The Hindu Business Line : It could be yours, but...

Any form of sale, exchange or relinquishment of right in real estate attracts capital gains tax. Any transaction involving possession of immovable propertyunder section 53A of the Transfer of Property Act also qualifies as capital gains. Executing and registering the sale deed is essential for the transfer to take effect.

If a property is inherited through the execution of a will or received as gift, or through the partition of a Hindu Undivided Family (HUF), it does not qualify as capital gains.

Types of capital gains

If the asset is held for not less than 36 months, it is a `long-term capital asset'. When held for lesser period it becomes `short-term capital asset'. The resulting profits are respectively called long-term capital gains and short-term capital gains. Whenever the asset is acquired as gift, inheritance or through partition of HUF, the period of asset holding by the previous owner is also taken into consideration.

Agricultural land

There are no capital gains on transfer of agricultural land, subject to certain conditions. Urban agricultural land qualifies as capital asset and is consequently chargeable to capital gains upon transfer.

Any agricultural land situated within a specified distance from an urban agglomeration would be liable to capital gains upon transfer.

Only agricultural land situated beyond the specified limits (maximum 8 km from municipality limits or a cantonment board vide notification No. 9447 dated 06-01-1994) or situated in a village whose population is below 10,000 as per the last census would be exempt from capital gains.

Some previous rulings

* Transfer of leasehold interest in immovable property for long duration is a transfer. — R.K. Palshikar vs. CIT (172 ITR 311) SC.

* Solatium received on compulsory acquisition is a part of consideration. — CIT vs. Ms M. Subaida Beevi (160 ITR 166) SC.

* However, any interest received on enhanced compensation is chargeable as income from other sources. — K.S. Krishna Rao vs. CIT (181 ITR 408) SC.

* Capital gains arising from sale of agricultural land situated within municipal limits is taxable. — CIT vs. Mahajan (ML) (2002) (255 ITR 272) SC.

Cost of inflation index

Taking 1981 as the base year (index 100), capital gains are indexed by considering the cost of inflation. (Index for 2004-05 is 480). Index remains the same during the year.

Determining capital gains

Capital gains is arrived at by deducting the indexed cost of acquisition from the net sale consideration.

Net consideration is the amount received minus the sales expenditure incurred on advertisement, brokerage, etc.

Cost of acquisition varies on a case-to-case basis.

If the asset was acquired before 01.04.1981, the value of the asset as on 01.04.81 is taken as the cost of acquisition.

Thus, if a property was acquired before 01.04.1981, its value as on 01.04.1981 would be considered to be 100. If cost of property as on 01.04.1981 is, say, Rs 2 lakh, the indexed cost of the asset for 2004-05 would be Rs 9.6 lakh (that is, 2 lakh x 480/100).

If the asset was acquired after 01.04.1981, the index prevailing that year is to be taken as the base. Indexing is done by multiplying the cost of acquisition with the index in the year of sale (480 for 2004-05) and divided by the index for the year of purchase.

If the asset was purchased in, say, 1987-88 for Rs 3 lakh, the indexed cost would be 3 lakh x 480/151 (151 is the index for 1987-88) i.e., Rs 9.536 lakh.

Cost of improvements

Any expenditure incurred on additions such as compound wall, bore well, etc., must be adjusted taking into account the cost of inflation index in the year of improvement.

Compulsory acquisition by Govt

In the case of acquisition of property by the Government, capital gains arise only on receipt of compensation from the Government and not on the date of acquisition. Cost of inflation index up to the year of receipt of compensation would be considered to arrive at indexed cost of acquisition.

If additional compensation is received in a subsequent year, cost of acquisition for the additional compensation would be nil.

Any interest received from the Government for delayed payment of compensation would be chargeable as income from other sources and can be spread over the period during which the interest is paid.

Chargeability to tax

Long-term capital gains are chargeable to tax at a flat rate of 20 per cent for individuals, while short-term capital gains are chargeable at normal rates.

The author is a Hyderabad-based Chartered Accountant.

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