Tax Talk -Nov 13:: Business Line

I am buying a flat for Rs 65 lakh, with my daughter contributing half of the cost. The registration will be done by October end. The new flat will be purchased by selling shares, closing FDs and raising loans from relatives. The sale amount will be used to pay for loans. After moving there, I intend to sell my existing flat for Rs 35 lakh, which I had purchased in 2002 for Rs 7 lakh. Can I avail long term capital gains tax exemption under section 54? Is it necessary to open a separate bank account?

— R.Narayanan

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According to section 54 of the Income-tax Act, 1961, if an individual transfers a long-term capital asset (LTCA), being a residential house, the long term capital gains (LTCG) from the asset shall be exempt from tax if the individual has either invested in a new residential house within one year before or two years after the date of sale of the old residential house. Alternatively, the individual can construct a new house within three years from the date of sale.

Any amount of capital gains which is not utilised for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited in a special account known as the Capital Gains Account Scheme (CGAS) account before furnishing such return to avail the exemption. The funds need to be utilised within the prescribed time and according to specified condition.

We understand that you have purchased a new flat in October 2012 using your savings and raising loans. Further you will be selling your existing flat which is a LTCA. According to the conditions mentioned above, the long term capital gains (LTCG) from the old flat shall be exempt from tax to the extent of cost of the new flat. Therefore, if the LTCG is equal to or less than the cost of acquisition of the new flat, then the whole of the LTCG shall be exempt from tax. In case the LTCG is more than the cost of the new flat, the surplus shall be taxable.

My wife and I intend to purchase a flat jointly at Siruseri, Chennai (presume it is urban) from a reputed builder for consideration above Rs 50 lakh. The contribution is through separate individual sources. I am paying 30 per cent and my wife is paying the balance. Are we required to deduct 1 per cent tax u/sec 194 LLA of Income Tax Act? and if so, is it required to be deducted individually ? What is the prescribed challan number for remittance of tax deducted u/s 194 LAA?

— V.Narayanan

The Finance Bill, 2012, proposed to provide for deduction of tax at the rate of 1 per cent of the amount paid or payable for transfer of certain immovable properties (Section 194 LAA). The proposed provision of tax deduction on transfer of immovable properties was for collecting tax at first point and also tracking transactions in real estate sector.

However, since the provision would have caused additional compliance burden on the transferee, the proposed provision of tax deduction on transfer of immovable properties was dropped. Hence, you and your wife are not required to deduct tax from the consideration paid to the transferee for purchase of flat as the proposal in the budget did not convert to law.