date of sale of the long-term capital asset, it should be possible to claim the benefit as suggested by you in the query.

Using capital gain for additional construction

Q. My wife is going to sell a residential home in Mohali for aprox Rs2 crore in 2016. After deducting the indexation, the net LTCG is about Rs70 lakh. Out of this LTCG, she will deposit Rs50 lakh in bonds in March 2016 and another Rs20 lakh in April 2016.

My questions are:

a) My wife intends to expand a partially built (existing 25 per cent) of 500 sq yd plot in Zirakpur. This partially built property will be gifted to her from her sister after paying gift deed expenses. Can she construct the house out of LTCG?

b) I’m told that an amendment was made in 2010 that the seller can keep with him/her 15 per cent of LTCG without any penalties, is this correct?

c) Can my wife deduct the circle value (approx Rs30 lakh) of the partial built home from LTCG?

— Akshay Gupta

A. Your queries are replied here under:

a)Your wife can construct a house out of the long-term capital gain on the partially built property proposed to be gifted by her real sister.

b) There is no such amendment to the Act in 2010 that requires that the seller need not invest 15 per cent of long-term capital gain meaning thereby that investment of capital gain is to be made to the extent of 85 per cent only.

c) It would be possible for your wife to claim deduction in respect of actual cost incurred for the construction of house and not the circle rate value for computing the amount of capital gain.