My mother bequeathed in July 2005 a housing property of 4,500 sqft, out of which 500 sqft, is commercial in nature. The rest 4,000 sqft is residential and I am occupying it at present. She had constructed it in 1985 and the cost of construction of the entire property was Rs 10 lakh. I have sold only the commercial portion of the property for Rs 12 lakh. What is the amount of capital gains earned by me, the amount of tax payable thereon and the ways and means of making the same exempt?

? Haresh Shah

1. For computing long-term capital gains arising out of the subsequent sale by a donee or legatee, the cost of the property is the cost incurred by the donor (your mother) when she originally acquired it.

2. Explanation ?iii? to Sec 48, defines ‘indexed cost of acquisition? to mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee (which is you).

3.This means that in the case of an inherited or gifted property, the cost of acquisition is the cost to the original holder, but the date of acquisition for indexing should be taken as the date of the inheritance. However, the character of long- or short-term depends upon the date of acquisition of the original holder.

4.This may end up in some strange results. For instance, if and when you sell the property, it will be treated as sale of a long-term capital asset, irrespective of your holding period, but the ratio for computation of indexed cost will be the index of fiscal year in which you have sold the property and the fiscal year in which you became its owner.

5.In your case, the cost of the commercial property sold by you is Rs.1,11,111 (= (500/4500) x 1000000)

6.The index for 2008-09 is 582. The index for 2005-06 during which the property was bequeathed to you is 497. The indexed cost would be Rs 1,30,114 (=111111 x 582 / 497). The long-term capital gains (LTCG) work out at Rs 10,69,886.

7.The tax on this amount is charged @20% which works out at Rs 2,13,977.

8.If you desire to render this tax exempt, you have 2 options :-

a.Invest within 6 months from the date of sale, Rs. 10,69,886 in infrastructure-related bonds of NHAI or REC u/s 54EC. The lock-in period is 3 years. The current interest rate is around 5.5% and this is fully taxable.

b.Purchasing a residential house within 1 year before or 2 years after the date of sale of the commercial property u/s 54F. Alternatively, you may construct a residential house within 3 years after the date. Sec 54F is related with sale of assets other than a residential house. The entire amount of sale proceeds, Rs 12,00,000 has to be invested in the new residential house. You should not own more than one house on the date of earning the capital gains. The new house has a lock-in of 3 years. If sold within the lock-in period, the corresponding capital gains (that on which you had saved the LTCG tax) is treated as taxable LTCG during the year of sale.

c. The amount which is not invested before the filing of returns for the year or the statutory last date for filing the returns, whichever is earlier, is required to be parked in ‘Capital Gains Account Scheme’ (CGAS) with a bank in India which offers such a facility.

I am the earning member in my family and fall into the highest tax bracket. My wife works but comes under a lesser bracket. My daughter is 12 years old, and according to my auditor any investments made in her name, income received thereon is taxable in my hands. Is he right?? He further states that income from investments made in name of minor is taxable in the hands of the parent who is in the highest bracket.

?Darius Kabrajee

All the income earned by a minor child is taxed in the hands of the parent who has an Indian income more than that of the other, unless the child has a physical or mental handicap or the child earns an income by virtue of its special skills or knowledge. There is a paltry exemption of Rs 1,500 per year per child (more, the merrier). Once the child becomes a major, the amount that was being clubbed when he was a minor, ceases to be treated so.

In the case of the spouse, the income on gifted corpus is clubbable. There is a slick advantage in giving gifts to spouse. Once you have paid the tax on this first-stage interest, it becomes her asset. Any income thereon is not clubbed in the hands of the donor. It is taxed in the hands of the donee.

For clarity, suppose you have given a gift of Rs 10 lakh and she has invested this amount in RBI Savings Bonds. She will earn interest of Rs 80,000 and you have to include this amount in your income chargeable to tax and pay tax thereon.

Suppose, she invests this amount of Rs 80,000 in additional bonds. She will earn interest of Rs 80,000 on the original corpus you have gifted and also Rs 6,400 on the investment of her interest of Rs 80,000.

You are required to continue to pay tax on Rs 80,000, but not on Rs 6,400. In other words, you pay tax on the interest earned on the original corpus gifted to her, but the interest on interest is taxable in her hands.

There is no clubbing provision in respect of gifts to major children.

The authors may be contacted at wonderlandconsultants@yahoo.com