Before you sell your house,look at the taxation aspect

Here is how one can compute capital gains and other aspects involved during taxation on the sale of house

Any gain arising from the sale of a house is taxable under the provision of Income-tax Act,1961. However,the Act provides exemption in certain circumstances. Here is how one can compute capital gains and other aspects involved during taxation on the sale of house.

Nature of gain

When a house is being sold,the first step is to determine whether the same falls under the category of long-term capital asset LTCA or short-term capital asset STCA. If the house is held for up to 3 years from the date of acquisition,it is classified as STCA and,accordingly,any gain arising thereon is termed as short-term capital gain STCG. On the other hand,if the period exceeds 3 years,the house is termed as LTCA and any gain arising thereon is termed Long-Term Capital gain LTCG.

How to compute

In case the house is a STCA,cost of acquisition and improvement of the asset along with expenses incurred at the time of its sale are deducted from the sale consideration received to arrive at STCG. But in case the house is a LTCA,the Act provides relief to cover for the inflation by permitting to enhance the actual cost and/or cost of improvement with reference to cost inflation index notified by the central government. Accordingly,in such cases,the cost of acquisition and improvement of the asset are replaced by indexed cost of acquisition and indexed cost of improvement respectively. Further,the individual has an option to substitute the original cost of the property with the fair market value as on April 1,1981 where the individual acquired the house prior to such date. Where the house was inherited by the individual,the cost of acquisition of the previous owner is deemed to be the cost of acquisition and the holding period of previous owner is also considered to determine the indexed cost of acquisition. Where previous owner acquired the house prior to April 1,1981,the individual is allowed to substitute the market value as on April 1,1981 as cost to the individual.

Tax Rates

STCG is taxed at the normal slab rates applicable to the individual and the LTCG is taxed at a flat rate of 20 per cent plus education cess.

Tax Savings

In case the gain arising on sale of house is in the nature of LTCG,one can save tax by making following investments subject to fulfilling the specified conditions as contained in the respective sections of the Income Tax Act,1961Act:

LTCG arising on transfer of a residential house property is exempt if the same is reinvested in a new residential house Section 54.

The gain arising on transfer of any LTCA is exempt if the sale proceeds are invested in the notified bonds within a period of 6 months from the date of transfer. However,there is a cap of Rs. 50 lacs per fiscal year for making investment in such bonds. Section 54EC

DTC Impact

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Things may not remain the same for individuals having capital gains once the Direct Tax Code DTC comes into play from April 01,2012. Key proposals are:

Capital gain would be taxable as Income from Ordinary Sources at applicable slab rates. In other words,where an individual falling under 30 per cent tax bracket is having LTCG,he is currently taxed at 20 per cent. But such individual may end up paying tax at 30 per cent on LTCG under the DTC regime.

The benefit of indexation is proposed to be provided in respect of assets transferred after one year from the end of the fiscal year in which it is purchased.

The date of considering the fair market value as on April 1,1981 is proposed to be advanced to April 1,2000. Aforesaid provisions may merit to evaluate the timing for selling your house where you are about to sell your house. But one would really need to wait for the final print of DTC to analyze the actual provisions enacted in the DTC. l

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Author Kuldip Kumar is executive director and Chander Talreja is senior manager,PwC Indiaviews are personal