I am about to undertake a property sale in India. We intend to pay the taxes due and bring the balance money here. From your past columns I am aware of the paperwork involved. What I am not aware of is the tax calculation. Our chartered accountant in India has sent us a calculation wherein we find repeated mention of the work indexation along with the relevant figures. Could you explain what this indexation means in terms of calculation of property taxes?
— V F Murthy
When you sell your property, you would be liable to pay capital gains tax. If you have purchased the property over three years ago, then you would earn long-term capital gains. Else your gains would be short-term in nature.
To compute LTCG, the law allows the facility of indexing your cost. Indexation is the mechanism by which the cost gets adjusted for inflation. The authorities specify the Cost Inflation Index applicable for each financial year. Indexation is carried out by multiplying the cost by the CII of the year of sale and dividing by the CII of the year of purchase. This basically increases the cost by the inflation factor and reduces the absolute amount of capital gain. The indexed cost has to be reduced from the sale price (net of commission/brokerage and other incidental cost) to arrive at the LTCG amount. The tax rate is 20.6 percent of the LTCG.
On staying longer than 60 days in India when on a visit, is a Non Resident Indian who is now a United States citizen required to file his tax returns in India? Or is this rule applicable only to an NRI who retains his Indian passport?
— Partho
First of all, the rules for NRIs (Indian citizens) and Persons of Indian Origin (foreign citizens) are identical, at least in this respect.
Secondly, the mention of 60 days in your query seems to have been due to a draft proposal contained in the proposed Direct Tax Code. That is only part of the law as highlighted in various sections of the media. It’s important that NRIs/PIOs understand the proposal in its entirety.
First and foremost, both laws (the current Income Tax Act and DTC) do not define the term NRI. Instead the term ‘resident’ is defined and a person who does not qualify to be a resident automatically gets classified as an NRI.
The DTC states: An individual shall be Resident in India in any financial year (April to March) if he is in India for at least a period or periods amounting in all to:
a. 182 days in the FY OR
b. 365 days out of the preceding 4 FYs AND 60 days in the FY.
The ITA contains an additional clause. It provides that a person, being a citizen of India, or a PIO, who, being outside India, comes on a visit to India in any FY, the period of 60 days in clause ‘b’ above is to be substituted by a period of 182 days.
Consequently, for all practical purposes, an NRI/PIO on a visit to India had to be in India for 182 days or more in any year to qualify as a resident. The period of 60 days is not relevant to such a person.
In other words, this aforementioned clause (of substitution of 60 days by 182 days) has been dropped under the DTC. This in turn has given rise to the fear that under DTC, one had to remain in India for only 60 days to lose their NRI status.
It must be noted that the period of 60 days doesn’t appear in isolation. It is combined with an additional condition that the person along with having been in India for 60 days in that year also has to have been in India for 365 days in the previous four years. If both these conditions (60 days and 365 days in 4 years) are being met, then yes, the NRI/PIO in question will lose his NRI status.
Lastly, the DTC isn’t the law yet and is not slated to be at least in the near future. As and when it does become the law by substituting the current ITA, a number of proposals may undergo modifications from their current form and substance.
I have made a capital gain of Rs 10 million ($160,000) on the sale of my apartment in Mumbai in January 2014.
Can I put Rs 5 million in Rural Electrification Corporation bonds for CG tax saving in FY 2013-14 and Rs 5 million in REC bonds (under section 54EC) next year, FY 2014-2015, to save capital gain tax on entire Rs 10 million?
Alternatively, can I put Rs 5 million in REC bonds in FY 2013-14 and buy a house at my native place in India for Rs 5 million ($80,000) next year, FY 2014-15, to save capital gain tax on the entire Rs 10 million?
— Bikram Roy
1. The background to this query (for the benefit of other readers) is that LTCG tax can be saved by investing in specific bonds within six months of the sale transaction. These bonds yield around 6 percent per annum and have a lock-in of three years. The maturity is tax-free. It’s a very good deal so far as the taxpayer is concerned. The only issue is that there is a cap of Rs 5 million per financial year on investment in these bonds
The answer to the first query is not free from doubt. As per the letter of the law per se, what you suggest can be done. This is because the law specifies that the investment in these bonds has to be done within six months of sale. It doesn’t specify that it has to be in the same financial year. Therefore, if the six month period overlaps two financial years, the full limit of Rs 5 million can be invested in respect of the same transaction for each financial year. Whether the tax officer will agree with this or not is another story altogether. There have been court judgments both for and against this strategy. So while it can be done, one should be prepared for litigation if the method is questioned by the authorities.
2. The answer to the second query is in the positive. One can invest Rs 5 million in the bonds and Rs 5 million (or more) in property — there is no problem with this. Note that the law imposes a condition that you should not own more than one house at the time of sale of the shares.
However, if the house is not purchased before filing the return for FY 13-14 you will have to deposit the balance amount in Capital Gains Account in a nationalized bank.
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