I have a house and a 2,400 sq ft land in Chennai. I plan to execute a settlement deed to transfer the house to my daughter and the land to my son. What capital gains tax will be required to be paid if they decide to sell the property after two years?
Amit Maheshwari, Partner, AKM Global: In the instance of sale of property by your daughter and son, long-term capital gains tax would arise at the rate of 20% (with indexation), plus applicable surcharge and cess, as per Section 112 of the Income-tax Act,1961, in their hands. In order to compute the capital gains tax, the cost of acquisition (COA) will be deemed to be the COA to the previous owner, that is, you, and the period of holding (POH) will be considered from the date on which the asset was first held by you. Further, as per Section 56(2)(x) of the Income-tax Act, 1961, any receipt of movable or immovable property from a ‘relative’ would be considered a gift and shall not be subject to income tax in the hands of the recipient. Since the parent would fall under the ambit of the definition of relative, the house and land transferred by you shall not be chargeable to tax in the hands of your son and daughter at the time of receiving the same.
I am 52 years old and plan to sell my unlisted shares worth Rs 5 crore. I have two houses, for which I pay EMIs of Rs 1.3 lakh per month. One house is in my name and the second is in my wife’s name. My son is in his second year of college. My CTC at present is Rs 1.5 crore per annum. I need to save for my retirement. Please advise for the following scenarios: i) Invest Rs 5 crore in a bigger house to avail of LTCG, and sell both the houses, which will fetch Rs 2 crore. ii) Pay tax as applicable and continue paying the EMIs. Put the proceeds of share sale in fixed deposits or mutual funds to build a corpus for retirement.
Adhil Shetty, CEO, BankBazaar: No matter which option you choose, there will be an associated tax burden. Opting to reinvest your funds in a bigger house may take care of the capital gains from the sale of shares, but you will still invite capital gains from the sale of two houses. Typically, capital gains from the sale of different assets are treated separately, and it may not be possible for you to club these. The second option seems more straightforward. However, taking a decision requires you to understand your exact tax liabilities in each case based on your income and exemptions. Consult a tax expert to understand your liabilities and take a decision accordingly. Once you have a clear idea of your liabilities, plan your retirement. As a thumb rule, your retirement corpus should be roughly 25 times your current annual expenses. Make sure you account for inflation while calculating your projected annual expenses. Do not expect any downscaling in your lifestyle and do not mix your retirement planning with other financial goals, such as funding your child’s education or any other major asset or lifestyle expense.
I recently sold real estate for Rs 1.02 crore and the capital gain after indexation was Rs 96 lakh. I need to pay Rs 19.2 lakh tax on it, and though I am not keen on buying a second property, I want to avoid paying such a high tax. I retired a year ago and am living comfortably on my pension. Please advise whether I should purchase another property, rent it for three years and sell it, or pay taxes and invest the balance in equity mutual funds.
Preeti Khurana, Director, ClearTax: Assuming you have sold the property after holding it for more than two years, a 20% rate of tax shall apply, along with some cess and surcharge. If you do not want to purchase another property, you can save tax on capital gains by investing these in capital gains bonds under Section 54EC. These bonds should be bought within six months of selling the asset. However, the maximum amount that you can invest in a financial year is Rs 50 lakh. The rest can be invested in the next fiscal year, assuming both these investments are done within six months of selling the asset. On the other hand, you could pay 20% tax on the capital gains left after investing Rs 50 lakh in capital gains bonds. Note that investments in specified bonds are eligible only for saving tax on capital gains. In case you do not wish to opt for the above, you could invest the sales proceeds in another residential property as per Section 54. This house can be purchased one year before or within two years of selling the property. You could also construct a property within three years of the sale of the property. You must continue to hold this new property for a minimum period of three years. Once you decide to exit the newly purchased property, you will again earn capital gains and find yourself in a similar situation.
