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flat in 2010 (the year of capital gain) would be at least Rs 72 lakh. The capital gain would be Rs 72 lakh – Rs 9,52,740, i.e. Rs 62,47,260. The capital gains tax, at around 20 per cent of this amount would be Rs 12.5 lakh — a substantial burden on the erstwhile tenant.
Punmiya counters this from a taxation perpective. “If the (Paghadi) transaction (cited here) is prior to 1994, and no money is paid officially, then cost of acquisition will be taken as zero. If there is no cost, there is neither fair market value nor indexation. If the tenant intends to stay in the new house, technically purchased as per Section 54F of the Income Tax Act (related to capital gain), then he is not liable to pay capital gains tax.”
The tenant should get the redeveloped house within three years of giving up possession to avoid crossing the three-year time frame of Section 54F. “He will not be able to transfer the new flat for the next three years for exemption under long-term capital gain. Any sale/transfer in future will attract capital gains tax,” says Punmiya.
He adds that official Paghadi transactions after 1994 will be subject to capital gains tax, allowing for fair market value and cost indexation (like that calculated above).
Punmiya advises tenants to have all documents such as agreements, purchase deed, completion certificate etc to justify exemption to the tax authorities. In case of substitution of fair market value, the valuer’s report must be obtained, preferably before demolition.