Tax Obligations For Property Transactions

The Income Tax Act, 1961 specifies provisions on tax liabilities with regard to transactions on residential property. Read on to learn more.

Q) One of my friends recently sold a 12-year old residential house and bought another one in the same city. The transaction was arranged as mentioned below:

1. My friend's house and the house of the sister of the original prospective buyer of my friend's house was first exchanged and registered in the sub-registry office.
2. A month after the exchange, the house of the said sister, i.e. the house belonging to my friend post-exchange, was again sold to her by my friend.
3. Following this, my friend bought another house and a plot of land.

Will there be any tax implications to these transactions?

- S Matilal

Reply – 

1. Your friend’s house and the house of the sister of the original prospective buyer were exchanged. Section 2(47) of the Income Tax Act, 1961 includes transfer, and hence the above transaction will entail Capital Gains Tax liability on such exchange of properties. Your friend may get exemption u/s 54 of the said Act, as s/he has invested the sales proceeds in the purchase of the other house in the process of the exchange.
2. It is not clear what you mean when you say that the house belonging to your friend post exchange was sold to the sister of the original prospective buyer. However, if the house is sold after one month of the said exchange, it would amount to a fresh sale, and as such, the profit or loss on such a sale would be a short term capital gain/loss. Also, the exemption u/s 54 availed on the exchange would be withdrawn, as the new asset, which was purchased to claim exemption u/s 54 of the said Act, was sold within three years.
3. The investment in the purchase of a new house against the new sale would not be eligible for exemption. So also, the investment in the purchase of the plot of land would not be eligible for exemption.

The tax implication would be clear from this explanation.

Q) I have purchased a flat in the name of my wife, with myself as the joint owner. A loan was taken for the purchase of the said flat by mortgaging another residential house that I own. The repayment of the said loan is being done by my wife. Can she claim deduction of interest under the head ‘Income from House Property’? Further, can she also claim a deduction u/s 80C of the said Act in respect of the repayment of principal amount of the loan from her Gross Total Income? Please advise.

- D Joshi, Mumbai

Reply –

As your wife is the first holder of the flat, she would be entitled to claim the said property as her property (assuming that your name is inserted for the purpose of convenience as her husband). Since she owns the flat and the loan has been taken for acquisition of the said flat, she will be entitled to claim a deduction u/s 24(b) of the Income Tax Act, 1961 in respect of the interest on capital borrowed. The fact that the loan was taken against the mortgage of your flat is not relevant.

Further, as your wife is repaying the loan from out of her taxable income, she will be also entitled to claim deduction in respect thereof u/s 80C of the said Act.