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How to avoid capital gains tax on sale of property

A senior citizen, aged 73, sold his only residential flat in a Mumbai suburb on March 14, 2006 for Rs. 10 lakh. It was bought in 1999 for Rs. 6 lakh out of the sale proceeds of his house in Tiruchi for Rs. 5 lakh and his savings.

So far he had only "one" residential house and presently "none". Some of his friends say that "he need not reinvest the sale proceeds in immovable properties and need not pay capital gains tax or Income tax" as a senior citizen and owner of "one house".

He wants to know whether the above advice is right and if wrong, he wants to know how to dispose of the sale proceeds to avoid capital gains tax / income tax. He had spent nearly Rs. 1.75 lakh after the sale towards his "by-pass surgery" on July 6, 2006.

There is liability to pay capital gains tax on the sale of a property at Rs. 10 lakh. After deducting indexed cost, including registration fee, there is still Rs. 2.50 lakh capital gain, subject to any part absorbed in the minimum exemption limit available for senior citizens at Rs. 1.85 lakh.

The taxable amount of capital gains is taxed at 20 per cent. There is no special exemption for senior citizens from capital gains tax. Merely because it was a sale of a single property, tax is not avoided.

There was a provision, which spared capital gains from sale of property where the sale value was less than Rs. 2 lakh with proportionate reduction, if the sale value exceeded the amount under Section 53, which has long since been omitted from assessment year (AY) 1993-94 substituting indexation of cost with effect from the same date.

The fact that Rs. 1.75 lakh out of the sale proceeds was spent on meeting medical expenses on by-pass surgery cannot go to reduce liability.

Reinvestment benefit in bonds under Sec. 54EC is available in theory, but unless fresh bonds are notified, the benefit is not actually available, since notified bonds are not at present available for subscription. The only other source of relief is reinvestment in another residential unit under Sec. 54, subject to conditions thereunder, but with time limit running out for investment in Capital Gains Account scheme. The reader's case is yet another instance, where tax liability is invited by not seeking timely professional advice.

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