CAPITAL GAINS TAX I

Long Term Capital Gain(LTCG)
INDIAN INCOME TAX AND SAVING CAPITAL GAINS TAX (LTCG) WHEN SELLING LAND / PLOT

Sales and Purchases of Land, Plots, Flats, Independent Houses, Floors or any other form of residential property i.e. property in any form, is a frequent activity in present scenario. The real estate sector is becoming the center of attention offering good returns. The transactions are often subject to complex income tax structure.

When you are selling land for a profit, it attracts Capital Gains Tax in the form of Long Term Capital Gain (LTCG). How to avoid Capital Gains Tax arising out of the Long Term Capital Gain

 If an Assessee, an individual is in the process of transferring a long term capital asset not amounting to a residential house and the proceeds are to be utilized to buy a capital asset amounting to residential house. Section 54F of the Income tax Act 1961 deals with the current situation.

Where the assessee is an individual, and capital gain arises from the transfer of any long term capital asset (not being a residential house) which in the present case is land (not amounting to agricultural land) and the assessee has within a period of one year before or after the date on which the transfer of the original asset has taken place, has purchased a  residential house (new asset) or has constructed a residential house within three years; the capital gain shall be dealt as per the following conditions:

1.  If the cost of the new asset is more than the net consideration received in respect of the original asset, the whole of such capital gain shall not be charged to capital gain tax as per section 45 of the Income Tax Act.

2.  If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears the cost of the new capital asset shall not be charged to capital gain tax as per section 45 of the Income Tax Act.

However, the capital gains exemption enumerated in (1) & (2) above is subject to the some conditions. The benefits as discussed shall not be available if:

1.  If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.

2.  If the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset

3.  If the assessee constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.

Adjusting losses in Tax Return

Proper use of this facility can help you optimise your tax return and ensure minimum tax payment

On every important aspect of the return filing process is the adjustment of losses. The Income Tax Act allows taxpayer under certain conditions to set-off loss against income, thereby reducing the net tax liability. If such loss cannot be fully set off, the remaining balance can even be carried forward for set-off in future years. It is necessary to properly understand and take advantage of facilities in this regard, to optimise the tax return and ensure minimum tax payment.

Inter-source adjustment

There are five heads of income under which any taxpayer can earn income - salary, house property; income from business or profession, capital gains and the residuary income from other sources.

Now, by definition, there cannot be a loss from salary and income from other sources. However, a person could suffer losses from other heads of income. The first and foremost rule is that loss under one head of income has to be first adjusted against any income from the same head. This is known as inter- source adjustment. For example, say someone who has two different businesses - one that is loss-making and the other profit making - then the loss from the first one can be set-off against the profit from the second one. Or say if you have two properties, one for self-occupation and the other one given out on rent, then the loss from the first property (on account of the mortgage interest) can be set off against the rental income from the second property.

The only exception in this regard is to do with long-term capital gains, which we shall examine later on in the article.

Inter-head adjustment

Now say after setting off the loss as above, there still remains some balance. This balance loss can then be set-off against income from other heads. This is known as inter-head adjustment. For example, a taxpayer who has a single self-occupied house property bought on mortgage will necessarily show a loss. This is because the annual value of a single self occupied property is taken to be nil and the adjustment of any interest will result in a negative value.

Now, such a loss may be adjusted against salary income or say income from business, if any.

There are two exceptions to the rule of inter-head adjustment:

o Losses under capital gains cannot be set-off against income from any other head

o Loss from business or profession cannot be set-off against salary income

Carry forward of losses

And last but not the least, any loss that cannot be set-off either against the same head or under other heads because of inadequacy of income, may be carried forward to be set-off against income of the subsequent year.

Such a carry forward exercise may be done for 8 years. After 8 years, if the loss hasn't yet been fully set-off, it has to be written off and cannot be used for tax saving. The important point to note is that for carry-forward losses, only inter-source adjustment is available in the subsequent years and not the inter head one. Table 1 encapsulates the above discussion. Adjustment of loss under capital gains head

Table 1: Carry forward of capital gains

1. Loss from  Hose property	Income under head income from house property	8 years
2.Business Loss	Any business profit	8 years
3.Capital Loss:
A.      Short term	Any taxable income under the head “capital  Gains”	8 years
B.      Long term	Long term capital gains	8 years

The first and foremost point to note about losses under the head capital gains is that they have a boundary i.e. they have to be adjusted against other capital gain income only and other incomes are not available for the setting off. In other words, the inter head adjustment referred to earlier is not available in the case of capital losses.

The second condition in this regard is that long-term capital loss can only be adjusted against long-term capital gain. However, short-term capital loss can be set-off against any taxable long term capital gain or short-term capital gain.

Lastly; if the income from a particular source is exempted from tax, loss from such a source cannot be set-off. This means any long-term loss on sale of shares or equity oriented mutual funds cannot be set-off at all as long term gain from the sale of these instruments is exempted. In other words, loss of profits must be a loss of taxable profits.

Let's understand this with an example (See table 2).

LTCL from shares	20,000
LTCG from equity MFs	60,000
STCL from shares	40,000
LTCL from non equity MFs	25,000
STCG from sale of shares	50,000
LTCG from sale of gold	15,000

Now, LTCL from shares cannot be set-off since the LTCG from this source (in this case Rs 60,000) is exempted. The LTCL from non-equity MFs of Rs 25,000 can only be adjusted against the LTCG from sale of gold. Therefore, only Rs 15,000 can be adjusted and the balance Rs 10,000 will be non-adjustable.

Lastly; the Rs 40,000 STCL from sale of shares can be adjusted against the Rs 50,000 STCG and only the balance Rs 10,000 STCG would be taxable.

Lastly; note that for being eligible to carry forward and set-off any loss, it is important to file the tax return by the specified due date. If the loss return is submitted after the due date, the board may condone the delay only if it is satisfied that it was due to genuine hardship on the part of the taxpayer (Circular No 8/2001 dated May 16,2001).

Disclaimer

In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.