Large number of property transactions take place in Goa. The government has made special provisions to curb black money by levy of tax on the basis of stamp duty valuation, compulsory payment for property deals through account payee cheques and TDS on payments. The tax payer can also avail exemptions from payment of taxes on capital gains. This article gives complete guidance in respect of tax implications on sale of immovable property.
Under the Income Tax law, profit on sale of immovable property is called ‘capital gains’. If the property is owned and held for more than 24 months, it is ‘long term capital gain’, and ‘short term capital gain’ if the holding period is 24 months or less. The profit on sale or transfer of an immovable property is the difference between consideration received on transfer of the immovable property and the amount spent on acquisition, improvement and expenditure incurred in connection with the transfer such as stamp duty, registration charges, lawyer’s fees, brokerage, etc.
When the property is acquired by way of gift, will or inheritance, the date and the cost of acquisition is the date and cost at which the previous owner had acquired the property.
In case of short term capital gains, the difference between sales consideration and cost of acquisition, which includes cost related expenses, is added to total income of the relevant year and tax is charged accordingly based on the income slab. There are no exemptions for short term capital gains.
In case of long term capital gains, the tax payer has the benefit of Cost Inflation Index (CII) in respect of cost of acquisition and the amount spent on improvement. CII is provided to offset the inflation. CII number is released by the tax authorities every year with base year in 2001-02 at 100. CII for the financial year 2023-24 is 348. You need to time the transaction properly to get the benefit of CII. If the property is transferred on or after April 1, 2024, instead on or before March 31, 2024, indexation benefit will be more.
The taxable long term capital gain is difference between sales consideration and indexed cost of acquisition and charged at flat rate of 20%.
Tax liability can be reduced on long term capital gains from sale of residential house in two ways, which can be used simultaneously depending on the situation.
Exemption under Section 54EC will be applicable if capital gain amount (not sales consideration) of a maximum of Rs 50,00,000 is invested in the bonds of National Highway Authority of India or Rural Electrification Corporation Ltd within a period of six months after the date of sale. These bonds are redeemable after five years and carries low interest rate. These bonds cannot be redeemed for 5 years.
Under Section 54, the tax payer can claim exemption by purchasing one new residential house within a period of one year, before or two years after the date of sale or by constructing one new residential house in India within a period of three years after the date of sale. In case the capital gain amount does not exceed Rs 2 crore, the person at his option can purchase or construct two residential houses in India. This option can be exercised only once in a lifetime. If the amount remains unutilised till the due date of furnishing return, this balance should be deposited in a specified bank account under Capital Gains Accounts Scheme, 1988, and from this bank account, withdrawal should be made for purchase or construction of a new house. The exemption will be lost if the new house is sold within three years.
In case of sale of immovable property other than a residential house, a person can invest in Section 54EC bonds as stated above or under Section 54F a new house should be purchased within a period of one year, before or two years after the date of sale of immovable property or construct one residential house in India within three years after date of sale. The unutilised amount can be deposited in capital gains accounts scheme as stated above before due date of furnishing return. A person is eligible for this exemption if he/she has only one residential house on date of transfer.
After availing the exemption, the tax payer has to retain the new residential house for a minimum period of three years from the date of purchase or construction.
To prevent evasion of tax by understating sale consideration in sale deeds Section 50C is introduced, wherein if value adopted for stamp duty by Stamp Valuation Authority is more than sale consideration then stamp duty value will be considered as full value of consideration. However, if stamp duty value does not exceed 110% of consideration received, the consideration received is considered as full value
of consideration.
Under Section 194-IA, TDS @ 1 % has to be deducted by the purchaser of a resident seller, where the consideration for transfer of land or building other than agricultural land exceeds Rs 50 lakh. TDS @ 20 % is applicable if PAN is not provided by the seller. The tax should be deposited electronically within 30 days from the end of the month in which deduction is made, in challan-cum-statement in Form no. 26QB. Non-deduction of tax by purchaser attracts interest and penalty.
In case the seller is non-resident, under Section 195 tax should be deducted at source @ 20% (plus cess of 4%) of sale consideration, irrespective of the amount.
The tax payers while negotiating any property deals should carefully consider tax implications and conditions to be fulfilled for not getting saddled with avoidable tax liabilities.
Goan spouses governed under Communion of properties under Portuguese Civil Code can claim above deductions and benefits for each spouse separately with substantial tax savings.
(The author is a Chartered Accountant by profession)