CAPITAL GAIN TAX ON TRANSFER OF LEASEHOLD LAND

Dear Sir/Madam,

My uncle , like others , was allotted a plot of land at Salt Lake near Kolkata on long term lease basis. Lease deed was executed by the State Govt. upon payment of Rs. 50,000/- only. He constructed a single storied house property and then gave long term tenancy right to a gentleman at Rs.5.00 lakh ( one time payment ) in the year 1978. This practice was in vogue in Salt Lake. Govt. was also aware of this fact. Meanwhile , the said tenant constructed three storied building on the same structure.

Now, the State Govt. proposes to give ownership right to every lease-holder upon payment of certain money as transfer charges . Registration charges to be borne by my uncle . Present valuation of the property is around Rs. 2.5 Crore.

Now, the points are:

1) Stamp duty / Registration charges to be calculated on Market Value of Rs. 2.50 crore. Can this liability be shifted to the Tenant ?

2) Is there any liability on account of Income Tax- Capital Gain Tax? I understand this liability is primarily lies on my Uncle. How can he escapes from this Liability?

3) What will be the mode of calculation of Capital Gains?

Your valued opinion is sought.

Let's carefully analyze your uncle's situation about capital gains tax on transfer of leasehold land and related queries:

Scenario Summary:

Your uncle got a long-term leasehold land in Salt Lake, Kolkata, with lease deed executed by State Govt on payment of Rs. 50,000 (many years ago).
Constructed a single storied house; tenant acquired long-term tenancy rights in 1978 by paying Rs. 5 lakhs once.
Tenant constructed a 3-storied building.
Now State Govt plans to convert leasehold right into ownership right upon payment of some transfer charges.
Market value of property now ~Rs. 2.5 crores.
Questions on stamp duty, income tax capital gains, and calculations.

1. Stamp Duty / Registration Charges and Transfer to Tenant

Stamp duty and registration charges are generally payable by the party registering the document—here, your uncle who is converting leasehold to ownership.
If the property is being transferred/registered in your uncle's name as owner, the liability lies with him.
Shifting this liability to tenant depends on the agreement between uncle and tenant; unless the tenant agrees to bear these charges, uncle must pay.
If tenancy rights are transferred/sold separately to tenant, tenant may bear stamp duty for that transaction.

2. Income Tax - Capital Gains Liability

The conversion of leasehold right to ownership right by payment of transfer charges may be treated as a transfer under Income Tax Act.
The crucial question is: Is conversion a 'transfer' triggering capital gains?
The Supreme Court and CBDT have held that conversion of leasehold rights into ownership rights involving payment of transfer charges is a transfer.
So, your uncle is liable to pay capital gains tax on transfer.
Capital gains = difference between Sale consideration (value of ownership rights received) and cost of acquisition (leasehold right cost).
However, this is a complex area—sometimes government grants ownership rights without full market consideration; in such cases, fair market value may be considered.

3. Capital Gains Calculation

Full Value of Consideration: Usually the stamp duty value or market value of ownership rights received(here Rs. 2.5 crore).
Cost of Acquisition: Cost of leasehold right initially paid (Rs. 50,000) + any improvement cost.
Holding Period: Since lease was acquired long ago, gain is long-term capital gain.
Apply indexation on cost of acquisition using Cost Inflation Index (CII) from acquisition year to transfer year.
Capital Gains = Indexed Sale Value - Indexed Cost of Acquisition
Tax on LTCG at 20% with indexation.

Summary Table

Query	Answer
Stamp Duty/Registration charges liability	Paid by your uncle (unless tenant agrees otherwise)
Capital Gains Tax liability	Yes, your uncle liable; conversion treated as transfer
Capital Gains Calculation	Capital gain = Market value (ownership) - Indexed cost of leasehold rights

Can your uncle avoid capital gains tax?

No direct exemption on conversion of leasehold to ownership.
Possible reliefs:
- If transfer is made under a government scheme that provides exemption.
- Invest capital gains under Section 54 or 54F in residential property within prescribed time (if applicable).
Otherwise, capital gains tax is payable.