Selling a house? Keep in mind tax consequences

If you plan to sell your house to cash in on rising real estate prices, spare a thought for the resultant tax liability.

Short-term gain

If the house is held for not more than 36 months, it would be considered a short-term capital asset, and any gain from the sale would be classified as a short-term capital gain.

For a short-term capital asset, the cost of acquisition and improvements would be adjusted without indexation to arrive at the capital gain taxable at the applicable tax rates. No exemptions are available for short-term gains. Deductions under Section 80C and 80D would nevertheless be available.

Long-term gain

If the house is held for more than 36 months, it would be considered a long-term capital asset and any gain arising out of the sale would be classified as a long-term capital gain. For a long-term capital asset, the cost of acquisition and improvements would be adjusted with indexation to arrive at the taxable capital gain.

The cost inflation index (CII), as provided by the government for each year, would be considered to arrive at the indexed cost. In effect, the cost of the asset would stand increased to reflect the real gain to the individual. Where the residential house is purchased before 1980, CII for FY82 would need to be used.

Deductions under Section 80C and 80D would not be available for long-term capital gains. Long-term capital gains arising from the sale of a residential house are eligible for exemption where the sale proceeds are invested in specified assets and the prescribed criteria are met.

Purchase/construction of another residential house

Exemption may be claimed on sale of a residential house (original house) if the individual purchases a house a year before or two years after the date of transfer of the house, or has within three years from the date of transfer, constructed another house (new house). With effect from April 1, 2014, such new house should be purchased/constructed in India. The entire long-term capital gain would be exempt where the cost of the new house exceeds the capital gains. In any other case, the difference between the capital gains and the cost of the new house would be taxed.

If the entire capital gain is not immediately utilised for the purchase of a new house before the due date for the tax return for that year, the money may be deposited in a capital gain account scheme specified for the purpose. If the entire amount so deposited is not utilised within three years from the date of transfer, it shall be taxable in that year.

Further, if the new house is sold/transferred within three years from the date of its purchase, the capital gains claimed as exempt initially will now become taxed. The cost of acquisition on the sale of the new house would be nil where the entire capital gains on sale of the original house had been invested. In any other case, the cost of acquisition should be reduced by the capital gains earlier claimed as exempt.

Investments in specified bonds

An individual may also invest the capital gains within six months from the date of transfer in specified bonds (issued by REC and NHAI) notified by the government. Where the entire capital gains are invested, the entire amount is exempt. Otherwise, the exemption is limited to the amount invested.

If the bonds are redeemed within three years from the date of acquisition, the capital gains earlier claimed as exempt become taxable in the year of the bond’s redemption. The maximum amount that can be invested is limited to Rs 50 lakh.

By Tapati Ghose

The writer is partner, Deloitte Haskins & Sells LLP. With inputs from S Srividya, manager, Deloitte Haskins & Sells LLP