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Sunday, July 13, 2014
Re-invest home sale funds in only 1 house to save tax
12 Jul, 2014, 1223 hrs IST, TNN
Section 54 provides for capital gains tax exemption when a taxpayer sells his residential house, held for more than three years.
As families grow, a growing trend — especially in metros such as Mumbai — has been to sell a residential house to buy two adjoining flats, most likely in a distant suburb. For such re-investments, taxpayers claim capital gains exemption under Sec 54 of the Income Tax Act (ITA). Now, the Finance Bill has said such re-investment can be made in only one residential house in India.
Section 54 provides for capital gains tax exemption when a taxpayer sells his residential house, held for more than three years, and purchases or constructs 'a residential house' within the specified period. Such exemption is available to the extent of reinvestment in the new house.
There was ambiguity on whether the term 'a residential house' meant a single unit or could include more than one new house. Tax authorities often disputed the practice of reinvesting in two flats. Courts took varying views, including those favouring taxpayers.
The Andhra Pradesh HC, in the 2012 case of Syed Ali, held that reinvestment in 'a residential house' didn't indicate a single house. Benefits were available under Sec 54 for taxpayers who had invested in two adjacent flats bought from different sellers under separate sale deeds. Karnataka, Delhi and Bombay HC too passed similar judgments. On June 10, Bombay HC — in the case of Devdas Naik — again ruled in favour of taxpayers.
Here, capital gains were reinvested in two flats bought from different parties. One was bought in Devdas Naik's name, the other jointly with his wife. The HC held that the flats were converted into a single unit, thus capital gains exemption couldn't be denied.
The Finance Bill closes the debate. It clarifies that capital gains tax exemption is for reinvestments in one residential house in India. The ITA has been amended accordingly.
"While courts interpreted the law in favour of taxpayers, the Finance Bill ignored the taxpayers' need to invest in multiple properties disposing of their existing property to take care of their growing families. There seems to be no rationale for lawmakers to restrict the investment to one property," says Sonu Iyer, partner and leader human capital tax services at EY.
"Despite the amendment, tax authorities should consider favourable court decisions where flats purchased can be construed as a single unit," says Punit Shah, co-head (tax) at KPMG."The amendment is likely to increase litigation for taxpayers re-investing in more than one flat, if these are adjoining and joint use by families can be proven through a common kitchen or a passage connecting the two flats," says a Mumbai CA.
Tribunals have held that Sec 54 benefits can't be denied if reinvestment is in a new residential unit overseas. RBI doesn't permit overseas remittance for purchase of property, so the condition of the new house being in India may not have much impact. An amendment in conditions of reinvestment in a single house in India has also been made in ITA's Sec 54-F. Here, capital gains exemption on sale of long-term capital assets (other than a residential house) is allowed when reinvestment is in a residential house.
Union Budget 2014: House property — Buying, letting out and selling
Tired of your landlord's constant cribbing and threats to raise rent? Why not buy your own apartment? Banks give housing loans against the collateral of your prospective own apartment. But before you sign on the dotted line, it is vital to do your homework, including finding out over what period of time you would be most comfortable paying off this loan.
Buying your own house
Typically, the longer the loan tenure, the lower is the monthly EMI but higher is the interest outgo. The Reserve Bank of India has prohibited banks from levying any foreclosure charges if you pay off the loan prior to its tenure. Once you have the loan in hand, you will be paying a periodical interest and also repaying the principal — in tranches. I-T law provides for benefits in both instances.
Interest payable on housing loan
Interest payable on 'self-occupied' property is subject to a maximum deduction of Rs 2 lakh under the head 'Income from House Property'. Even a loan taken from an employer is eligible for such a deduction though you will need to obtain a certificate from your employer specifying the interest payable. Booking an apartment which is under construction is sometimes cheaper. I-T law permits you to claim the total interest paid during the pre-delivery period as a deduction in five equal instalments starting from the financial year in which the construction was completed or you acquired your apartment (generally this denotes the date of possession). Of course, the maximum you can claim as a deduction per year continues to be Rs 2 lakh. In both the above instances, it is essential that the acquisition or construction is completed within 3 years from the end of the financial year in which the loan was taken, else the deduction allowed will be limited to Rs 30,000.
Set off your interest payment
The main advantage of this deduction (which in technical parlance is a loss under the head 'Income from House Property') is that you can set it off against your income, which includes salary income, in the same year. This reduces your total tax liability. Any loss not set off within the same year can be carried forward and set off in the next 8 years. However, in the subsequent years, such set-off is possible only against 'Income from House Property'. You also need to be aware of what constitutes 'self-occupied' property. Even if you are suddenly transferred to another city (where you live in a rented apartment) your own property will be considered as 'self-occupied'. Or, if you have opted to purchase a new apartment in a tier 2 town where property is cheaper, and continue to deal with your landlord, this new apartment will be regarded as 'self-occupied' entitling you to deduction of housing loan interest.
Hot tip: If you have purchased the new apartment jointly — say with your spouse, then each of you is entitled to a deduction of Rs 2 lakh, as explained above. In case you have a working son/daughter and the bank is willing to split the loan three ways, all three can avail of deduction up to Rs 2 lakh each.
Repayment of housing loan
The principal repayment of the housing loan made by you is allowed as a deduction from your gross total income (subject to an overall cap with other eligible investments of Rs 1.5 lakh). Please refer to the section on savings.
An additional benefit was provided for first-time home buyers during FY 2013-14. The additional one-time deduction allowable from gross total income was for Rs 1 lakh, which if not exhausted in FY 2013-14, is allowed during FY 2014-15. This deduction is allowed only when the loan amount is up to Rs 25 lakh and the value of the house is up to Rs 40 lakh with the loan being sanctioned in FY 2013-14. This is not available for loans sanctioned in FY 2014-15.
Caution point: Unlike deduction of interest, deduction of principal repayment will be allowed only if the loan is taken from
Letting out your house
It makes sense to rent out your house because a locked house still attracts tax on 'deemed value'. The tax on the locked house is calculated at expected market rent. Interestingly, if you let out the second house, you can deduct the entire interest you are paying on it, without any cap, from the rent received. If there is a loss, you can deduct the loss from your taxable income. For eg, if your interest outgo is Rs 8 lakh and the rent is Rs 2 lakh, you can get a tax benefit on Rs 6.6 lakh (after standard deduction of 30% of rent). This is applicable for any number of houses and there is no cap on the amount of deduction you can claim.
Selling your apartment
If you sell your house, whether it is your self-occupied house or a second apartment, you will incur capital gains (given that there has been appreciation in property prices, it is unlikely that you will be making a loss). Capital gains are the difference between the sale proceeds and the cost of acquisition of the apartment you are selling. Further, capital gains can be either short-term or long term and each has a different tax impact. If the house is held for not more than 36 months, on sale, you will incur a short term capital gain, which is subject to I-T based on your applicable slab rates. If you fall in the lower tax bracket with a tax rate of 10.3%, short term capital gains will not pinch you. Else you could end up with a tax rate of as high as 33.99%. If the property is held for a longer period, long term capital gains (LTCG) arise. The cost of acquisition used for computing LTCG is the indexed cost of acquisition (in other words an adjustment is made for inflation). Tax is levied on LTCGs at 20% (plus surcharge and cess). The buyer has to deduct 1% tax of the sale consideration if it is above Rs 50 lakh. The seller can then claim credit of 1% that was deducted when he files his returns.
Save on LTCGs
Reinvestment of capital gains could get you tax breaks.
Reinvesting in residential property or securities
Make sure you invest the entire LTCG from sale of the house in another residential property in India. (Such investment can either be one year before or two years after the date of sale). Mind you, it should not be reinvestment in a commercial property. You could construct another residential house within three years of the date of sale. Also, you may put the sale proceeds in a capital gains account scheme with a bank where investment in new property is not made before filing of I-T return (not later than the due date of filing your I-T return). Exemption is also available for investments in certain bonds within six months of sale, such as of Rural Electrification Corporation and National Highways Authority of India. The maximum amount that can be so invested is Rs 50 lakh. If the entire amount is not reinvested or not deposited in capital gains account scheme, the remaining portion of the gain will be taxable.
Caution point: If the apartment is held for not more than 36 months, on sale, you will incur a short-term capital gain, which is subject to I-T based on your applicable slab rate