As per the Income Tax Act, 1961, taxability under the head ‘capital gains’ is attracted when a capital asset is transferred. As per Section 2(14) i.e. definition of Capital Asset, land is also a capital asset but capital asset does not include any stock in trade or agricultural land. The sale of your property for a profit of Rs. 5,00,000 will be considered as capital gain as given under Section 45 of the Income Tax Act, 1961. The only exception will be if this property is a part of your stock in trade then the sale of the property will be considered as part of your ‘profits and gains of business and profession’ for the relevant assessment year.
Section 48 of the Income tax Act provides the process for the computation of capital gain.
Capital Gain = Sale consideration - The cost of acquisition of the asset - The cost of any improvement to the asset - Expenditure incurred wholly and exclusively in connection with such transfer.
Depending upon the facts given by you, the capital gain seems to be Rs. 5,00,000 for the sale of the property. However it is requested that the different heads mentioned under Section 48 be examined before you conclude on what your capital gain is. In all probability once you take into consideration all the other elements mentioned above, your capital gains will reduce slightly.
Further, to determine the tax accrued on the capital gain it is important to determine whether the said property is a long term capital asset or short term capital asset. This classification is determined by the duration for which the property is held by you. A property which is held for a period less than 36 months is a short term capital asset and the capital gain on the sale of this property is called short term capital gain. If the property has been in your possession for more than 36 months then it’s a long term capital asset and the capital gain on its sale is long term capital gain. For short term capital gain the income tax slab rate for the relevant assessment year will be applicable on the capital gain while for long term capital gain, 20% tax will be charged on the long term capital gain.
Under Section 54 of the Income Tax you have the option to gain exemption from the tax on the long term capital gain. To get the exemption under Section 54 you will have to invest amount for the purchase of residential property or invest the same for the construction of a residential property. In this situation you must ensure that after the purchasing the new property you cannot sell it for minimum three years. If the purchase or construction of the residential property costs more than the capital gain (Rs.5,00,000) then the entire amount is exempted and if the cost is less than the capital gain then the difference between the cost price of the new property and the capital gain will be taxed. Therefore it is advised that if the capital gain is a long term capital gain then the same must be invested for the purchase of residential property to gain exemption on the capital gain of Rs. 5,00,000.
You do have a period of two years to purchase the property or a periodof three years if you want to construct the residential property. In the intervening period the capital gain will be taxed in the year which you sold the said property for Rs. 15,00,000. For long term capital gain you have the option of putting Rs.15,00,000 in the capital gains scheme of certain banks. The Capital Gain Scheme provides two options – Account A and Account B. Account A offers flexible withdrawals with the interest rate of the saving account of the concerned bank. Account B on the other hand gives a higher interest, similar to the interest rate of term deposits but the withdrawal is not flexible. In this scheme the amount deposited can be withdrawn only for the purpose of buying a new property or constructing a new property. Further to close this account an authority letter from an income tax officer is required. If you are unable to use the sum for the said purpose then the amount will be charged as capital gain after the expiry of three years and a tax of 20% will be charged on it.
You have the option of entering into a partnership with other individual/ firm to reinvest the sale amount of the flat. In such a situation it must be duly noted that the benefit of Section 54 is available only to an individual or a HUF. Therefore the above mentioned option of investing the capital gain for the purchase or construction of new residential property will be exempted only if you individually purchase a new property. The same money transferred to a firm will not be entitled to the exemption under Section 54 and will be considered as an income for the firm and will be charged at the rate of 30% with 10%surcharge and 3% Education Cess.
Therefore, it is advised that you must determine the duration for which the existing property was in you possession. If the property was in you possession for less than 36 months then Rs. 5,00,000 is a short term capital gain and will be charged as your income as per the income tax slab in the relevant assessment year. If the property was in your possession for more than 36 months then Rs. 5,00,000 is a long term capital gain which can be exempted under Section 54 if the amount is invested in the purchase or construction of a new residential property. In the intervening period of three years the amount can be deposited in the capital gain account scheme. If the amount is not invested in the residential property then the same will be taxed @ 20%. The said amount can be transferred to a firm but then the exemption available under Section 54 will not be available as it is available only for individuals and HUFs. The amount transferred to the firm will be treated as the income of the firm and will be taxed separately.