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Senior citizen wanting to sell house/land in chennai

Muthu (Director) (25 Points)

12 October 2011

Hello all

My father is wanting to sell his house in Chennai and buy a smaller flat for him and my mother to live in. What is the tax implication if he sells his house to a developer and buys a flat from the same developer vs buying a separate flat in a different part of the city? He has had this house for nearly 40 years. We are very confused about the tax issues, so please help.

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4 Replies

Hari Wadhwa (CA in Practice) (485 Points)
Replied 12 October 2011

Dear Mr Muthu

You need not to worry about the tax implications that may arise on selling your house.

Proper advice can be given only if you share the facts & figures (expected figures may be shared to get a broad idea as you have still not sold your house) of the transaction like: -

- Cost of Purchase of property

- Cost on improvment or renovation incurred (after 1.4.1980 only), if any

- expected cost that is likely to be incurred on transfer of your house

- Circle rates of your local area where your property is situated, if circle applies (contact your local municipal corporation) (Pls note that a house cannot be sold below the rate specified by the local municipality as even if it is sold below that rate, selling price, for the purpose of income tax shall be taken that minimum rate as specified by your local municipality)

After having these figures, long term capital gain or loss can be computed (pls note that selling home to a developer & buying home from the same developer or buying home within the same city is irrelevent to your tax figures)

On the basis of your long term capital gain , if any arises, you can deceide how much to invest in your new smaller flat so as to claim exemption under section 54 & how much would be reuired to pay tax if some amount of capital gain is not invested in purchasing the new house.

Muthu (Director) (25 Points)
Replied 13 October 2011

Dear Mr. Hari The land was purchased in the late 1960s and the house was built in the early 1970s. The cost of land and house was less than 1 lakh. Since 1980 a total of ~5 lakhs has been put into renovation of the house (this is a rough guess). According to some developers, they are willing to pay up to 50 lakhs for the property. So, these are the numbers to be used in calculating the tax?

Can you explain what is section 54? and how does this apply to us?

Thank you very much.

Hari Wadhwa (CA in Practice) (485 Points)
Replied 14 October 2011

Dear Mr Muthu,

Long term Cap Gain/ Loss working as produced below: -

Selling Price 50,00,000

Less: Indexed* Cost of Acquisition 7,11,000

Rs 1 Lakh X 711 (i.e, cost Inflation index of yr 2010-11)

100 (i.e, cost inflation index for yr 1981-82)

Less: Indexed Cost of Improvment 35,50,000

5 Lakhs X 711 (i.e, cost Inflation index of yr 2010-11)**

100 (i.e, cost inflation index for yr 1981-82)

** it is assumed that entire cost on improvment was incurred in the yr

1981 (you should take cost inflation index of respective yrs if the yr of incurrance of

renovation expenses are preciously known)

Less: Transfer Expenses (Assumed Nil) . Nil .

Long term Cap Gain 7,39,000

** Government allows to index the "cost of purchase" of property as well as the "cost incurred on its improvment or renovation" to bring these costs at the current market price thereby making them compaarable with the selling price which is of the today's time. Had it been not allowed to the assessee, he would end up paying a big chunk of capital gain tax. Thus, it is a benefit to him.

What is Section 54 of Income Tax Act?

In simple words, it is another relief provided to the taxpayer if he purchases or constructs a new house on selling his old house. The amount of Capital Gain need to be invested in the new house to claim relief under this section otherwise, you would be required to pay taxes on the above Capital Gain @ 20%.

Note 1: - Section 54 need to be studied thoughrouly to understand the requirments of the provision to claim exemption

Note2: You need to ensure that you posses the bills or any proof through Bank statment to claim cost of improvment/ renovation incurred by you.