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Budget clarifies capital gains exemption on house sales

August 12, 2014 14:36 IST

In the Indian Budget some changes were made to the inco­me tax rules applicable to mutual funds. I have substantial MF holdings and may invest further in them. What are these changes and how will they affect our investments, both current and in future?

Parmeet Kaul

There have been two changes announced so far as MF taxation is concerned. However, before proceeding to explain them, here is a brief summary of the existing provisions.

Currently, on income earned at redemption (sale) of non-equity based mutual funds, the investor has an option to pay tax at following rates, whichever is more beneficial:

1. On profits (sale value: cost of acquisition without indexation) at 10 percent or

2. On capital gains (sale value: indexed cost of acquisition) at 20 percent, whichever is beneficial to him provided the units have the color of being long-term in nature (holding period of over 12 months.

The amendment has deleted the first option of 10 percent; so the income will be charged to tax on long-term gains at 20 percent. In other words, the 10 percent rate will no longer be applicable.

The second amendment is to do with the holding period. As per existing provisions, any unit of any MF used to be termed as a long-term asset upon a holding period of 12 months or more. After the amendment, a unit of a non-equity based MF shall be a treated as a long-term asset only if it is held for 36 months or more.

Both amendments are applicable from April 1, 2014 (financial year 14-15). It should also be noted that both changes are in respect of non-equity MFs only. Equity-based MFs will continue to offer exemption from long-term capital gains and the holding period (for qualifying as long-term) would continue to be 12 months or more.

I am a United States citizen of Indian origin. I recently sold ancestral property in India and the proceeds are lying in my Nonresident Ordinary account. I am given to understand that I will have to pay 20.6 percent capital gains tax unless I buy another house in India within 12 months. Since it was an inherited ancestral house, the proceeds are quite large and I do not wish to reinvest the entire money in another large property.

Can I buy two or three smaller properties (such that in future my children can be independently bequeathed each) instead of leaving them a share in one single large property?

Prem Naresh

The timing of your question couldn’t have been better. For years, this issue was ambiguous since the law offered exemption from capital gains tax if the proceeds were invested in ‘a’ residential house. Now, it wasn’t clear whether the term ‘a’ residential house was used generally as a preposition in the English language or whether it was meant specifically to signify one residential property.

The recently announced India Budget 2014 has put this controversy to rest by specifying that tax exemption ‘a’ indeed was meant to be ‘one’ house — the benefit was always intended for investment in one residential house within India.

My deceased father was a US citizen. So am I. He had an NRO account in India where I was the second holder. His name has been deleted by the bank and the account is in my name. He had been an active investor in India and consequently the account has some money. I would like to get this money to the US.

Is there a way to do this without filling out complicated forms that you had mentioned in previous colum­ns? Will a simple net banking transaction not work without having to go through the tedious paperwork?

Sam Ajmera

Every banking transaction comes with its own paperwork and there is just no avoiding the same. For remittances from India to any other country including the US, Forms 15CA and CB have to be filled out and submitted. The procedure for the same has been discussed in several past columns.

The restrictions on repatriation on funds lying in NRO accounts have been largely relaxed. Yes, some forms are still required to be filed, but there is no complication involved.

You will do well by approaching the branch of the bank where you hold the NRO account for directions.

Last year I purchased two properties in India. So far, I haven’t rented out any. As per my accountant, even if the apartments are under lock and key, I will have to pay tax on one of them. I don’t understand how?

Manoj Vaishnav

The basis of calculating income from house property is the rental value. This is the inherent capacity of the property to earn income. Property income is perhaps the only income that is charged to tax on a notional basis. This charge is not because of the receipt of any income per se, but is on the inherent potential of the house property to generate income.

The first property one buys is exempt from income tax. The second property onwards, even if it’s kept under lock and key, a notional rent value, based on the market rental value, will be adopted as taxable income from the second property

To put it differently, even if a taxpayer earns no income from the second property, it will be taxable as if he has put it out on rent. It would be advisable to rent the second property since anyway the owner will have to pay tax on an assumed rental value.

Note that this above discussion applies only in respect of house property; it does not cover a plot of land.

Also, the first property is tax-free only if not let out. In other words, if you earn rent, whether from one property or more, all the rent is taxable. However, in cases where the property is not let out (or is self occupied) then one property is exempted from tax.

A N Shanbhag and Sandeep Shanbhag