Usha, aged 65 years, a resident of Gurgaon inherited 20% share in a palatial house in a posh locality of New Delhi after the demise of her father. With a simple calculation, the capital gain tax in her case worked out to INR 100.00 lacs. After fully availing the provisions of the income tax act legally available to her, the capital gain tax worked out to Rs. 40.00 lacs only. A perfect legalized savings of INR 60.00 lacs in this case. This is not uncommon - tax payers are generally not aware about advance tax planning measures or do not get desired guidance in time and are thus dispossessed of material savings on account of capital gain tax.

The profit or gain arising from transfer of a capital asset is charged to tax under the head ‘Capital Gains’. Capital asset is defined to comprise any type of property held by an assessee, whether or not related with trade or occupation of the assessee. Any stock-in-trade, fragile stores, or raw material held by a person for the purpose of his business or profession; e.g., motor car for a motor car dealer or gold for a jewellery merchant are their stock-in-trade and therefore, not capital assets for them. Gain arising on transfer of long-term capital asset is termed as long-term capital gain and gain arising on transfer of short-term capital asset is termed as short-term capital gain. However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as short-term capital gain.

Indexation plays a very important role in capital gain tax planning and must be used as a tool for legal tax planning which is a process by which the cost of acquisition/improvement of a capital asset is adjusted against inflationary rise in the value of asset. The advantage of indexation is accessible only in case of long-term capital assets and is not available in case of short-term capital assets. In general, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 1981, the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market value of the asset as on 1st April, 1981.

‘Capital gain’ arises only when a person ‘transfers’ a capital asset. Tax laws exclude various transactions from the definition of ‘transfer’. Transactions so covered are not deemed as 'transfer' and, hence, these transactions will not give rise to any capital gain. Transfers of capital asset by way of gift, or under will, etc. are few major transactions not covered for the purpose. Thus, if a person gifts his capital asset to other person, then no capital gain will arise in the hands of the person making the gift. If the person receiving the capital asset by way of gift, will, etc. subsequently transfers such asset, capital gain will arise in his hands. Special provisions are applicable to compute capital gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and the period of holding of the capital asset will be computed from the date of acquisition of the capital asset by the previous owner.

Tax laws provide a list of incomes which are exempt from tax. Amongst these, the major exemptions relating to capital gains are - Long-term or short-term capital gain arising on transfer of units of Unit Scheme, 1964, an individual or Hindu Undivided Family (HUF) can claim exemption in respect of capital gain arising on transfer of agricultural land situated even in an urban area by way of compulsory acquisition. This exemption is available if the land was used by the taxpayer (or by his parents, in the case of an individual) for agricultural purpose for a period of two years immediately preceding the date of its transfer.

The Act exempts the capital gains from the sale of a house only if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years from the date of sale. This means that one cannot invest in a commercial property or land; to save tax – one has to essentially buy a residential property only. If the property is under construction, the two-year period is further enhanced to three years. However, one should not own more than one house, besides the house he is investing in. Further, if a property has not been identified and purchased before the income tax return has been filed or before the due date for filing the tax return, whichever comes earlier, the money has to be deposited in a special account known as the Capital Gain Account Scheme (CGAS). This proves to the authorities that you would be going to acquire a house property to save the capital gains tax. Any withdrawal from CGAS should only be for payments to be made in relation to the purchase of the new property. In case the amount deposited is not used wholly or partly for the purchase or construction of a new house within the period specified, the idle sum will be charged as income of the financial year in which the period of three years from the date of the transfer of the original house expires. Such new property purchased has to be held for a minimum period of three years failing which the capital gains arising from the sale of the new property together with the amount of capital gains exempted earlier will be chargeable to tax in the year of sale of the new property.

One can claim tax relief by investing the long-term capital gains in the bonds issued by the National Highway Authority of India or by the Rural Electrification Corporation Limited. The investment should be made within a period of six months from the date of transfer of capital asset and such bonds should not be redeemed before three years. This benefit cannot be availed in respect of short-term capital gains. Maximum amount which qualifies for this investment will be INR 50, 00,000.

One has also to be very watchful while computing capital gain arising on transfer of land or building or both. If the real sale consideration of such land and/or building is less than the stamp duty value, then the stamp duty value will be taken as deemed selling price and capital gain will be computed accordingly. For example, Atul sold his bungalow in Civil Lines, New Delhi for Rs. 450.00 lacs. The value adopted by the Stamp Valuation Authority of the bungalow for the purpose of payment of stamp duty is Rs. 475.00 lacs. In this situation, while computing taxable capital gain arising on transfer of bungalow, Rs. 475.00 lacs will be taken as full value of consideration (i.e., sale value of the bungalow). Thus, actual selling price of Rs. 450.00 lacs (being less than stamp duty value) will not be taken into account while computing taxable capital gain.

Another example - Saurabh sold his land in Kolkata for Rs. 180.00 lacs. The value adopted by the Stamp Valuation Authority for the purpose of payment of stamp duty is Rs. 150.00 lacs. In this situation, while computing taxable capital gain arising on transfer of land, Rs. 180.00 lacs (being actual sale value) will be taken as full value of consideration and the stamp duty value (being less than actual selling price) will not be taken into account.

It is again very important to note that any advance received on transfer of capital asset, shall be chargeable to tax under the head 'Income from other sources', if such sum is forfeited and the negotiations do not result in transfer of capital Asset.

Certain losses from the sale of capital assets can be adjusted against gains from other assets. If the entire loss cannot be adjusted in one year, the taxpayer can carry forward the balance for up to eight financial years. The common taxpayer is supremely uninformed of the provisions relating to capital losses. They say later - if only it was known to them that the losses from stocks could be carried forward to subsequent years, it would have saved a lot of tax.

Latest changes as per Union Budget: To simplify the procedure and promote ease of doing business, capital gains tax will now be computed from the date of acquisition of financial instruments like bonds and debentures and not from the date of their conversion into shares. This would facilitate mergers and acquisitions, promote investments and put an end to litigation between tax authorities and companies as regard ‘the date of acquisition’ for the purpose of computation of capital gains tax.
Currently, most of the home buyers make payment to the builder but do not get possession within stipulated three years' period. Since the buyer does not get possession within three years, he is entitled to get only Rs 30000 p.a. tax deduction. Now this time limit rose to five years. Government has realised that a greater number of housing projects are delayed and most of the buyer has not been able to avail tax exemption on home loan interest. Earlier when a home buyer is borrowing money to buy home, he has been allowed tax deduction on interest portion of loan up to INR two lacs on possession within the stipulated three years period. Now buyer would avail tax exemption on interest portion for an extended time limit of five years.
It is also proposed that tax will be levied only on the property price on the agreement date not on the date of registry. Usually when you sell the house property the buyer gives some advance but not registered that property immediately. The buyer would also say that he will register later on so as to arrange money to pay for the property.
The Budget also indicated that government will open a new option for long term capital gain. If you sell a house after three years, it is considered as long term capital gain. This gain must be invested in either residential house or capital gain account. There is very limited option. Now, government will notify certain funds, where seller can invest long term capital gain in to these funds up to INR 50.00 lacs.