Tax planning : upgrade house

That is a good planning ability you have there.

1) Flat puchased on Dec 2011 can be sold not before Dec 2014 (36 months period for long term capital gain). 

2) Sale proceeds from sale of property used for repayment to bank will not avail exemption u/s 54. The condition is to purchase another property, either completed flat or underconstruction flat, within a period of 2 years after sale of property. But then again, it also depends on the price of the flat prevalent on Dec 2014 to compute long term capital gain of the first flat worth 25 lacs. However, you shall be allowed to purchase a flat with the sale proceeds as well as obtain a housing loan, for example a flat worth Rs. 50 lacs where you pay Rs. 30 lacs and you take a home loan for remaining 20 lacs; here you can claim exemption u/s 54 for upto 30 lacs. But if you have a home loan of 50 lacs, you cannot sell another flat and deposit 50 lacs to the bank and claim exemption. 

3) Since you have already availed interest deduction u/s 24(b), this amount shall not be part of cost of aquisition in computing capital gains.

4) If the house is self-occupied then interest deduction u/s 24(b) is upto 150,000/- and if it is let out then interest deduction shall be actual interest paid. 

5) To avail exemption u/s 54, one can invest in another flat within 2 years, or invest in bonds within 6 months, whichever is the case, the assessee isrequired to first deposit the money in capital gain account. There are cases where an assessee invested the money in buying a flat after 1 year without depositing in capital gain account, exemption u/s 54 was not allowed. Only after computing the ltcg after indexation, you can know how much is to be invested to save tax and how is your disposable money. 

6) I do not know about wealth tax.

7) We can only make limited assumptions relating taxation because our FM brings changes to IT act every year. We don't know what deductions/exemptions shall be available in the year 2015-16-17.

Wait for others to reply.

Originally posted by : Mihir
	That is a good planning ability you have there. 1) Flat puchased on Dec 2011 can be sold not before Dec 2014 (36 months period for long term capital gain).  2) Sale proceeds from sale of property used for repayment to bank will not avail exemption u/s 54. The condition is to purchase another property, either completed flat or underconstruction flat, within a period of 2 years after sale of property. But then again, it also depends on the price of the flat prevalent on Dec 2014 to compute long term capital gain of the first flat worth 25 lacs. However, you shall be allowed to purchase a flat with the sale proceeds as well as obtain a housing loan, for example a flat worth Rs. 50 lacs where you pay Rs. 30 lacs and you take a home loan for remaining 20 lacs; here you can claim exemption u/s 54 for upto 30 lacs. But if you have a home loan of 50 lacs, you cannot sell another flat and deposit 50 lacs to the bank and claim exemption.  3) Since you have already availed interest deduction u/s 24(b), this amount shall not be part of cost of aquisition in computing capital gains. 4) If the house is self-occupied then interest deduction u/s 24(b) is upto 150,000/- and if it is let out then interest deduction shall be actual interest paid.  5) To avail exemption u/s 54, one can invest in another flat within 2 years, or invest in bonds within 6 months, whichever is the case, the assessee isrequired to first deposit the money in capital gain account. There are cases where an assessee invested the money in buying a flat after 1 year without depositing in capital gain account, exemption u/s 54 was not allowed. Only after computing the ltcg after indexation, you can know how much is to be invested to save tax and how is your disposable money.  6) I do not know about wealth tax. 7) We can only make limited assumptions relating taxation because our FM brings changes to IT act every year. We don't know what deductions/exemptions shall be available in the year 2015-16-17.   Wait for others to reply.

Thanks a lot Mihir for your responsse. 

I do understand that law can change however i would like to do house purchase/tax planning considering current laws and may change my decesion if law gets change accordingly.

As I understand from point 2) of your response, I can not use sale proceeds of first house , to settle (part-payment) of second house loan.  But if i first sell my current house and deposit  sale proceeds in capital gain account and then buy new house with-in two years of sell of first house , i would be eligible for exemption of long term capital gain tax.

this means i don't have any other option but first to sell my current  house, move to some rented house and then purchase new bigger house by making down payment of proceeds of first house (which is lying in ltcg account) and take loan on remaining amount from bank.  However actually i was looking for some option with which i don't have to shift to rented house rather i can move directly to new house in 2015 and then sell my current account. however looks like it is not possible.

I am now clear with your reponse on point 4) above that interest on my second home loan would be exempted under section 24 (b) with limit of 1.5 lakhs because at that time, it would be my self occupied property . Since that is only house i would have at that time , so no question of let out and hence no question of unlimited exemption of interest paid under section 24 (b).

Thanks for your detailed answer.  If i still misunderstood your response , please correct me.

thanks

Nikhil

The problem is that IT dept looks at the purchase of a new capital asset from the sale proceeds. You are not technically purchasing a new asset when you are repaying a housing loan. In housing loan, you have already purchased the property in which bank has made the payment and you are now repaying the bank in installments for few years. 

It is a fact now that investment in real estate is a sound investment, provided the paper work is clean.

Thanks Mihir for clarification.

So assuming tax laws remain same till 2015, I would go with either of  following option.

Option A

1) Sell my current house in 2015.

2) Deposit Sale proceeds in ltcg account (if there is significant LTCG after considering indexation).

3) Move to rented house till i buy new property .

4) This new second house would be bought by paying down payment from LTCG account + my saving at that time and take loan on remaining amount.

5) For subsequent years  , till this new loan is over , take benefit of section 24 (b) with max cap of 1.5 lakhs.

However if in point 2) above , if there is not significant LTCG after considering indexation , i would go with below plan.

Option B

1)  Purchase my property in 2015 by taking huge loan and move in there.

2) Sell my first house and deposit proceeds in LTCG account . Do i need to deposit there or not ?

3) Pay LTCG to Government .

4) Use sale proceeds lying in LTCG account , to do part payment of loan of new property.

5) For remaining loan amount , take benefit of interest paid as per section 24 (b) with max cap of 1.5 lakhs.

Thank you Mihir.

Nikhil

@ Nikhil - Such type of planning keeps the IT dept at bay. Excellent. I hope you do know about TDS u/s 194-IA to be deducted on property sale over Rs. 50 lacs.

@ Terry - There have been cases where the IT has disallowed exemption u/s 54 for not deposited in capital gain account. You can read the section 54 word to word and see that they want the sale proceed to be deposited in capital gain account before you invest in a property or infra bonds. Yes, you are right, an assessee can purchase another property 1 year before transfer of existing property and exemption u/s 54 shalll be available.

Thanks Mihir . Good you reminded me of 1% TDS. I did some googling to understand and i think following gets applied in my scenario example. Please correct if i am wrong.

In option B, when i am selling first house in 2015, buyer would deposit this amount  of  1% of total sale proceeds to IT dept and it would get adjusted against whatever LTCG i would be paying  above. So i would be paying tax of (LTCG minus 1%TDS) . so if LTCG  is more than1%  TDS  then, i would need to deposit more tax to IT department  and if TDS is more than LTCG , i would get refund .

In option A though I would get entire 1% TDS refunded because LTCG is not applicable for me.

TDS u/s 194-IA is applicable w.e.f. June 2013. It is a new provision. We are not sure how the credit of TDS deduction will benefit the assessee in his IT returns. So, I cannot say it with certainty the effect of TDS on the IT returns vis-a-vis the tax liability from long term capital gains. We have to wait for some more clarifications.

1. From 2015 onwards, you may get deduction under 24b upto Rs 2,00,000 (From AY 15-16) for the home loan for2nd House.
2. Since both the house are self occupied the interest deduction shall be limited to Rs 2,00,000 only  There is no restrictions in no of house  while claiming interest deduction
3. You can purchase a flat atmost 1 year before the sale  of the property. In your case you can avail capital gain exemption  u/s 54 even if you purchase new flat and then sale your existing property. Only word of caution is that you can sell the old property only after December 2014. So you may purchase new house worth 1 crore, sale old house at estimated 60 lakhs. The LTCG on sale of old property shall be deemed to be utilized for purchase of new property as per section 54 and hence it will exempt.  The LTCG need to be utilized before due of Filing return. In your case you are first purchasing the new property and then you shall be selling your old property.  As said by you in your case, you will purchasing new property in February 2015, you need to sell old maximum by February 2016. Hence if you want to claim the benefit of capital gain exemption, you shall need to utilize the sale proceeds upto February 2016.
4. For Wealth Tax, one house is exempt from wealth tax. Since you shall be purchasing house in feb 2014 and then selling your  old house your net wealth will increase more than 30 lakhs , you will have to pay notional wealth tax @ 1% for the FY 14-15 as you shall be having 2 house as on 31-3-2015. For FY 2015-16, if you sell your old house before 31-3-2016, you shall not be liable for wealth tax subject to your other wealth.  There is no concept of refund in wealth tax. Wealth tax is paid value of the wealth on the 31st March of every year .  Hence your wealth tax laibility depends on no of property you held on 31st March of every year and not in between the year.
5. As said earlier, you will have to sale your house within 1 year from the date of purchase of new house.
6. If you purchase property under construction in feb 2015, you shall get time of 3 years for selling your old house instead of 1 year as per your plan. The LTCG of selling your current house can be used for property under construction payments to save capital gain tax.
7. From June 2013, 1% TDS is to be deducted by buyer of the property while making payment for purchasing the property.
8. For Tax Planning let us directly move to your option A and Option B. In option A, I would suggest you to stick to your original plan of purchasing new flat and then sell old property. Amount of LTCG does not matter. Whatever shall be the capital gain, it can be used for repayment of housing loan you took for new house. Only one thing is to be kept in mind that old house must be sold within  one year from the purchase of new house. If you are not sure that you may be able to sell your with one year, you may consider buying an under-construction  which may be get completed within 2-3 year which may provide additional time to sell your old property at desired price.