PF withdrawals after 5 years of continuous service tax-free

Q I and my wife were allotted a residential plot by HUDA in 1996 on a yearly installment which was paid till 2006. Then, a dispute regarding the possession started. The possession of a different plot of same area was given at the same price in 2009. We sold it in September 2019 for Rs 2.9 crore. Please clarify:

A) Since some installments were paid before April 1, 2001, and some after that, how the cost of acquisition will be calculated?

B) In your previous columns, you advised that extension fee paid yearly would be taken as cost of improvement. Some CAs say extension fee cannot be included in the cost of acquisition. What’s the rule?

C) My wife and I have purchased 54 EC bonds of Rs 50 lakh each, and now we have to decide about the remaining amount. Can we purchase a residential plot jointly and build a house? If so, do we have to use the whole sale proceeds minus 54-EC bond amount, or only the LTCG minus 54-EC bond amount?

D) Can we purchase a house jointly? If so, do we have to do it from the whole sale-proceed minus 54-EC bond amount, or only LTCG minus 54-EC amount? Of the remaining amount, can we purchase two separate dwelling units in our respective names? We already have a house in our joint names.

E) If we purchase a residential plot before July 31, 2020, and complete the house after that, do we have to deposit the remaining amount i.e. after paying for the cost of plot, in capital gains account in a bank? If so, how the withdrawals will be made for day-to-day construction expenses?

— RP Yadav

A Your queries are replied hereunder:

In my opinion, installments paid up to April 1, 2001 should be indexed on the basis of the cost of inflation index applicable prior to that date, which should be adopted as the fair market value on April 1, 2001. The fair market value so arrived at should be indexed on the basis of cost inflation index which is presently applicable. The indexed value so computed should be substituted for the actual cost paid for the purchase of the plot.

B) Cost of improvement is the amount of capital expenditure incurred by an assessee in making additions or improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital asset or to cure such title. The amount of extension fee paid is in the nature of protecting the title to the plot and therefore should be considered as a part of the cost of improvement. The term cost of improvement has not been defined by the Income-Tax Act, 1961. However, any amount paid which improves the title to the capital asset should be considered as the cost of improvement. In one of the cases

(Mathura Das Mangal Das Parekh vs CIT (126 ITR 669) Gujrat), expenditure in the shape of a betterment charges paid under the town planning schemes were held to be in the nature of enduring benefit and thus considered to be in the nature of improvement to the value of the land.

C) You can purchase a residential plot in joint names and build a house within a period of three years after the date of sale of plot. However, the entire amount of net consideration (amount of sale consideration less expenditure incurred wholly and exclusively incurred in connection with the sale of plot) realised or accruing on the sale of plot less the amount utilised for purchasing tax saving bonds is required to be utilised for construction of a residential house within aforesaid period so as to claim the exemption under Section 54F of the I-T Act from the taxability of the amount of capital gain.

D) You can purchase an already constructed house in joint names. The amount of net consideration less the amount utilised for purchase of tax saving bonds will have to be utilised for purchasing the house in joint names.

E) Each one of you can also utilise the amount of net consideration realised or accruing on the sale of the plot less the amount utilised for purchasing tax saving bonds or for purchasing or constructing a residential house. The construction of the residential house has to be completed within three years after the date of the sale of the plot. However, the purchase of the residential house is required to be made within two years after date of sale of the plot. The amount of net consideration should be utilized by each one of you in the same proportion in which the plot was owned by both of you.

Q A PF account was opened by my company A sometime around March 2007. I worked in the company for four years and four months. I had transferred my PF of two years from the last company B to A. I left my company A around July 2011 and thereafter did not do a job. The government paid interest on the PF amount for three years and stopped paying interest after that. Now If I withdraw the entire PF, will the TDS be deducted? Will there be income tax? If yes, how much?

— Prashanth KC

A. According to Rule 8 of Schedule IV to Act, the accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be included for the computation of his total income if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer. The exclusion from the total income under such schedule would be applicable only if a person has rendered continuous service with his employer for a period of five years or more. The explanation to the above rule clarifies that in case of transfer of an accumulated amount of provident fund from one employer to the other will be considered to be a case of continued service. According to the above provisions therefore, the accumulated amount withdrawn by you should not be subject to any tax as it seems that you have rendered continuous service with your employer for a period of more than five years. Reply to your query is based on this presumption as well as on the presumption that the contributions were made by you to a recognized provident fund.