Long Term capital Gain tax

Madsud 1
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Our partnership firm was allotted an industrial shed in 1963 on hire purchase. In late 70s it was converted to a leasehold property worth about Rs. 90 thousand. The land was offered to be converted to Freehold in 2005. The conversion charges were about Rs.8,20,000.00. The father son partnership got dissolved due to father's death. Son and wife became partners immediately thereafter and continued with existing manufacturing business. Conversion Charges were paid in 2006.The Freehold process was completed by the government in 2010 with additional charges of Rs. 2 lakhs approx for taking on a family member(wife) as a partner. Mutation was done in the name of son and his wife. Registration of property as Freehold was completed in Sept 2010. Now we want to sell the property. the market price is between Rs 12- 15 Cr. What would the long term capital gain tax be. Would it not be beneficial to forego indexation and pay only 10% tax?

To save payment of tax would it make sense to buy a high value house(a floor in posh colony e.g vasant vihar,defence colony,new friends colony)Who would be the buyer of the residential property-the partnership firm or individual partners in the ratio the share in the firm?

What would the value of new purchase be if the selling price of the industrial shed is Rs.15 crores.The sale could be completed in the next 6 weeks.

For your information I have inherited 50% share in a residential house and also own in joint ownership with my wife(unequal share from a previous LTCG) a flat in a still under construction building in GREATER NOIDA. Does the ownership percentage in the partnership firm that owns the industrial shed and the ownership percentage in the flat in GNoida have any bearing on the capital gains tax amount and the amount that needs to be invested by us jointly or separately?

Thanks. P.S. Are you from IIT Delhi? I am from IIT D B.Tech1969 graduation.

partnership-firm section-54f commercial-property long-term-gains capital-gains
1 Answers

Capital gain has to be computed only with indexation. 10% without indexation computation is not available in this case.

You should compute indexed purchase cost with all cost incurred and years in which amount was spent.

Total indexed purchase cost will be sum of all such indexed costs. e.g. Lets say 8.20 lacs was spent in 2005 the indexed cost will be = 8.2 x (CII for 2011-12/CII for Cost year) = 8.2 x (785/497) = 12.952 lacs. (CII is cost inflation index here)

Say, total indexed purchase cost comes as P (sum of all such cost computed as shown above). Then long term capital gains will be Selling price - Total indexed purchase cost. 20% income tax will be payable on this difference amount.

Income tax can be saved u/s 54F by investing into a residential property in name of partnership firm only. To save tax fully, new property price should be equal or more than sale consideration amount (which is 15 crore here).

Section 54F has some condition for applicability. These should be followed:

  1. Possession of new property must be taken within two years from sale of old property.
  2. Partnership firm should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
  3. If total residential houses owned by partnership firm is two (including new property), it should not buy another one within next three years of purchase. Or in next three years, total owned residential houses should not be more than two.
  4. New property should not be sold before next three years.

Your ownership in existing residential properties should not impact income tax benefit for partnership firm. But I would still advise you to consult a property/tax expert or experienced CA in your case as it involves huge amount.

BTW I am not from IIT Delhi, But I am a B.Tech 2003 passout graduate.

Pankaj Batra5212
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