Tax on capital gain amount not invested in property

Q. I had purchased a leasehold residential property in Chandigarh in December, 1995 for Rs 7.9 lakh. The same was sold for Rs 1.20 crore in April, 2016. My queries are:

What amount of long-term capital gain can be claimed by me?

Out of Rs 1.20 crore, I propose to invest only Rs 75 lakh in residential property and will pay tax on the balance amount. What will be my tax liability. Is there any way to minimise this liability?

Since this is a leasehold property, the conveyance deed will be available to the buyer only after the property is converted to freehold. Is it necessary to produce a copy of the conveyance deed to claim long-term capital gain? What are the options available to me in this scenario?

Considering my claim for capital gain is refuted on some grounds, then what options will be available to me to minimise the tax liability and how much tax will I have to pay ultimately?

— Kuldip Chand

A. Your queries are replied hereunder:

Normally a leasehold property can’t be transferred within a certain number of years and after the expiry of such a period, an amount of unearned increase is payable to the lessor before permission is granted for the transfer of such a property. In the alternative, if the lessor has permitted conversion of a leasehold property into a freehold property after payment of an amount, a conveyance deed is executed in favour of the lessee by the lessor. In the query it has been mentioned about the sale of leasehold property without the execution of a conveyance deed. It is, therefore, presumed that it is a case of the nature where lessor has permitted the conversion of leasehold property into freehold by execution of a conveyance deed. You have not indicated the amount payable for the execution of conveyance deed. Hence it is not possible to compute the amount of capital gain as the said amount will form part of improvement expenditure which expenditure is deductible for computing the amount of capital gain. 

It has been indicated above that in case any is sum required to be paid to the lessor towards unearned increase or for the execution of conveyance deed, then any transfer of leasehold property of the nature specified in the query would be illegal without the payment of unearned increase or execution of a conveyance deed and therefore would not be recognised by the law. You may not be able to execute a sale deed without the availability of a permission to transfer or a conveyance deed in your favour.

There is no reason as to why your claim for the computation of the amount of capital gain would not be accepted by the department. There can be a difference of opinion with regard to the computation of the amount of claim but the fact of capital gain having arisen on sale of a residential property can’t be denied. Therefore, the question raised in the second part of your query should not arise.

Should we pay nomination charges to the builder?

Q. A well known real estate company had launched a project in year 2010 but due to some environment permission or other reasons they had not started that project. But now the company has started with all clearance certificate and has also modified the construction plan. My uncle and aunt had also booked two flats in this project. They are around 60 years old and want to add the names of some relatives/friend as nominees for the flats. But the developer is demanding nomination charges @ Rs 200 per sq ft. The developer has issued only an allotment letter till now and there is no registered agreement . What should my uncle do in this case? Should he pay the nomination charges to the developer?

— Sachin Jain

A. Normally, there should not be any charge for the insertion of the name of the nominee in an agreement entered into with the builder. However, buyer’s agreement and/or allotment letter containing terms and conditions with regard to the booking of the flat may include a clause for payment of nomination fee. Therefore, please go through the documents signed by your uncle ad see whether there is any such clause due to which the builder can demand nomination fee. In case there is no such clause, the buyer has a right to approach the Court for directing the builder to allow the buyer to nominate a person in case of death of the buyer who has booked a flat.

Interest on capital gain bonds

Q. We had sold ancestral agricultural land which was within municipal limits in July, 2015. A sum of Rs 50 lakh was invested in capital gain tax bonds @ 6 per cent interest under Section 54 and rest of the amount of Rs 68,000 has been deposited in capital gain account in SBI. The money invested in capital gain tax bonds can be invested anywhere after three years. I want to know whether the money deposited in capital gain tax account be encashed anytime during the three-year period, or only after three years?

How can this be utilised and do we need to pay tax on the interest accrued after its maturity.

Kindly guide me about the best way to invest this money and how it would be mentioned in the ITR 2015-16.

Interest under both plans (bonds and bank capital gain account) is to be added to income or not? 

Are senior citizens entitled to any tax benefit?

— K. Saini

A.It is presumed that the amounts mentioned in the query represent the amount of net consideration arising on the sale of the agricultural land situated within the municipal limits. Further, the amount of Rs 68,000 represents part of the net consideration which has been deposited under capital gain scheme. The amount of Rs 50 lakh also represents part of the amount of net consideration for which tax-saving bonds have been purchased. Reply to your queries is based on the said presumption:

Section 54EC of the Income Tax Act 1961 (The Act) which deals with the utilisation of the amount of capital gain for purchase of tax-saving bonds, does not require that the amount of net consideration should be utilised for purchasing tax- saving bonds. The requirement is to invest in such bonds the amount of capital gain within six months of the sale of the capital asset (a residential house or any other capital asset). A lesser amount could have been utilised for purchase of tax -saving bonds so as to claim that no amount of tax is payable on the amount of capital gain so arising.

The amount of Rs 68,000 which has been deposited under the capital gain scheme account can be utilised for purchase of a residential house within two years of the date of sale of the agricultural land or for the construction of a residential house within three years after the sale of the agricultural land. It cannot be utilised for any other purpose. The Income tax return contains a column wherein the particulars regarding the deposit under capital gain scheme and buying of tax saving bonds is required to be reflected.

In case the amount is not so utilised within the period mentioned above, an assessee would be liable to pay the amount of tax on long-term capital gain so arising. The amount of tax would be payable for the year in which the period of three years expires. The amount deposited under capital gain scheme can be withdrawn only after the payment of tax as mentioned above.

Interest earned on the tax-saving bonds as well as on sum deposited under capital gain scheme is taxable and has to be added to the total income of an assessee.

There is no other benefit available to a senior citizen except those which are applicable with regard to the availability of higher limit on which tax is not payable by a senior citizen.

Only two options are available for saving tax on the amount of long-term capital gain in the case cited by you — purchase or construction of a residential house within the period specified hereinabove or utilisation for purchase of tax-saving bonds within six months of the date of sale of the capital asset.

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