A person who is 72 years old sells his only house in Chennai. His monthly pension is Rs.7,000/- and he has no other source of income. He is not an income tax assessee. He sells his house for a consideration of Rs.1.30 crores to a flat promoter and in addition to it receives a 2BHK flat in the same place. He has three sons and a daughter and all of them are married. What are all the best possible options available to him in order to reduce/avoid tax.
In case, if he divides the money equally and gives them to his children without paying capital gains tax, what will be the tax imapact in the hands of the receipients and in his hands.
11 October 2011
With this information, we cannot provide tax planning advise to you. Provide the following information to compute capital gains and exemptions: When was the sold property purchased? year of purchase? cost of acquisition? any improvement(construction)? whether purchased or inherited? year of sale? Cost of the new property?
A person who is 72 years old sells his only house in Chennai. His monthly pension is Rs. 7,000/- and he has no other source of income. He is not an income tax assessee. He sells his house for a consideration of Rs.1.30 crores to a flat promoter and in addition to it receives a 2BHK flat in the same place. He has three sons and a daughter and all of them are married. What are all the best possible options available to him in order to reduce/avoid tax.
In case, if he divides the money equally and gives them to his children without paying capital gains tax, what will be the tax imapact in the hands of the receipients and in his hands.
31 July 2024
In the scenario you described, the key issues are related to the capital gains tax on the sale of the house and the implications of distributing the sale proceeds among the children. Here’s a detailed explanation of the options and tax implications:
### 1. **Tax Implications of Selling the House**
#### **Capital Gains Calculation**
Since the person is selling his only house, he will need to calculate the capital gains on the sale:
- **Sale Consideration:** ₹1.30 crores - **Cost of Acquisition:** The cost of the house (which needs to be considered for computing capital gains) and any improvements made. For simplicity, let's assume the house was purchased long ago at a nominal cost.
**Capital Gain Calculation:** - **Capital Gain = Sale Consideration - (Cost of Acquisition + Indexed Cost of Improvement)**
**Note:** The Indexed Cost of Acquisition and Improvement are used to adjust for inflation and reduce the capital gains tax liability.
#### **Exemptions**
To reduce or avoid tax on capital gains, the following exemptions can be considered:
1. **Section 54:** - **Exemption for Purchase/Construction of Residential Property:** If the proceeds from the sale of the house are used to purchase or construct another residential property within the specified time frame (1 year before the sale or 2 years after the sale for purchase, or 3 years for construction), the capital gains can be exempted under Section 54. - **Replacement Property:** The new property must be a residential property, and the exemption is limited to the amount invested in the new property.
2. **Section 54EC:** - **Investment in Specified Bonds:** Investment in specified bonds (such as bonds issued by NHAI or REC) within 6 months of the sale of the property can also provide exemption from capital gains tax under Section 54EC. The maximum investment allowed is ₹50 lakhs.
3. **Section 54F:** - **Exemption for Purchase of New Residential Property:** If the person doesn’t have more than one residential house on the date of transfer and the proceeds are used to buy or construct a new residential property, they can claim exemption under Section 54F. The exemption is proportionate to the amount invested in the new property.
### 2. **Dividing the Money Among Children**
#### **Tax Implications for the Seller**
If the person distributes the money among his children:
- **Gift Tax Implications:** There is no gift tax on transfers to close relatives (including children) under the Income Tax Act. However, if the amount gifted exceeds ₹50,000, it is treated as income in the hands of the recipient, but there is no tax liability for gifts from parents to children.
#### **Tax Implications for the Recipients**
- **Capital Gains Tax:** The capital gains tax liability remains with the person who sells the house. The distribution of the sale proceeds among children does not affect the capital gains tax liability of the seller.
- **Recipient’s Taxability:** The amounts received by children are considered gifts and are not taxable in their hands. However, if the house or property were to be sold later by the children, they would inherit the property at its market value at the time of the gift, and any future sale would involve capital gains calculation based on this value.
### 3. **Recommendations**
1. **Invest in a New Residential Property:** To fully utilize the exemption under Section 54, invest the sale proceeds in purchasing or constructing a new residential property within the stipulated time frame.
2. **Invest in Specified Bonds:** If unable to reinvest in a residential property, consider investing up to ₹50 lakhs in specified bonds under Section 54EC to claim the exemption.
3. **Consult a Tax Professional:** Given the complexities involved, it is advisable to consult a tax professional for detailed calculations and tailored advice based on specific facts and figures.
### Conclusion
- To reduce or avoid capital gains tax, utilize the exemptions under Sections 54 or 54EC. - Dividing the money among children is a way to transfer wealth but does not affect the capital gains tax liability of the seller. - Future tax implications for the children would depend on what they do with the property or money received.
Feel free to reach out if you need further clarification or assistance!
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