13 June 2010
Hi, one of my client was having a share in a Plot (location-UP)acquired by his Family in 1971 and transfered to him by way of inheritance. In Jan.09 they were entered into a Development Agreement with Builder whereby the Builder is suppose to construct a New Building wherein out of 24 Flats 12 Flats will belong to my Client's Family Members. Out of this 12 Flats, 2 Flats will belong to my Client.Now out of these 2 Flats my client wants to sell One Flat.These 2 Flats are not yet registered with Stamp Authority. The Sale Proceeds of the Flat is around Rs.15 Lakhs. Now my query is whether there will be any Capital Gain on Transfer of Development Rights to Builder in Jan.09, how to compute Index Cost & Capital Gain, Whether its a Long Term or Short Term Capital Gain, Whether Section 54 provisions will attract.
18 July 2024
In the scenario described, there are multiple aspects related to capital gains tax that need to be addressed:
### 1. Capital Gains on Transfer of Development Rights:
When your client's family entered into a Development Agreement with the builder in January 2009, it typically involves transferring development rights in exchange for consideration, which is a taxable event under the Income Tax Act, 1961.
- **Date of Acquisition**: The plot was acquired by the family in 1971, and your client inherited his share later. The cost of acquisition for computing capital gains will be considered from the date of acquisition by the original owner, adjusted for inflation using Cost Inflation Index (CII).
- **Consideration Received**: The consideration received from the builder in the form of development rights needs to be determined. This would generally include the value of the flats allotted to the family members, including your client.
### 2. Calculation of Capital Gains:
To compute the capital gains on the transfer of development rights:
- **Indexed Cost of Acquisition**: Determine the indexed cost of acquisition of the plot by applying the Cost Inflation Index (CII) from the year of acquisition (1971) to the year of transfer (2009).
- **Indexed Cost of Improvement**: If any improvements were made to the property (though not directly mentioned in your scenario), their indexed cost would also need to be considered.
- **Capital Gains**: Capital gains will be computed as: ``` Capital Gains = Consideration Received - (Indexed Cost of Acquisition + Indexed Cost of Improvement) ```
### 3. Nature of Capital Gains:
- **Long-Term or Short-Term**: Since the development rights were transferred in January 2009, the capital gains will be classified as long-term capital gains (LTCG) because the holding period of the property exceeds 3 years.
### 4. Section 54 Provisions:
- **Applicability of Section 54**: If your client wishes to sell one of the flats received from the builder (part of the redevelopment), and if this transaction meets the conditions laid down under Section 54 of the Income Tax Act (relating to exemption on LTCG from sale of residential property), then your client may be eligible for exemption from capital gains tax by reinvesting the sale proceeds into another residential property within the specified timeframes.
### Steps to Proceed:
1. **Gather Documentation**: Obtain all relevant documents related to the acquisition of the plot, inheritance details, and the development agreement with the builder.
2. **Calculate Indexed Cost**: Compute the indexed cost of acquisition and improvement using the appropriate Cost Inflation Indexes.
3. **Compute Capital Gains**: Calculate the capital gains arising from the transfer of development rights.
4. **Exemption under Section 54**: Determine if your client intends to utilize the proceeds from the sale of the flat (once registered) to claim exemption under Section 54 for reinvestment into another residential property.
Given the complexity and specific details involved, it is recommended to consult with a qualified tax advisor or chartered accountant who can provide tailored advice based on all relevant documents and specifics of the transaction. They can ensure accurate computation of capital gains and provide guidance on claiming exemptions under Section 54.
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