Tax Column

Under Section 54 of the Income Tax Act, any individual who sells residential house, which is a long term asset, can reinvest the entire capital gain in a new residential house. 

Jayesh Dadia
Chartered Accountant 

I am an individual. I am likely to earn dividend income of `20 lakh from domestic companies in FY18-19. I have two minor sons who will also earn dividend of `15 lakh each from domestic companies. I was told that dividend incomein excess of `10 lakh is now taxable. Kindly let me know whether me and my two minor sons would get Rs10 lakh exemption each or aggregate of `10 lakh in respect of one tax return as my minor sons’ incomesare going to be clubbed with my income? Kindly clarify. 

 Under section 115BBDA, every individual who receives dividend income from domestic companies is entitled to exemption of `10 lakh per financial year. Individuals include minors. Therefore, you as well as both your minor sons are entitled to separate deduction of `10 lakh each. Further, under section 64(1A) of the Income Tax Act, income which is taxable in the hands of the minor would be taxed in the hands of parents. Therefore, only taxable income of minor will be taxed in your hands, i.e. `5 lakh. 

Thus, when you file the return of income for the current financial year, you would get exemption of Rs30 lakh under section 10(34) of the Income Tax Act and the balance amount of Rs20 lakh would be subject to special rate of tax at 10%. I am an individual and have sold one residential property. I have reinvested the entire capital gain of `5 crore in another new residential house which was acquired in the financial year itself. I have given the new residential house on lease to a family for their residential purpose. Can you advise me whether I will lose any exemption under section 54 of the Income Tax Act if I give the new residential house on lease? 

Under Section 54 of the Income Tax Act, any individual who sells residential house, which is a long term asset, can reinvest the entire capital gain in a new residential house. Since you have invested the entire capital gain in new residential house, you will enjoy exemption under section 54 of the Income Tax and the entire capital gain would be exempt. The requirement of Section 54 is to invest in new residential house. Thus, the intention is very clear that the new house should be used for the purpose of residence and not for commercial purpose. Since your tenant is also occupying the house for residential purpose, you have satisfied the basic condition of Section 54 of the Income Tax Act. The provision nowhere says that individual has to stay in the new house. The only requirement is that the new house should for the purpose of residence. As such, you will not lose any exemption under section 54 of the Income Tax Act. 

I am a senior citizen. I own a piece of land. I have decided to dispose off this land and, accordingly, I have started negotiations for its sale. I have entered into an agreement for sale with one Mr. X for a total consideration of `5 crore. As per the agreement, I have received `50 lakh advance and the balance consideration was to be received within three months from the date of the agreement. The prospective buyer could not pay the balance amount within three months and, accordingly, I forfeited the advance payment of Rs50 lakh. On this Rs50 lakh, am I supposed to pay any tax or is it a capital receipt, not subject to tax? 

From the financial year 2014-15, a new section 56(2)(ix) was inserted. Under this section, any money received as an advance in the course of negotiations for transfer of a capital asset, and if such advance is forfeited, then such advance received would be subject to tax as ‘income from other sources’.The normal rate of tax is applicable. The normal rate of tax is maximum 30%. Since you have forfeited the advance amount of Rs50 lakh, then the entire `50 lakh is taxable under section 56(2)(ix) of the Income Tax Act.