Saving LTCG Tax on Sale of Flat

Anil 1
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Hi: I bought a residential flat in 2000 for 16 Lakh in joint name with my wife but made 100% payment from my a/c or joint loan (for which all instalments were paid by me). About 10 Lakh was spent on alterations / furnishing in 2000 and then in 2005 (approx 5 lakh each time) from my a/c. Now I am selling it for Rs. 100 Lakh.I have booked a flat in June 2010 in my single name for about 85 lakh, the possession of which is due in September 2013. I have already made a payment of 30 Lakh for this new house (20Lakh loan and 10 lakh self funds). I have following questions.

  1. What will be the amount of LTCG on sale? Both me and my wife are in the highest tax bracket.
  2. Will the entire LTCG to my account or 50% will be share of wife in LTCG even though no amount is paid by her.
  3. Can I consider the money spent on alterations / furnishing etc in original cost for the purpose of calculating LTCG? What proofs will be required for this expenditure, as may not have bills / receipts for many of these payments.

In order to save LTCG, if I use the Capital gain amount against new house, I have following queries:

  1. The payments for new house are construction linked and will be made over next 24 months - can i use the funds in the interim as i like or are there any restrictions like keeping it in the special bank account etc?
  2. Is it necessary to have one-to-one linkage between the funds received from sale and payment for new house?

Thanks and Regards Anil

alteration-cost joint-owner long-term-gains section-54 capital-gains income-tax
1 Answers

Part 1:

  1. You can consider alterations/reconstruction cost in old flat cost. But there has to be structural changes like new floor construction, additional room construction etc. You should also have payment receipts for above costs like for material or payment to builder. Cost for furnishing like curtains, paint, furniture cannot be added to cost.

  2. Generally capital gains is divided in same ratio in which payment towards flat is done while purchase. So as you had paid whole amount in purchase, whole capital gain will be on your part only.

  3. Please see below computation for long term capital gains and income tax. It has been assumed that additional spent has been done on constructional changes (as mentioned in above point). If figures varies, you can recompute with formula shown below.

Purchase Year = 2000-01
Purchase Cost = 2600000
Cost Inflation Index (CII) for purchase year = 406

Alteration/Construction Year = 2005-06
Alteration/Construction Cost = 500000
Cost Inflation Index (CII) for Alteration/Construction year = 497

Sale Year = 2011-12
Selling price = 10000000
CII for sale year = 785

Indexed Purchase/Construction Cost = 2600000 x (785/406) + 500000 x (785/497) = 5816832
Long term capital gain = 10000000 - 5816832 = 4183168
Income tax on capital gain = 4183168 x 20% = 836633.6

Part 2:

If possession for new house is not taken before filing of return of year in which capital gains occurred, whole gain amount has to be deposited to capital gain scheme account. Amount from this account can only be withdrawn in form of payment towards new house or after three years by paying income tax on gains.

Pankaj Batra5212
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