Purchasing property for investment purposes and selling it later at a higher price has become common practice. If you sell real estate for a profit, you will need to pay capital gains tax on the money. The tax varies, depending on the time period the property was held on to. Capital gains tax is definitely an aspect which every property seller should consider in a cost-sensitive market. For this purpose, capital asset means property of any kind, held by an assessee, whether or not connected with his business or profession, but does not include, personal effects, that is to say, moveable property (including furniture) held for personal use.
Capital gains on sale of property
Capital gains on sale of property are chargeable to tax. If the gains qualify as long term capital gain (LTCG), the same may be reinvested in specific assets or schemes within the prescribed time limit to avail tax exemption. One such option is to invest the LTCG in buying a new house located within India within the prescribed timelines. However, where the LTCG is more than the price of residential house so purchased or constructed, then the differential amount is taxable as capital gains in the year in which the property is sold. The new residential house was construed to mean house property, however recently the Ahmedabad tax tribunal has given a ruling which opens doors for legitimate tax planning. In a recent ruling, investment in the residential house as well as amount spent on buying furniture and fixtures was allowed for the purpose of claiming the tax exemption.
Allowing the claim in entirety for investing the capital gains in residential house along with furniture and fixtures, despite two separate agreements entered into for sale of house and sale of furniture, has shown that Indian courts are becoming progressive thinkers. It has been specifically observed that “a residential house may have many other things, other than civil construction and including things like furniture and fixtures, as its integral part and may also be on sale as an integral deal”.
Pertinent facts of the case
It so happened that the assessee, a non-resident, sold his house property in India and earned LTCG of Rs 1.89 crore. He invested Rs 78 lakh in another property in India, for which he claimed deduction under Section 54. During the assessment proceedings, the I-T official disputed that the assessee had entered into two separate contracts, for purchase of house property and the furniture and fixtures. A consideration of Rs 60 lakh was paid for the purchase of house property and the remaining payment of Rs 18 lakh was made for purchase of furniture and fixtures in the property. The Tribunal allowed the deduction under Section 54 by treating entire amount of Rs 78 lakh as the “cost of the residential house”. It held that “though the arrangements for separate purchase of furniture and fixtures were indeed artificial, but the remedy did not lie in declining deduction under Section 54 to the buyer to that extent, the remedy was in bringing the right amount of capital gains to tax by ignoring the nomenclature of sale of personal effects, specifically excluded from the definition of capital assets.”
This ruling has reiterated the principle that a lapse cannot be allowed to prejudice the legitimate interests of the assessee. This ruling is thus suggestive of the fact that, by buying furniture along with the residential house, the entire amount can be claimed by the buyer as cost of acquisition of the new house and hence eligible for deduction u/s 54. Therefore, while buying a property to save capital gains, consider buying a furnished accommodation and claim the total amount paid for the residential property including the furniture and fixtures too.
The writer is partner, Nangia & Co. Inputs from Vasudha Arora