Jan 292017
 

Method for Showing Long Term Capital Gains on House Sale in ITR

Did you have an immovable property that you sold after 3 years from date of purchase? This immovable property can be anything like a house or a land. If you have done so, the existing rule dictates that you need to show long term capital gains. In order to do so, you have to fill up the scheduled CG in forms ITR-2, ITR-3 etc. But the question is, how to do so? This is precisely what we will be looking into in this article.

Method for Showing Long Term Capital Gains on House Sale in ITR

A word of warning: This article is going to be very long. However, we strongly recommend that you read till the very end. It will benefit you and prevent any kind of action from the Income Tax Department of Government of India.

Segregation Short Term and Long Term Capital Gains

Capital gains can arise when you sell or transfer any capital asset. The gains that arise out of such sale or transfer are referred to as capital gains. Since there are various types of capital assets, it is very important to segregate the capital gains. Why so? Simple! If, for every type of capital asset, a separate type of capital gain is defined, the computation of the capital gains become enormously complex. Hence the need for segregation.

The rule of thumb dictates that when multiple capital assets (that fall under the same type) have been sold/transferred, computation of capital gains should be done by combining all such assets under the same type.

Here are a few points that should be remembered:

Property sold within 3 years You may buy a property and then sell it before 3 years of ownership is completed. Whatever money you get from the sale will be considered as short term income and hence, it will be added to your gross income. Now, you will be taxed as per the taxation slab you are in.
Property sold after 3 years You buy a property, stay in possession of the property for a minimum of 3 years and then you sell it. The money you earn from that sale is considered your long term capital gains. This amount will then be indexed and eventually taxed at a rate of 20%.
Tax deduction reversal Huh! Sounds scary but you need to abide by. Here is the scenario. You buy a property after taking out a home loan. Section 80c of Income Tax law states that you can claim tax deduction for the principal amount of the home loan. However, if you end up selling your property before 5 years of possession is completed, the tax deduction for the principal amount of loan will no longer apply. It will be added to your income (alongside the capital gains generated by the sale of the property) and then you will be taxed. There is one relief though. Once you have claimed interest deduction on the housing loan under section 24(b), you will continue to enjoy that even if the property is sold within 5 years from the date of purchase.

LTCG or Long Term Capital Gains on House Sale and ITR

Here is one question that you need to ask: Which income tax return form is to be selected for filling up schedule capital gains in income tax return? Actually there are variants of ITR forms.

ITR form also known as ITR-1 form doesn’t have an option for filling schedule capital gains. Neither will you find that option in ITR-2A. However, this section is available in ITR-2, ITR-3, ITR-4 and ITR-4S. So, if you as an individual or an HUF have sold debt mutual funds, gold, house or land, you will have either short term capital gains or long term capital gains. In such a scenario, the forms that you need to use are: ITR-2, ITR-3, ITR-4 or ITR-4S.

Remember: Just owning a house will generate house property income. Since the property is not sold, you will have to show that income as house property income in ITR. If, you sell the property, the sale proceeds become your long term capital gains or short term capital gains. In such a scenario, you need to fill in schedule CG.

Schedule Capital Gains in Income Tax Return

There are two parts of schedule capital gains. These two parts are the short term and long term capital gains. In long term capital gains, you will see section 1. This section is designed for reporting any capital gains arising out of property sale or transfer. This section 1 is to be filled only and only if you have sold your property after completing 3 years of ownership.

Now you need to know one thing:

Capital gains on property sale = Sale price of the property – Purchase price of the property

This means, the difference between the sale and purchase price is your capital gains. However, there is a tiny problem here. You need to consider income. Suppose you purchase a property back in 2008 and you want to sell it in 2016. By this time the prices have inflated quite a bit. So, the actual equation of capital gains is not reflecting that inflation. That has to be considered. The Income Tax Department is fully aware of this.

This is the reason why the need for indexation comes in. Indexation will only elevate the purchase price to current year’s purchase price. Then, the difference between the sale price and the purchase price will show the correct capital gains.

A quick example should be great!

Let us assume that Mr. Parekar bought a house back in 2004 and sold the house in 2016. Out of the money he earned from the sale, used a majority of that money for purchasing a new house. Let us make the following assumptions (remember that these are only assumed numbers):

Purchase price in 2004: INR 84,000

Sale price in 2016: INR 10,00,000

Brokerage fee: INR 10,000

Purchase price for new house in 2017 (i.e. within 2 years from date of sale of the previous property): INR 8,00,000

The question here in this example: What is the capital gain of Mr. Parekar that will be taxed?

We need to compute this. But how? For this we will need to indexation value. This indexation value is known as CII. Let us again make a few assumptions:

CII Month Year
480 May 2004 – This is the purchase year
1039 September 2016 – This is the sale year

With the above assumed data, let us now compute the capital gains for Mr. Parekar:

Rows Item Name Item Serial Number (alphabetical) Item Value
Row 1 Total sale value a INR 10,00,000
Row 2 Stamp valuation authority’s ascertained value b INR 10,00,000
Row 3 Full value considered (greater of (a) and (b)) c INR 10,00,000
Row 4 Indexed acquisition cost d = 84,000 x (1039/480) INR 1,81,975
Row 5 Indexed improvement cost e Not Applicable
Row 6 Expenditure exclusively and wholly incurred in relation to the transfer (brokerage fee) f INR 10,000
Row 7 Net purchase price after indexation g = d + e + f INR 1,81,975 + INR 10,000 = INR 1,91,975
Row 8 Capital Gains = Sale price – Purchase price h = c – g INR (10,00,000 – 1,91,975) = INR 8,08,025
Row 9 New purchase price i INR 8,00,000
Row 10 Deduction that can be claimed under section 54 j INR 8,00,000
Row 11 Net balance (this is the net long term capital gain) k = h – j INR (8,08,025 – 8,00,000) = INR 8,025

Explanation of the table above:

That table looks pretty ugly, ain’t it? Anyway, don’t panic. Here is a simple explanation for the table:

  • Row 1: Total sale value is the price at which Mr. Parekar sold the property.
  • Row 2: Stamp duty authority actually ascertains a value to the property which is being sold. This value is given during property registration.
  • Row 3: The greater of the total sale value and the value ascertained by stamp duty authority is to be put in. This will be considered as the actual sale price. In our example, both have been considered to be same.
  • Row 4: The initial purchase price of the property has to be raised to today’s date as per inflation. This is called indexation. This row calculates the indexed purchase price.
  • Row 5: If any improvements were made during the ownership, the total cost of those improvements will be included in the purchase price too. However, the improvement cost has to be indexed too. In our example, no improvement costs have been considered.
  • Row 6: Mr. Parekar may have to incur various costs like stamp duty, brokerage etc. In our example, only brokerage has the included. If stamp duty was there, it would be added to the brokerage fee.
  • Row 7: This row shows the actual inflated purchase price in today’s date. It will include the improvement costs as well as other exclusive costs that were incurred by Mr. Parekar during the sale (this includes brokerage, stamp duty etc.).
  • Row 8: This row gives the gross capital gains that Mr. Parekar had after selling the house.
  • Row 9: This row shows the purchase price of the new property that Mr. Parekar purchased.
  • Row 10: This row shows the deductions that are allowed to Mr. Parekar under section 54 since the new house was purchased within 2 years from the date of capital gains.
  • Row 11: As per our example, Mr. Parekar enjoys a deduction of INR 8,00,000 or 8 lakhs. This will be deducted from the gross capital gains he earned (Row 8). The deducted value is the actual or net capital gains for Mr. Parekar. He has to pay 20% tax on this amount.

VERY IMPORTANT NOTE:

The table we have given above has absolutely no similarity with the table you will actually find in the ITR forms. We have heavily tweaked the table only for the purpose of simplicity.

In the actual form where you need to input the calculated long term capital gains, you need to fill the field 3bii. This is to be done in the total income section. Other fields may have to be populated depending on other types of incomes you have.

Here is a snapshot of what you can expect in actual form:

Capital Gains Exemptions Under Section 54

In our above example we showed that Mr. Parekar gets an exemption. What exemption exactly? Glad that you asked! Allow us the opportunity to explain.

It may happen that a person is selling the existing house only to buy a new house. This new house that he or she wishes to purchase will be bought using the sales proceeds of the previous house. Under such situation, the primary objective of the person will be to purchase a residential house and not that of earning money. So, in that situation, the person or the taxpayer will not be able to enjoy exemptions on capital gains taxes. However, if the sales proceeds are not used for purchasing a residential house, those exemptions will not be available. For example, the person may decide to purchase a new shop instead of a residential house. In that case the exemption under section 54 cannot be enjoyed.

Here are a few points you need to remember:

  • This exemption will be made available only and only to an individual or an HUF.
  • The asset being sold should be a capital asset of long term.
  • The amount of exemption one can get under section 54 is either the price of the new house or the amount obtained from sales proceeds of the old house – whichever is lower.
  • The exemption will be available only if the money is reinvested in purchasing a residential house.
  • The exemption will be given only if:
    • A person buys a new house within a year before he completes the sale of the residential property in question.
    • The person sells the property in question and then purchases a new property within 2 years from the day when the sale was concluded.
    • The person sells the property and then completes the construction of the new residential house within 3 years from the day when the sale of the old property was concluded.
  • By the time the return of income is filed, the capital gains may not be used (completely or in parts) for purchase or construction of a new house. This may happen in a scenario like the capital gains came in towards the end of the fiscal year when return of income has to be filed. In such a case, the person can deposit the money in any public sector bank branch under Capital Gains Deposit Accounts Scheme. This will allow to enjoy exemption until the money has been used for purchase of a new house or construction of a new house. Remember the time limit. It has to be within 2 years or 3 years for purchase or construction respectively.
  • Since the assessment year 2015-2016, Government of India made it mandatory that section 54 exemptions can be applied only when a person buys a new residential property or constructs one within India. Also, it became a mandate that exemption will be given only and only for a single residential house. In case a person decides to buy more than one house or construct more than one house, the exemption will be applied only for the first house.

Let us take two examples:

Example 1:

Mr X sells an old house in 2016 and then buys a new house in 2017 using the sales proceeds. The capital gains Mr. X enjoyed was INR 5,00,000 He purchased the new house for INR 4,00,000. Let’s see if he needs to pay capital gains tax:

Items or parameters Item serial number Value in INR
Capital Gains a INR 5,00,000
Purchase price for new property b INR 4,00,000
Exemption amount will be lesser of a or b In this case it will be b INR 4,00,000
Net capital gains c INR 1,00,000
Taxable capital gains In this case it will be c INR 1,00,000

Example 2:

Mr Y sells an old house in 2016 and then buys a new house in 2017 using the sales proceeds. The capital gains Mr. X enjoyed was INR 5,00,000. He purchased the new house for INR 6,00,000. Let’s see if he needs to pay capital gains tax:

Items or parameters Item serial number Value in INR
Capital Gains a INR 5,00,000
Purchase price for new property b INR 6,00,000
Exemption amount will be lesser of a or b In this case it will be a INR 5,00,000
Net capital gains c NIL (actually net capital loss)
Taxable capital gains In this case there will no taxation because whole amount has been exempted INR 0

TDS to Be Paid On Property

Government has made it mandatory. Now TDS has to be paid for any property transaction that exceeds the amount of INR 50 lakhs. The deducted TDS will be 1%. In case PAN is not disclosed, the TDS will be deducted at the rate of 20%.

Let us take an example. A person sells a property for INR 70 lakhs. The buyer will have to pay the TDS of 1% on the whole amount. This stands to INR 70,000. If, there is no PAN, TDS will be 20% of 70 lakhs, which is INR 14,00,000.

If, a property is bought from an NRI, the buyer will have to pay TDS of 20%. That’s the flat rate applicable for all property purchases from NRIs.

Is It Possible to Adjust Long Term Capital Gains Against the Limit of Basic Exemption?

This is possible for resident individual and resident HUFs. For non-resident individuals and non-resident HUFs, this is not possible.

In case of resident individuals or resident HUFs too, the adjustment is allowed only after income adjustments have been made from all other sources. Let us take an example.

Mr. X sells a property (say land). He is 68 years old. The taxable LTCG he earns is INR 2 lakhs. There are no other income sources for Mr. X. Will he be allowed to adjust LTCG against the limit of basic exemption?

In the example that we have taken above, you will notice that we have put Mr. X’s age in the age group of 60 and 80. As per rule, the exemption limit for people belonging to this age group is INR 3 lakhs. Now, Mr. X is assumed to have no further income source. All that he earns is in form of long term capital gain. But, the LTCG he earns is well below the exemption limit of INR 3 lakhs. In this case, all his earnings from long term capital gains will be totally exempted. He will not have to pay any tax even though he earns LTCG.

Is Deduction Claim Allowed U/S 80C to 80U for Long Term Capital Gains?

The plain and simple answer to this question is NO. Still let us take an example.

Mr. X who is 57 years old resident individual is a retired man. He decided to purchase a land in 2010. Then then sells the same land in 2015. From the sales proceeds he gets taxable long term capital gains of INR 4 lakhs. There are no other income sources for him. He decides to deposit INR 50,000 in NSC and another INR 1 lakh in PPF. Will he be allowed to enjoy deductions under 80C?

In this example, Mr. X is allowed to claim or enjoy a basic exemption of INR 2.5 lakhs. The remaining that has been invested in NSC and PPF will not enjoy any deductions. Tax has to be paid in full. The taxation rate will be 20% (the applicable rate for long term capital gains) along with SHEC and educational cess. So the tax amount stands to INR 30 thousand. Now, he can however claim a rebate of INR 5 thousand according to section 87A. Including Cess of 1 and 2% respectively, the total tax he needs to pay will be INR 25,750.

That is all about showing long term capital gains on house sale. Actually we learned more than what was required in this article.  The original topic ended just before we started talking about TDS. The remaining info on this article is for your benefit. It only helps to attain more clarity on other aspects of long term capital gains.

In case you have any questions, do drop us a message. We will try to revert back to you as soon as possible.

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