How to minimize tax on capital gain on Indian Real Estate?

[VRG]

Gurus,

What are the various ways to reduce capital gain (as a result of selling residential property) in India?

1) One is to buy another bigger residential space? which is not happening in my case.
2) Take some cash
3) Show some expenses
4) Invest in some instruments like Infrastructure bonds etc..don't know much about this..:confused:

Please help!!

Thanks.

[pnarain]

Please find enclosed a note on the same

Pradeep Narain

[VRG]

Thank Narain, have few questions:

1) Are these two "Bonds of National Highways Authority or Rural Electrification Bonds" still available? If yes, then would these be subjected to PFIC for USC?
2) regarding item 2 in the table where there are no taxes due in case the gain is invested in another residential property.

Let's say, I'm selling an apt for 40 lacs and the capital gain is approx. 15 lacs. I plan to invest the money in buying a plot and building a house. Does the total cost of new asset (plot + construction) has to be more than 40 lacs?

Thanks.

[DosaiLvr]

Please find enclosed a note on the same

Pradeep Narain[/quote]

From your table in the attachment, it appears an individual who sells a residential prop can ONLY reinvest in another resi prop to avail LT cap gains tax exemption.

This could be the reason why my CA never mentioned LT gains exempt bond/funds etc to me, when I sold a res. prop recently in BLR...

Investing the cap gains from selling a res. prop in exempt bonds/funds was proposed in another thread by another member.

My clear understanding now, is that one cannot invest the taxable gains amt. in any bond or fund etc. The only temporary relief (max 3 yrs if buy plot and build) is the Cap Gain Exempt account in any bank?

Could you please confirm this?

(There are certain details that one could oversee as far as reinvesting AND avioding cap gains tax restrictions go, which I'll post later.)

TIA

[pnarain]

VRG
It appears in your case that residential house property [apt ] is sold to construct another residential house property. You can invest Rs 15 lakhs and claim exemption [S.54].

Bonds of National Highways Authority or Rural Electrification Bonds are available.

TIA
You can invest in Bonds too on sale of residential property. Sec 54 EC does not prohibit investments in the Bonds on sale of residential house.

[VRG]

Thanks PN.

DL: Bro, you're confusing me..:confused:

My father in law sold an apt (resi.) 2-3 yrs back and bought Bonds (Now recall these were of National Highways Authority) to avoid taxes. I know this for sure.

PN confirmed that these are still available as I read some other thread questioning whether these bonds are still available. I don't know whether these are subjected to PFIC for USC or GC holders.

PN: My understanding is that capital gain can be either invested in these two Bonds or other residential property. The Selling of old residential will qualify for LTC gain (since held for > 3yrs) regardless which of these you invest in. Can u pls confirm.

Thanks.

[pnarain]

Yes, you have got it right.

[VRG]

Thanks PN.

One more question regarding following example (as per your table):
Sale of property in 2005-06
100,00,000
Purchased in April, 1981
15,00,000
Indexed cost of acquisition [Rs.15,00,000*519/100]
77,85,000
Capital Gains
Sno.[ 1- 3 ]
22,15,000
Tax payable @ 20%
4,43,000
Surchage@10% on above
44,300
EC @2% on Tax + SC
9,746
Tax + SC + EC 4,97,046

How much do I have to invest (out of above amounts) in order to have zero tax liability? Can the amount be split (any proportion) into two: resi prop and bonds?

Thanks.

[DosaiLvr]

DL: Bro, you're confusing me..:confused: [/quote]

Sorry, bro. I got confused there myself too..

You can invest in Bonds too on sale of residential property. Sec 54 EC does not prohibit investments in the Bonds on sale of residential house.[/quote]

PN,

Thanks for the replies. I had stopped reading past sec. 54:o

Yes, Sec 54EC does not preclude "Any Person" from "Any Cap Gain" from investing in NHA and Rural Electricity bonds.

However, one needs to bear the shorter duration in mind - 6 months!

Thanks

[Bobus]

Pradeep: Thanks for posting the WORD document. The table at the end of the document is a nice summary of how to get exemption from tax on cap gains.

VRG: Please see table in Pradeep's document.

If the property sold

(a) is residential property
(b) has been held for 3 years so that cap gain upon sale is long term cap gain
(c) owner is individual or HUF

then per Sec 54, if the individual invests merely the long cap gain portion (not necessarily entire sale proceeds) in another residential property within 2 years of sale, then the long term cap gain from thd sale of the first residential property is exempt from tax.

Further, it appears that the individual needs to invest merely the long term cap gain that is computed after taking inflation indexation into account. Perhaps Pradeep or Rajesh can confirm.

Example

Basic acquisition cost of residential house = say 10 lacs
Sale proceeds = 40 lacs
Inflation Indexed cost of acquisition = 25 lacs
So long term cap gain is 15 lacs = 40 - 25 after taking inflation indexation into account.

Individual needs to invest only 15 lacs in a new house within 2 years to get exemption from cap gains on sale of house.