Help needed for tax calculations

This query is : Resolved

Sachin Gera (Querist)
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11 May 2017 I need some small help from you in calculating the tax part from the taxation angel please.

We are selling a property where we are residing jointly.There will be shares like this:
Share 1,2,3
Section 54 states that only Only ONE house property can be purchased or constructed. Now how other shares be taken in this scenario and tax computation will be done?

1. Should the other two shares be taken through WILL or through gift deed with consideration?
2. What would be the best way to save tax as we are going to buy two new house properties using the Share Amount.
3. Is it a pre-requisite that we have to buy a new property within 6 Months of the sale date and construct it within 3 Years?

Please guide.Many Thanks in advance.

@VaibhavJ

@VaibhavJ (Expert)
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12 May 2017 Property is owned jointly or you all are residing jointly??

Sachin Gera

Sachin Gera (Querist)
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12 May 2017 We are residing jointly. Property is owned by the parents.

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Sachin Gera

Sachin Gera (Querist)
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16 May 2017 @VaibhavJ : Can you please advise?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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27 July 2024 When dealing with the sale of a property and its associated tax implications under Section 54 of the Income Tax Act, there are specific considerations and strategies to keep in mind. Here’s a detailed guide to address your queries:

### **1. Understanding Section 54**

Section 54 of the Income Tax Act provides tax relief on long-term capital gains arising from the sale of a residential property. The key conditions are:
- The capital gains should be reinvested in the purchase or construction of a new residential property.
- The new property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years from the sale.

### **2. Handling Multiple Shares and Property Purchases**

#### **a. Distribution of Shares**

When a property is owned jointly, the sale proceeds are divided among the co-owners according to their share. Each co-owner is entitled to claim the exemption under Section 54 based on their respective share of the capital gains.

1. **Transferring Shares:**
- **Will vs. Gift Deed:**
- **Will:** A will is a testamentary document that comes into effect after death. If the property is transferred through a will, the capital gains tax implications will depend on the nature of the inheritance.
- **Gift Deed:** A gift deed is an instrument used to transfer property during the lifetime of the owner. A gift deed with consideration would involve a formal transfer and could have tax implications depending on whether it's considered a sale or gift.

The method of transfer (will or gift deed) will impact the taxation based on the timing and valuation of the transfer. Generally, a gift deed can be used to transfer property shares among family members and should be documented properly.

2. **Tax Computation for Multiple Shares:**
- **Claiming Exemption:** Each co-owner can claim tax exemption under Section 54 for their respective share of capital gains, subject to the condition that the gains are reinvested in one residential property.
- **Documentation:** Ensure proper documentation and valuation for the shares transferred and reinvestment of the sale proceeds.

#### **b. Best Way to Save Tax**

1. **Purchasing Two Properties:**
- **Section 54F:** If you want to invest in more than one property, you should consider Section 54F, which allows tax exemption on long-term capital gains if the entire sale proceeds are invested in the purchase of one residential property, but it’s applicable to individuals who do not own more than one residential property.

2. **Utilizing Exemption:**
- **Section 54:** The exemption under Section 54 can be claimed only for one property. Therefore, if you are purchasing two properties, you can claim the exemption for one property under Section 54 and use other tax-saving options for the second property.

### **3. Timing for Purchase and Construction**

1. **Purchase Within 1 Year or Construction Within 3 Years:**
- **Purchase:** The new residential property should be purchased within 1 year before or 2 years after the sale of the old property.
- **Construction:** If constructing a new property, it should be completed within 3 years from the sale of the old property.

2. **Joint Ownership and Investment:**
- **Joint Ownership:** If the new property is jointly owned, the capital gains exemption under Section 54 can be claimed proportionately based on the share of each co-owner.

### **4. Practical Example**

**Assume:**
- You sell the property for ₹1 crore.
- You have a long-term capital gain of ₹30 lakhs.
- The property is jointly owned by three individuals.

**Steps:**
1. **Calculate Capital Gains:**
- Long-term capital gain is ₹30 lakhs, divided among three co-owners.
- Each co-owner's share: ₹10 lakhs.

2. **Reinvestment:**
- Each co-owner should reinvest their share of ₹10 lakhs in the purchase of a new residential property to claim exemption under Section 54.

3. **Additional Investment:**
- For the second property, you may have to consider Section 54F or other options, as Section 54 allows exemption for only one property.

### **5. Summary**

1. **Transfer Shares:**
- Use a gift deed if transferring shares among family members, documenting all transactions properly.

2. **Reinvestment:**
- Reinvest each co-owner's share of capital gains in one residential property for exemption under Section 54.
- For additional properties, consider other tax-saving sections or methods.

3. **Timing:**
- Ensure to purchase a new property within the stipulated time frame or complete construction within 3 years.

### **Conclusion**

To navigate the complexities of capital gains and property transactions, it’s advisable to consult with a tax advisor or financial planner. They can provide tailored advice based on your specific situation, help with the correct documentation, and ensure compliance with tax laws.