MT: Indian Tax on Real Estate gains

[LoveIndia]

Link to original thread: Indian Tax on gains from ancestral property sale...

From: R21orNot (Original Message) Sent: 9/21/2006 2:09 PM
My dad who is an indian resident, may get some money from sale of land which belonged to my grandfather. My grandfather is not alive and the sale proceed will be distributed to his sons (including my father). What is his tax liability?


Can anyone answer this??? I guess the best thing to do would be to contact an accountant but I am trying to see if someone has information on this..

Also, I was wondering what are the investment options he may have in India. He is retired (55+) and will probably need 15K per month for his expenses. The amt he would be getting is close to 25L. I want him to invest it so that it will take care of his future years. I guess even if he puts in a savings account he would be getting 11-12k per month plus taxes.

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From: Bobus175 Sent: 10/13/2006 3:51 PM
Looks like your dad inherited a share in the land, which is being sold now. Your dad will be liable for tax on cap gain. For purposes of cap gain computation, the basic acquisition cost will be the cost at which your grandad acquired that share of land.

Say grandad acquired the land at 2 lac rupees. Say your dad inherited 40% of that land. Then basic acquisition cost for your dad is 80K.

If it has been 3 years since land was originally bought by granddad, then the land is a long term cap asset, and the acquisition cost above is eligible for inflation indexation per tables published by IT Dept.

Cap gain = Sale proceeds less indexed cost of acquisition (am assuming no improvements etc have been made).

The Indian rate of tax on cap gain is 20%.

As to where to invest, there are plenty of avenues. Need to know your dad's full financial picture to offer any responsible suggestions.

[LoveIndia]

From: Bobus175 Sent: 10/13/2006 4:02 PM
If grandad acquired the land before April 1, 1981, then basic acquisition cost (at your dad's option) may be taken to be the fair market value of your dad's share of the land as of April 1, 1981. Then use inflation indexation tables provided by IT Dpet to arrive at indexed cost of acquisition.

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From: R21orNot Sent: 10/13/2006 4:03 PM
Thanks Bobus. I will give as much info as possible.

The land was purchased by my granddad back in 1940's (i guess) and he bought it under Nizams rule. The purchase price was Rs 4 or 5 for an acre. he was a farmer when he purchased it. During late 70's (I guess) under Indira Gandhi's rule, some land ceiling act came into picture and most of it was taken over by army. Now they released some of it which is being sold and my dad's share is 25%.

Regarding question 2, my dad doesnt have any financial picture!! I support him pretty much and now luck has favored him! I just dont want him to spend this money irresponsibly and want to put it somewhere for his future.

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From: Bobus175 Sent: 10/13/2006 4:42 PM
#5:

Lets assume your dad's share is X acres.
Get fair market value of those X acres as of April 1, 1981. This will be basic acquisition cost.
Then use inflation indexation tables of IT Dept to get indexed cost of acquisition.
Knock of indexed cost of acquisition from net sale proceeds to arrive at long term cap gains. Then ask your dad to include that in his IT return and pay tax. If he does not have PAN, he can apply for one.

Just to confirm, does your dad get any pension or any other income? No other assets? Looks like you want a regular income stream for him from the 25 lacs or thereabouts of sale proceeds (after taxes). If he aint 60 years old yet, then senior citizen savings scheme is not an option.

[LoveIndia]

From: R21orNot Sent: 10/14/2006 9:14 AM
No my dad does not get any pension. Also, he does not have any property on his name, but he may have some share from my grandad's inheritance. We are a HUF and everything was on my granddad's or grandmom's name, house, land etc.. I guess in a few years, when they decide to split up, he will aquire some share again through inheritance.

I looked at the inflation indexation table. How should I apply this value to the sale proceed? For ex, let's say in 1981, the fair market value of his share was 2 lakh, and from 81-00 the inflation indexation values are:

Financial
Year Cost Inflation
Index
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 250
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-2000 389


http://incometaxdelhi.nic.in/payers/capital15.htm

So for 1982, inflation indexed value of his share would be 209,000? and for 2000, it would be 7,78,000? (assuming this was in 2000, but I will find the values for 2006) And then this amt is deducted from 25L to arrive at taxable capital gains?

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From: RAJESH Sent: 10/14/2006 10:16 AM
Dear R2IorNot
1.Presently, is the property agricultural land or residential plot ?
2. Gains from agricultural lands and particularly those agricultural lands outside the specified limits of urban city are exempt from tax..Hence it is necesssary to examine , where is it situated ? If near a city, what is the distance from the city?
3. For creation of regular income, you should consider investment in Arbitrage Funds, which have possibilities of tax free income in the range of 7 % to 9 % p.a.
.02 Details of Arbitrage Funds can be found on our website at : http://www.nribanks.com/mf/jm/jm_arb_ipo.htm

Best Wishes
RAJESH H DHRUVA

[LoveIndia]

From: Bobus175 Sent: 10/14/2006 11:02 AM
So for 1982, inflation indexed value of his share would be 209,000?

1.09 * 2 lacs if sold in 1982-83.

and for 2000, it would be 7,78,000? (assuming this was in 2000, but I will find the values for 2006)

3.89 * 2 lacs if sold in 1999-2000

And then this amt is deducted from 25L to arrive at taxable capital gains?

Yes. Also, look into point 2 in Rajesh's post about agri versus residential land.

Looks like you may consider the following:

(a) Post office monthly income scheme (limit 3 lacs)
(b) Indian debt mutual funds and balanced funds (choose growth option and make sure liquidation for regular income is done at least 1 year after investment).

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From: RAJESH Sent: 10/15/2006 10:08 PM
Dear Bobus,
1. The Cost Inflation Index for F.Y.2006-07 is notified at 519.

Best wishes,
RAJESH H DHRUVA


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From: Bobus175 Sent: 10/16/2006 3:28 PM
Rajesh:

Thanks for your two posts in this thread.

General Remark: That the cost inflation index is 519 for 2006-07 (base year of 1981-82 is 100, and the index takes only 75% of inflation into account) suggests that over the last 25 years general inflation in India has been such that to buy today, what 100 rupees could buy 25 years ago, one would need 519*1.33 (the multiplication by 1.33 is done to account for the fact that the index takes only 75% of inflation into account) i.e. about 692 rupees.


Some info on the arbitrage funds that Rajesh has refered to in # 8.

http://ia.rediff.com/money/2006/oct/11mc1.htm

Copy and Paste Job (emphasis mine)

There has been a spate of derivative or arbitrage funds being launched, the most recent one being SBI Arbitrage Opportunities Fund. What is an arbitrage fund and what should investors look for before investing in one? The article addresses these and related issues.

But first a little background. Sometime back the markets were at an all time peak. And then the much feared correction arrived. Just when investors were almost giving up hope, the market turnedaround and crossed the 12000 mark again. In such volatile situations, what is an investor supposed to do?

Most astute investors book profits at regular intervals and milestones. And then when the valuations fall, they buy into bargains. Buy low and sell high is the only way to make money on the stock markets and those who actually do end up making the money follow this mantra regularly. (Also read - How to choose the right mutual fund)

Anyway, say you have sold some shares and booked profits. What will you do with the money? Some money can go back into stocks. But at this point you might not want to commit all your funds to equity. At the same time, you wouldn't want to lock up your funds for any length of time. You never know when the market will provide an opportunity next and you will like to keep your money reasonably liquid.

Income funds are not the answer. Interest rates being on the upswing investors would have to undertake a heavy "interest rate risk".

Interest rates and prices of fixed income instruments share an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa. Therefore, in the past when interest rates were falling linearly year after year, most income funds yielded returns that even a well doing equity fund would be proud of. This is done by adjusting the portfolio to the market rate of returns is called 'Mark to market'. However, this article is not about the mechanics of the interest rate risk. (Also read - Low risk, high returns. Here's how)

In simple words, when interest rates in the economy rise, the NAV of an income fund falls and vice versa. Therefore, as of now, investors have to look elsewhere�some place that gives them fixed return at a very low risk.

Enter Arbitrage Funds

Investors not familiar with this type of scheme might just end up thinking that these are just equity-oriented schemes with another fancy name. However, this is not so. What such funds aim to do is to take advantage of the arbitrage opportunities between the cash and the futures market to generate fixed income. Therefore, these are a type of income scheme.

The arbitrage is sought by taking advantage of the mispricing between the cash and the derivatives market. Let's understand how this works. (Also read - How to build your MF portfolio?)

Suppose the stock price of XYZ Ltd. is quoting at Rs. 600. Let's say the stock is also traded in derivatives segment, where its future price is Rs. 610. In such a case, one can make a risk-free profit by selling a futures contract of XYZ Ltd. at Rs. 610 and buy an equivalent number of shares in the equity market at Rs. 600.

Now when settlement day arrives, it wouldn't matter which direction the stock price of XYZ Ltd. has taken in the interim. In other words, it is irrelevant whether the share price of XYZ Ltd. has risen or fallen, one would still make the same amount of money.

This happens because on the date of expiry (settlement date) the price of the equity shares and their stock futures will tend to coincide. Now, all one has to do is to reverse the initial transaction i.e. buy back the contract in the futures market and sell off the equity. So four transactions have taken place --- buy stock, sell futures, sell stock, buy futures. In this manner, irrespective of the share price, the investor earns the spread between the purchase price of the equity shares and the sale price of futures contract.

Examine the following table


Scenario I
Scenario II

XYZ Price at settlement
700
500

Profit/Loss on sale of equity shares at expiry
100
-100

Profit/Loss on purchase of stock Future at expiry
-90
110

Net Profit
10
10









In Scenario I, XYZ Ltd. skyrockets to Rs. 700 on the settlement date. At this point, the price will be same in the equity and futures markets. So when you sell the stock, a profit of Rs. 100 is earned. However, you also buy back the stock future thereby incurring a loss of Rs. 90. End result, a net profit of Rs. 10 is earned. The same thing happens even in Scenario II where the share price crashes to Rs. 500. Still you will end up with same profit.

Yes, it does sound like a very simple and effective way of making money in the market. After all, the problem that most investors have with entering into the equity market is the lack of assured risk free returns. And now here is a product that gives you exactly that. However, if only life were indeed that simple.

The first hurdle is the presence of arbitrage opportunities. In a given period of time, the market may or may not provide any meaningful arbitrage opportunities. And as explained above, it is these arbitrage opportunities that hold the key to the amount of money the fund will earn. No doubt, the fund management team will have to be extra vigilant in identifying such opportunities.

Of course, nowadays, they have sophisticated softwares that flag such mispricing the moment it occurs. However, investors do have to take into account the uncertainty of the supply of arbitrage as a hurdle in earning returns. For this very reason, such schemes cannot assure returns, the returns totally and completely depend upon available opportunity.

Secondly, there is the issue of costs. Each transaction in the stock market involves payment of brokerage and security transaction tax (STT). These costs directly dilute the earnings. Each leg of the entire transaction i.e. buying stock, selling future, selling stock and buying futures will entail the payment of these costs. Therefore, it again comes down to the presence of the arbitrage opportunity and it being meaningful enough i.e., after the payment of the expenses, the left over profit if any, should be material enough to make the transaction worth entering into.

To Conclude

Investors should note that by definition such schemes will always yield limited returns. However, the risk free nature of the returns is the USP of the product. Like mentioned earlier, if you want your funds to take a pit stop from the jet setting pace that the stock market has set, such a scheme will be an ideal shelter. Also, with the abolition of Sec. 80L, most fixed income earning avenues won't cover inflation post taxes.

However, in the case of non-equity MFs, dividends are subject to only a 14.025 per cent distribution tax, thereby again creating an arbitrage opportunity for taxpayers in the highest bracket. If one chooses the growth option and stays invested for over 1 year, capital gains tax @10 per cent or @20 per cent with indexation has to be paid.

This then becomes another alternative apart from Fixed Maturity Plans & Floating Rate schemes to beat the risks inherent in income schemes. Those wanting a breather from the equity market and those looking for safe fixed income should invest.

The author is the Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at [email][email protected][/email]

[VRG]

I have some questions regarding Exemption from taxes on long term capital gain for Real Estate. I know we have discussed this in few threads but need some answers for my situation.

I'm visiting India next month for few weeks and would like to do some ground work for my apt which will be sold in May (as it'll complete 3 yrs to qualify for long term) this year.

Following are the two ways to avoid taxes on capital gain:

1) Buy another residential property: Can I book an apt in March? Let's say pay 25% and later on use Capital Gain money to fund remaining 75%.
2) Invest in some Bonds (NHAI or Rural Electrification): Can I open an tax exempt a/c b4 selling my apt? And my folks deposit the gain later in my absence.

Please help.

Thanks.

[Felix8415]

VRG

In your case, you can buy the house in March and still avail the capital gain exemption.

You folks can also deposit the gain in a capital gain deposit account.

Rgds

Felix

[VRG]

thanks Felix8415.

[VLT]

Hi Rajesh,

I need some advise on buying an Apartment in India. :

I am an NRI residing in Singapore.

I am planning to buy an apartment in India , jointly with my aunt who has a small apartment & wishes to sell it off & use this money for buying this new apartment.


Now following is the situation :

Cost of the New Apartment = @ 90 L

Expected Sale proceeds of my aunt?s present apartment = @ 50L

Amount that I will be putting in from my income ( NRE account) = @ 40L.


Questions :

1) First of all is it permitted to have such a joint holding . ( I am an NRI & my aunt is a resident)
2) Will my aunt be needed to pay any capital gain tax ?
3) Are there any tax implications for me?

[RAJESH H DHRUVA]

Dear VLT,

1. Foreign Exchange Management (Acquisition And Transfer of Immovable Property in India ) Regulation,2000 does not have a specific qualification or disqualification for Joint Holding of Immovable property in India by non-resident Indian jointly with a resident Indian.
2. As such, you may purchase the said property jointly with your aunt who is an Indian resident.
3. If your aunt does not have any other house property and also presuming that her original apartment is held/owned by her for more than three years then as she is re-investing entire capital gains for purchase of new house property, said Capital Gains will be exempted from tax .
4. For purchase of property there are not tax implications for you.

Best Wishes,
RAJESH H DHRUVA

[VLT]

Thanks Rajesh,

Your advise is always very helpful.