FAQs on Short and Long Term Capital Gains

Capital Gains arising out of sale of a property or land is a very serious topic and one should understand the taxation in case if you want to sell your property within 3 Years which account for Short Term Capital Gains or after 3 Years which account for Long Term Capital Gains.

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Answer 1.
Cost inflation index for the year 2008-09 has not been notified by government. Generally it is done by the month of August-September. However , in all probability cost inflation index maybe around 583 , estimated on previous increase. For computing the approx value of your capital gains, you can use this figure .

Answer 2.
Brokerage and stamp duty are part of cost of acquisition of the land. You can also get indexation on this amount.

Answer 3.
Since you have sold the residential plot and not the residence, exemption under section 54 is not available. However you can avail exemption u/s 54F or 54EC . If you have only one house at the time of claiming exemption u/s 54F, you can avail of exemption by employing sale consideration in buying the house within two years from the sale of land on which you gained or construct the house within three years.

Cost inflation index for the year 2008-09 has not been notified by government. Generally it is done by the month of August-September. However , in all probability cost inflation index maybe around 583 , estimated on previous increase. For computing the approx value of your capital gains, you can use this figure .

I am planning to sell 3 more properties in my name (Residential Plots and a House) and buy a single flat/house in a metro city. Can I get exemption from capital gains arising out of selling all 4 properties in this way?

Answer 4
If you are planning to sell three more properties- two land and one house , it is better tax planning to sell lands within the same financial year and purchase a big house. You can avail of exemption u/s 54F .

In fact if you sell the house along with , you can claim exemption u/s 54 and 54F both at the same time. There is nothing in the I T Act that prevents a taxpayer to claim exemption u/s 54 and 54F together .Both the provisions are for two different types of relief. Section 54 is relief from tax on gains on sale of a residential house whereas section 54F is for relief from tax on long term gains on any capital asset other than residential house.

However, if you do not want to have legal battle to get the right, it is better in my opinion, that you do not sale the house along with the land.Sale the house next year and claim exemption u/s 54 or deposit the money in Bonds specified u/s 54EC .

Question 5.

I am a 60 Years plus and a SENIOR CITIZEN. I sold my property which is a piece LAND and had a Long Term Capital Gain. I could not utilized the Capital Gain Amount but before submitting my Income Tax Return deposited the Capital Gain Amount of Rs.19 lakhs with the State Bank of India under the "Capital Gain Account Scheme" for 3 years.  Due to some health reaons, I could not invest the Capital Gain Amount in any property or house within the period of 3 years. Now as the 3 years period has passed WHAT SHOULD I DO NOW TO SAVE THE CAPITAL GAIN TAX. Is there any way I can invest it in any means to save the tax.

Answer 5.

Unfortunately there is no means to save tax now. The reason is that savings in case of tax on long term capital gains from asset other than sale of residential house can be done either u/s 54F or 54EC . Both the provisions require that the deposit or purchase of assets should be within one year before or two years after the sale of asset on which long term gains have arisen. In your case , that date has already elapsed. So there is no chance of saving the tax the amount is chargeable to tax as per proviso to section 54F(4) of the I T Act

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,

(i) the amount by which

(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds

(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires ;...

Why bother to save tax when you have already done it?

Yes, you have already saved tax to the extent you earned interest from Capital Gains Account Scheme. This is what you have already gained

You did not pay any advance tax in the year in which gains (LTCG) was earned.

Even now, after three years, when amount of LTCG is to be taxed, rate of tax @ 20% shall be same .

You earned interest on the amount of gains, this reduces the net tax which is paid now after expiry of three years. So, even if you earned meager 5% each year, in two years you have earned more than10%. So effectively you are paying tax @ 10% only and not 20%. In fact, if you keep the term Deposit under CGAS in a bank, may be you will be earning much higher interest and that reduces your liability to tax in the year when three years expire.

Question 6.

What Is Capital Gains Account Scheme?

Answer 6.
If you get long term capital gains , Income Tax Act provides certain exemptions under section 54,54B,54D,54F and 54G .In short these exemption are for capital gains earned on account of

Sale of a residential house (Sec 54)
Sale of agricultural land (Sec. 54B)
Compulsory acquisition of land & building (Sec. 54D)
Sale of any long term capital asset (Sec. 54F)
Transfer of assets in case of shifting of industrial undertaking. (Sec 54G)

In all these cases, an assessee is given exemption if the sale proceeds are utilised for some specific purpose. But it happens that the money can not be utilised within short span of time. In that case, there is provision that the money is deposited in designated bank in a special kind of account called Capital Gains Account Scheme and utilise the money for that specific purpose within extend period given in those section.

Therefore , all those assessees who are eligible for exemption u/s 54, 54B, 54D, 54F & 54G are eligible for applying for accounts under Capital Gains Account Scheme.

What are types of deposits under CGAS ?

There are two types of accounts:

Deposit Account-A - This is a saving account.

Deposit Account-B- This is a term deposit account.

Where can I open this account?

You can open this account in any State Bank of India or any bank which is authorised for this scheme. You will have to fill up and submit the Form A in the bank and deposit the money in the account.

What will be the date of deposit in case of deposit of money by cheque?

In case the money is deposited by cheque or draft , the money is realised by the bank even after the date , the effective date for the purpose of counting period given in the provision for exemption will be the date on which the cheque was given to bank.

Can I withdraw money from these accounts ?

Yes, from savings account , you can withdraw by filing Form C with the Bank. However, in case of withdrawal other than initial withdrawal, you will have to submit Form D to the Bank in duplicates.

In case , you want to withdraw from Account Type-B , it will first have to be converted into Type A by filing Form B and then all the methods of withdrawal of money from account A shall follow.

What is the rule regarding the utilisation of the amount of withdrawal?

The amount withdrew has to be spent only for the purpose for which it was deposited as per respective provision under which capital gains arisen. There is also time limit of sixty days from the date of drawl within which it has to be spent. The balance if any , has to be deposited in the bank.

How can I close this account?

Closure By depositor : The depositor will get the approval from his assessing officer in Form G and submit it to the bank.

Closure by nominee: Seek the approval of the assessing officer in Form H who has jurisdiction over deceased depositor and submit to bank.

Closure by legal heir: Seek the approval of the assessing officer in Form H who has jurisdiction over deceased depositor and submit to bank and also submit the disclaimer by other heirs .

Remember however, if there is more than one heir , the assessing officer will give approval only after getting the a succession certificate or a probate of a will or a letter of administration to the estate of the deceased.

Question 7.

Will I Get Exemption u/s 54 For Buying Commercial property?

I have an apartment in Mumbai. I bought it in September 2001 but got the possession in July, 2002. I purchased it around 25L but the current market price is almost double. I plan to sell it and invest the same amount in a commercial property. Going by the Cost Index, I might have to pay 3.5L tax after I sell my property. Since I am investing almost all the amount in another commercial property, will this help to save my tax when I sell the apartment?

Answer 7.

Unfortunately, the exemption provided under section 54 of the I T Act is not for investment in commercial property. This exemption is exclusively for the reinvesting the sale proceeds out of a residential property in another residential property. Read the extract of section u/s 54,

Section u/s 54

54. (1)Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset , being buildings or ands appurtenant thereto, and being a residential house, the income of which is chargeable under the head Income from house property (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say.

Therefore you will not be able to save on capital gains if you are investing in commercial property.