Capital Gains to go under income head soon
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In the proposed income tax code the distinction between short term and long-term is removed , writes C.H.Gopinatha Rao
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Constructive: These proposals are expected to have a significant impact on property investment and planning.
The new Income Tax Code proposed by Government of India that aims to simplify the Income tax rules and norms would come into effect from April 1, 2011.
Of the many things suggested, proposals relating to capital gains would have significant impact on property investment and planning.
In the proposed code, the receipts relating to ordinary sources such as employment, house property, business, capital gains will be classified under income.
Compulsory acquisition
The gains arising from the transfer of assets will be treated as capital gains that is to be added to the total income of the financial year in which the investment asset is transferred irrespective of the year in which the consideration is received.
For example, if you sell a property in 2009 and register it in 2009 but the full and final payment happens in 2010, the year 2009 will be taken for tax purpose.
In case of compulsory acquisition, capital gains will be taxed in the year in which the compensation is actually received.
At present in case of immovable property, if the period of holding is less than three years capital gains will fall under short-term and the gain made by transfer of the property is added to income from other sources and Income Tax has to be paid for the total amount.
In case of the property held for more than three years, capital gains is taxed at 20 per cent of the gain made.
The tax will be exempted if the gain made is deposited in specified bonds (issued by National Highways Authority of India by the Rural Electrification Corporation Ltd) within six months from the date of transfer.
This is set to change.
In the proposed code the distinction between short term and long term is removed.
Gains made from the property, irrespective of the years of holding, will be added to the income received during the year.
The present distinction between short-term investment asset and long term on the basis of period of holding the asset will be deleted.
However, the gains arising from the transfer of personal effects and agricultural land beyond specified urban limits will be exempted.
Inflationary gains
In other cases it will be equal to the full consideration received minus cost of acquisition, improvement and transfer related expenses.
If an asset is sold after a period of one year after purchase, the cost of the acquisition and improvement will be adjusted on the basis of cost inflation index to reduce inflationary gains.
If a flat was purchased in April 1981 for Rs. 1 lakh sold in March 2008 for Rs. 25.51 lakh, the gain made is Rs. 25.51 lakh minus cost of the acquisition multiplied by the cost inflation index. (Rs 25.51 L – ( Rs 1 L x 5.51)) which is Rs. 20 lakhs. As per the proposed code, Rs 20 lakhs will be added with the net income and taxed.
However, the provision to get the tax exempted if the entire sum is deposited in the specified bonds will continue.
Benefits
The proposed code has drastically altered the tax rates and may bring benefits to the tax payers.
Another major change proposed in the code is relating to the base date for calculating the value of the asset.
The new code proposes to shift the base date from the current practice of adopting April 1, 1981 to April 1, 2000. In other words, if the date of acquisition is before April 2000, the value of the property as on as April 2000 alone will be taken for computing Capital gains tax.
A provision has also been made to render the cost of acquisition of investment or cost of improvement nil if they cannot be determined for any reason.
The author is former National President, Institution of Valuers.
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