Sale of House property held for more than 3 years: Long Term Capital Gains Tax?

Question:

I am a 50 year-old housewife. I plan to sell my house which I bought in 2003 -04 for Rs.60 lakh. I have decided to buy a smaller flat for Rs.44 lakh.Is this will attract long-term capital gains tax?. Sundara Kumari, Madurai.

Ans:

As the house property is held for more than 36 months (36 month) before the date of sale, there will be LTCG (long term capital gains.) To offset capital gains, you need to purchase a residential house, (the smaller flat - apartment-  you plan to buy) within 2  (Two) years after the date of transfer of the original flat.

In case it is an under-construction property, then it should be constructed within three (3) years of transfer of your flat. If the amount of capital gain is less than the cost of the new flat, the entire amount of capital gains is exempt from tax.

However, if the capital gain amount is higher, then the excess of the said amount is chargeable to tax as capital gains. Capital gains is calculated by taking the excess of the full value of sale consideration to be reduced from indexed cost of acquisition (In your case if the purchase date is 2003-04 the cost inflation index will be 463 and if you plan to sell in 2012-13 the indexed rate will be 852), which means the purchase price of Rs. 60 lakh will become about Rs. 81 lakh.

Any other expenditure incurred either as improvement (indexed) or incurred wholly and exclusively in connection to such a transfer will also be added to the cost of purchase.

The resulting figure will be your capital gain and the said amount, if it is in excess of Rs. 44 lakh, needs to be invested in a capital gain bond under section  54EC (capital gains will not be charged on investment in the said bonds). These bonds carry a lock in of three (3) years and are issued by the NHAI (National Highways Authority of India) and REC (Rural Electrification Corp. Ltd) These bonds carry a fixed rate that is taxable.

Equally important is the investment you make in the smaller flat. You need to ensure you don’t transfer the house within three years from the date of purchase / or construction.

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