House Property and Capital Gain Taxation – Budget 2017

The Budget 2017 presented by the FM has proposed many changes affecting the computation of capital gains. In fact the capital gain tax becomes friendlier for honest tax payers.

We shall see some of the major proposals of Budget 2017;

a)      Shifting the base year for indexation of cost of acquisition

If a capital asset acquired prior to 1st  April 1981 is sold, we have to substitute the Fair Market Value as on 1st April 1981 as its cost of acquisition. Then we can go for the indexation of such fair market value based on the Cost Inflation Index of the year in which sale took place.

Budget 2017 proposed the change of base year from 1st April 1981 to 1st April 2001.  So by shifting the base year the FM proposes to give the tax payers a big relief as the price appreciation during the date of acquisition till date of sale has become fully tax free in your hand.

b)     Reduction of holding period of immovable property

Usually the gain on sale of a capital asset is segregated as long term or short term is based on the period of holding of such capital asset. This may vary from 12 months to 36 months for short term capital gains and long term capital gains respectively.

Budget 2017 proposed to reduce the 36 months period in respect of long term capital gains to 24 months. This amendment is also very beneficial for the tax payers as once the capital asset sold by you qualifies for being long term asset, you just need to pay tax @ 20% on the profits so made and that too with the benefit of indexation.  Moreover this also gives you various options to save the taxes by investing the sale proceeds/capital gains in residential house /capital gains bonds and thus legally escape from the liability to pay any long term capital gains.

c)      Conditions for claiming exemption on transfer of listed shares

Presently Section 10(38) of the income tax act exempts capital gains whish arises on sale of a equity shares listed on any stock exchange in India and  held for more than 12 months and  on which security Transactions Tax (STT) has been paid. This provision has been grossly misused by people for money laundering so the budget provides an additional condition in respect of equity shares acquired after 1st October 2004, the date on which STT became applicable. The budget provides that for such shares the long term capital gains shall become exempt only if STT has been paid on purchase of such transactions as well. The government is being authorized to notify some other acquisitions on which though no STT has been paid will still continue to be exempt under Section 10(38). This notification should include the shares acquired under IPO, FPO, bonus shares, ESOPs etc. to carve out genuine transaction of acquisition of listed shares.  

Let’s take an example;

Residential house property bought on April 1960 for Rs 1,00,000/-

Improvements made on March 2012 for Rs 8,00,000/-

Sold on March 2017 for Rs 60,00,000/-

Cost Inflation Index:

 1980-81          100 (base year)         

 2011-12          785

 2016-17          1125

New residential house property bought on April 2018 for Rs 3000000

Particulars	Amount	Amount
Sale Consideration		60,00,000
Less: Expenses on Transfer		NIL
Net Consideration		60,00,000
Less: Indexed Cost of Acquisition	100000*1125/100	11,25,000
Less: Indexed Cost of Improvement	800000*1125/785	11,46,497
Long Term Capital Gain		37,28,503
Less: Exemption under section 54	Rs 3000000 or the amount of capital gain whichever is lower	30,00,000
Long Term Capital Gain Taxable @ 20%		7,28,503

As per the Budget 2017 proposal the base year has been shifted to 2001 and the same shall be applicable from 2017-18 onwards.

Note: Exemption under section 54

i)           Eligible tax payers            - Individuals

ii)          Capital Gains eligible for exemption - Long Term

iii)         Asset to be transferred - Residential House Property

iv)         Asset to be acquired for exemption - One Residential House Property

v)          Time limit for acquiring new assets – If purchase then, 1 year before or 2 years   after the date of transfer. If construction then within 3 years after date of transfer.

vi)          Exemption Amount – Investment in new asset or capital gain whichever is lower

vii)         Withdrawal of exemption - If new asset is transferred within 3 years of its acquisition.

viii)         Deposit in Capital gains deposit scheme before due date under section 139(1) – Yes

Capital gain Account Scheme - The scheme is open to all taxpayers, who wish to claim exemption under Sections 54, 54B, 54D, 54F, 54G or 54GB. If taxpayer could not invest the capital gains to acquire new asset before due date of furnishing of return, the capital gains can be deposited before due date for furnishing of return of income in deposit account in any branch of a nationalized bank in accordance with Capital Gain Account Scheme 1988.