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Capital Gains Tax

amulya_r8 (Business) (197 Points)

16 March 2010

Land has been purchased in Oct 2006 whose guideline value is 4lacs and actual purchase price is 30Lacs on which building has been constructed and completed in October 2009.what is the incidence of tax when the building is sold?How will the sale consideration be apportioned between Land and Building ?Will Profit from Sale of Land be taxable as LTCG and Building STCG?What are the exemptions available to avoid Capital Gains Tax?

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9 Replies

Amir (Learner) (4016 Points)
Replied 16 March 2010

Dear Amulya,

Choice is urs if Sale consideration is not apportioned between Land & Building then Entire Gain will be treated as "Short Term" & in this case Exemption u/s 54 &/or 54EC cannot be claimed.

So better is to go for apportionment of sale consideration for taxation purposes -

1) Gain arising on Transfer of Land will be treated as Long Term. So Lower Rate of Tax i:e 20%

2) Benefit of Indexation of Cost will be available

3) Gain on Land can be claimed exempt u/s 54EC &/or 54F

4) Whereas Gain on Sale of Building will be treated as "Short Tem" & no benefit is available unlike in case of Land.

While apportioning sales consideration, provision of Sec 50C should be kept in mind.

In composite sales, gains must be bifurcated into long-term and short-term - Where the land is a long-term capital asset and the building thereon is a short-term capital asset, and both are sold together for a consolidated consideration, the gains must be bifurcated into long-term (pertaining to land) and short-term (pertaining to building) and brought to tax, since the land is an independent and identifiable capital asset, and it continues to remain so even after the construction of building - CIT v. Dr. D.L. Ramachandra Rao [1999] 236 ITR 51 (Mad.).

Well regarding How to apportion Sale Price - I am not sure but think that Valuation done by registered valuers and all would do....

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Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 16 March 2010

The profit on sale of land would be taxable as LTCG and of building would be STCG.

The value of the total sale should be apportioned deciding the fair value of both of them and in the ratio of sale.

Also in your query it seems that only building has been sold not land. So if only building is sold and then entire sale proceeds will be towards building

amulya_r8 (Business) (197 Points)
Replied 16 March 2010

What I intended to say was Land is sold along with Building?

karthikeyan.v (Chartered Accountant) (523 Points)
Replied 16 March 2010

Dear Amulya

As far as the land is concerned it is long term asset and as far as the building is concerned it is short term asset, therefore capital gains as fas as tha land is concerned will be long term capital gains and for the building it is short term capital gains, you have to split the sale consideration between land and building, indexsation benifit will be available fr land.

as far as the exemptions my friend Amir has given it

regards

karthi

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C.Balaji (Learner) (1867 Points)
Replied 16 March 2010

Dear Amulya.........

Land - October 2006 - 30 lacs.....Building - October 2009.....

Land - LTCA and Building - STCA........

The sale proceeds which u get from the sale of L&B should be apportioned in some proportion.... i.e.65-35 / 70-30 (or any other proportion).........Indexation is available only for Land.....

Since Building - STCA - Gain is STCG - No exemptions......

Land - LTCA - Gain is LTCG - Sec 54F and 54EC is available.............

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Mayank Shyamsukha (CA FINAL) (119 Points)
Replied 16 March 2010

Dear Amir,

You have opined that "Gain on Land can be claimed exempt u/s 54EC &/or 54F".

I have query that when building is sold after holding more than 36 months then sec-50 will come into picture and but Sec-50 says that the gain arise on sale of Building shall be Short Term and not the Building would be short term capital assets and hence building's capital gain is eligible for exemption under section 54EC & 54F.

Please correct me if i had misinterpreted it.

Awaiting for your reply.

Amir (Learner) (4016 Points)
Replied 16 March 2010

Dear Mayank,

Ur understanding is absolutely rite....

The above reply was based on the facts mentioned in the question where Construction is completed in 2009 only. Therefore the period of holding is less then 36 months.