Investing capital gain from sale of agri land

Q. I sold some agricultural land and made a capital gain of approximately Rs 1 crore. in order to save capital gain tax I wish to construct a residential house. My queries are:

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1. Can I buy a plot and then construct a house on the plot?

2. Is there any restriction as to how much to spend on plot and how much on construction?

3. If all or most of the capital gain amount is spent in buying the plot, can I utilise other funds for the construction of the building?

4. Can my wife be a joint holder of the house with me as the principal holder. If so, is it necessary for her to contribute money for the construction?

5. If the house is built through a contractor, what documents will be required to show the utilisation of capital gain for the purpose of income tax returns?

— Balwant Saini

A.Your queries are replied hereunder:

a) Yes, You can buy a plot and construct a house on such a plot by utilising the amount of net consideration on the sale of the agricultural land.

b) There is no restriction with regard to the quantum of amount to be spent out of such net consideration on purchase of land or the amount to be spent for construction of the house.

c) Section 54F of the Income Tax Act, 1961 (The Act) provides for the utilisation of net consideration accruing on the transfer of capital asset other than a residential house for the purchase or construction of a residential house within the period specified therein so as to save tax payable on the amount of capital gain arising on the transfer of such capital asset. Therefore, you have to utilise the entire amount of net consideration for the construction of the house (which would obviously include the cost of land) within three years after the date of transfer of agricultural land. Net consideration for this purpose means full value of consideration received or accruing on the transfer of a capital asset as reduced by the amount incurred wholly and exclusively in connection with such transfer.

d) Your wife can be a joint holder of the plot of land and also of the constructed portion thereon. However, you will continue to be treated as an owner of the house as no amount of consideration has been paid by her towards the purchase of land as well as for construction of the house.

e) You will need a copy of the sale deed with regard to the purchase of the land, all the bills of the contractor with regard to the construction of the house and supporting documents for the purchase of materials utilised for the construction of the house so as to prove the cost of construction of the residential house.

TDS tangle for NRI

Q. I am in negotiation for purchase of a residential flat jointly owned by an NRI couple. Do I have to deduct TDS from the payment made to the seller and deposit the same with IT Department ?

The seller NRI informs that he is any way depositing the tax on short-term capital gain @ 20-30 per cent (the income tax slab he is likely to fall in) immediately after the transaction. The seller undertakes to provide me proof in respect of tax having been deposited. Is this arrangement acceptable?

The plea of the seller is that large amount of TDS deducted shall be refunded to him after more than a year, where as he needs the money immediately.

— Mudit Uppal

A. Your queries are replied hereunder:

a) You will have to deduct tax at source from the total amount of consideration @20.6 per cent and deposit the same with the tax authorities.

b) The seller NRI will have to make an application under Section 195(3) of the Income Tax Act 1961 (The Act) in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive the sale consideration without deduction of tax. You can also approach the tax department under Section 195(2) of the Act permitting you to deduct at lower rate. The certificate from NRI seller would not help you as you would be held liable for penalty as well as interest for not deducting tax at source from the amount of consideration payable to NRI towards the purchase of residential flat.

c) The arrangement proposed by NRI seller should not be accepted. The difficulty of the NRI seller is understandable but he will have to comply with the requirements of the Act as indicated in the aforesaid paragraphs.

Payment in name of one owner of joint property

Q. I am retired person living in a home jointly owned by my wife and I. While buying the property all the payment made to the seller were from my bank account although my wife was also in government job and naturally contributed to the kitty by transferring monies from her account to my account. Other family members also helped in meeting the house purchase expense. We are now being pressed by our children to move with them by selling the house. The prospective buyer is getting part finance from the bank loan for purchasing our house.

We want that the payment is made in my name to take care of the tax angle. My wife is ready to give an affidavit to the effect that the payment be made in one name only. How do we satisfy the prospective buyer and specially the bank (which is part financing the purchase), that the payment should be made in one name on the basis of the affidavits? A joint name cheque may make my wife liable to pay hefty capital gain tax.

— Krishan Dev Uppal

A. The query posed by you does not indicate whether the residential house which you intend selling was being reflected as a jointly owned property in the tax returns of yourself and your wife or it was being reflected as individual property in your return of income. You have also stated in the query that your wife was in a government job and contributed towards the construction of the house by depositing money to your account by transferring the amounts from her account. Therefore, presuming that the house was reflected as a jointly owned house and the return of income in this respect was filed by you as well as by your wife and further that she had also taken steps to inform the government about the joint ownership of the house property, the receipt of entire consideration on the sale of the house by you would not enable you to reflect the amount of capital gain in your tax return. The amount of capital gain shall be reflected in the tax return of both you and your wife in the proportion in which the house was owned by both of you.

However, in case the house was being reflected as a house owned by you only, the amount of capital gain may be reflected in your return of income as you were the sole owner of the house. The treatment suggested by you with regard to the receipt of consideration in your name, in such a case should be acceptable to the bank as well as to the seller.

Do we need to register gifted property?

Q.My mother wants to gift one movable property of flat to each of her sons in Orissa. Please advise do we need to make only gift deed or register the same also? If we register do we need to pay any stamp duty for the same?  

— Ashok Prusty

A. A gift deed in respect of a movable property by a mother to her sons would not require any registration with the Registrar/ Sub-Registrar.  However,  an immovable property cannot be transferred without the same being registered in accordance with the provisions of Transfer of Property Act 1882 read with Registration Act  1908.  Therefore, in case your mother intends  to gift a flat to each of her sons, such a gift would require execution of a gift deed and its registration with the Registrar appointed by the state government for the district or as the case may be, Sub-Registrar for Sub-districts of the district or sub-district as the case may be, where the property is situated.  Stamp duty on the market value of immovable property so gifted will have to be paid at the time of registration of the gift deed.