NRI's CORNER
F.E.M.A.
Exemption of Long Term Capital gains of other Assets upon investment in Residential Property

 NRIs CORNER - EXEMPTION OF LONG TERM CAPITAL GAINS OF OTHER ASSETS INVESTED  IN RESIDENTIAL PROPERTY

Long Term Capital Gains [ LTCG ] earned from sale of any movable or immovable property other than a residential house can be claimed as tax exempt if the sale proceeds are utilised  for purchase or construction of  a new  residential house under the Income Tax Act , 1961 [ I.T.Act ]. Salient features of this exemption are:

1.Tax Exemption:

.01     Entire LTCG will be exempt from tax if the sale proceeds are invested in a Residential House in total.

.02    If part of sale proceeds is Invested In House Property, exemption will be granted on prorata basis. Say Rs. 5 mn are  invested out of sale proceeds of Rs. 10 mn for purchase of a new  house property and if the LTCG is Rs. 4 mn, then such investment will be eligible for 50% of tax exemption i.e. Rs. 2 mn of LTCG will be exempt from tax.

2. Conditions:

.01   The seller should not own more than one residential house on the date of transfer of original asset.

.02    New House Property is to be purchased within one year prior or two years after the sale of original asset.

.03    Alternatively New house property is to be constructed within three years after the sale of original asset.

.04   The assessed should not purchase any other residential house within a period of two years* nor construct  another residential house within a period of three years after the sale of original asset. [The Proviso mentionsOne year but the Section amended since 1-4-1988 lays down a period of two years. It seems that said Proviso is not amended erroneously].

3. Unutilised Gains:

.01   Sale proceeds not utilised for purchase or construction of new house till the due date of filing of return of income should be deposited in a "Capital Gains Bank Account".

.02     Purchase or construction should be met out of balance held in such Capital Gains   Account.

4.Tax Rates :
 

.01   LTCG of Listed Equity Shares and Equity Schemes of Mutual Funds subject to Security Transaction Tax (STT) are exempt from tax upto Rs.1 Lakh.
 

.02    LTCG from Securities Listed in India, Units of Indian Mutual Funds and Zero Coupon Bonds shall be taxed at 20% after indexation.
 

.03     LTCG of Unlisted Securities and Shares of Private limited company shall be tax at 10 % without benefit of  indexation.
 

.04      Other LTCG are taxed at 20% after Indexation.
 

.05      STCG of Equity Shares and Equity schemes of MFs subjected to STT are taxed at 15%.
 

.06      STCG of other assets are taxed at Normal rates of applicable tax on Total Income.

5.Contravention:
 

.01  If an additional/other Residential House is purchased within a period of two years or constructed within a periodofthree years after the sale of original asset the LTCG exempted earlier will be taxed in the year of such purchase / construction.

 

.02    If the new residential property so purchased is sold within the period of three years, then the LTCG exempted earlier will be taxed in the year of such sale.
 

.03   Balance of Capital Gains Bank Account not utilised for purchase or construction of new residential house within the stipulated time shall be charged to tax upon completion of three years from the date of sale of original asset.

6.Capital Gains - Computation:

.01   While calculating the LTCG, Indexed cost will replace the actual cost. 

.02    Indexed cost is computed by adding to the purchase price the notified cost of living index for each year of holding.

.03   LTCG are arrived at by deducting such indexed cost from the sale price.

.04 In case of immovable properties, sale price is to be replaced by the valuation of the property determined by the State Registrar for Stamp Duty payable by the buyer if the same is higher.

7.Capital Gains - Meaning:

.01      Profits and gains earned upon sale of Any Immovable or Movable assets are taxed under the head of "Capital Gains" under the I.T.Act, 1961.

.02   Such gains are classified as "Long Term Capital Gains (LTCG)" if the assets are held for a period of more than 36 months and as "Short Term Capital Gains (STCG) if held for lesser period. 

.03      Gains of Shares of a Company or equity or balanced schemes of mutual funds are defined as LTCG if the same are held for more than 12 months. Debt schemes of mutual funds are defined as LTCG if the same are held for more than 36 months.

.04   Gains of other movable or immovable assets are classified as "Long Term Capital Gains (LTCG)" if the assets are held for a period of more than 24 months and as "Short Term Capital Gains (STCG) if held for lesser period.

8.Disadvantage NRIs:

.01      Non Resident  are  at a disadvantage as against  residents as re: LTCG of  all assets or STCG of Listed Shares or Mutual Fund Units as the basic threshold exemption limit is not deductible in these gains  earned by Non-Residents.

.02      Thus a Non-Resident will be paying on gross amount of LTCG irrespective of basic threshold exempt limit of INR 2, 50,000.

.03    And as such entire LTCG will be taxed at 20% or 10% as the case may be and STCG of listed
 shares or Mutual Funds Units will be taxed at 15% from the 1st Rupee gain.

 

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