Tax on capital gains
11/21/2011 11:49 AM Monday
• For instances of conversion from stock to investments, there are no tax liability provisions on capital gains spelled out in the Income Tax Act, 1961.
• To be eligible for exemption, capital gains arising from the transfer of residential property must be invested in the purchase of a residential house within a period of one year before or two years after the date of transfer, or in the construction of a residential house within a period of three years after that.
Query 1 - I was involved in trading and investment in shares till the financial year ended March 31, 2011, and accordingly, I showed the profit on sale of investments as ‘Income from Business’ and the balance of the shares as stock in trade in the balance sheet. Hereafter, i.e. from the financial year commencing on April 1, 2011, I am desirous of showing the said shares as investments and not as stock in trade, and consequently, want to treat the profits on sale thereof as ‘Income from Capital Gains’. Can I do so?
- Manish Hingu
Reply - As per the definition of transfer u/s 2(47)(iv) of the Income Tax Act, 1961, where the asset is converted by the owner thereof into or is treated by him/her as stock-in-trade of a business carried on by him/her, such conversion or treatment is brought into the ambit of the definition of transfer. However, there is no such corresponding provision in the said Act where the conversion is from stock to investments. Hence, you may do so without any liability of tax on capital gains on the difference of cost and fair market value as on the date of such a conversion.
Query 2 - I am an NRI and have two flats in India. I would like to sell one of my properties in July 2012, when I would be coming to India on a vacation. I have already purchased another flat in January 2011, which is under construction. We have paid only the booking amount for this flat to the builder.
Kindly guide me whether the money received from the sale of one of my properties can be deposited in my NRO account, and whether the newly-purchased property would help me to save tax on long term capital gains. If not, what are the alternatives to save on my Income Tax (Long Term Capital Gains Tax) liability? Please advise.
- Roshan J. Bharadwaj
Reply - Section 54 of the Income Tax Act, 1961 states that long term capital gains arising from the transfer of a residential house, which is chargeable to tax under the head ‘Income from House Property’, shall be exempt if the assessee has, within a period of one year before or two years after the date of transfer, purchased a new house, or within a period of three years after that, constructed a residential house, to the extent that the said capital gains are invested for the purpose.
In your case, you have booked the flat for purchase in January 2011, but the schedule of payments and the date of purchase of the flat cannot be determined from your query. If the payments for the purchase are made during the period from July 2011 to July 2014 and the possession and registration of the purchase of the flat is received during the same period, you will be able to claim the exemption. However, if the majority of the payment has been made in January 2011 when the flat was booked, then you will not be entitled to any exemption, as the investment will be out of the period specified.
To avoid any controversies, the capital gains should be invested in the purchase of another residential property within two years after the date of transfer in July 2012, or in the construction of new residential property within three years of that date.
You may claim exemption under 54EC of the said Act, by investing the capital gains within six months from the date of transfer in the specified bonds issued by the National Highway Authority of India or the Rural Electric Corporation of India, subject to a maximum of Rs 50 lakh in a financial year. This exemption can be claimed in addition to that under Section 54 of the said Act, such that the aggregate of exemptions under both may not exceed the long term capital gains earned.
Find More Articles on: DSIJ Magazine, Tax Queries, Personal Finance, Tax