The Hindu Business Line : When your daughter lends money...

I RETIRED in 2002, and since then I do not have any income. However, I sold a land for Rs 12.50 lakh in 2003. I had bought it in 1989 for Rs 65,000. I thereafter purchased a flat for my residence for Rs.21 lakh. For this purpose I had borrowed Rs 13 lakh from my daughter who is a non-resident. My daughter now wants me to repay this loan. Can I reduce the loan repaid in computing my capital gains?

Reply

On the sale of the land, a capital gain would have arisen. The reader has not indicated whether the property was bought before April 01, 1989 or after it. The reply is, therefore, given on the premise that the property was bought on or after April 1, 1989. Similarly, the date of sale of the land is assumed to be on or after April 1, 2003. Based on this assumption the capital gains for the assessment year 2004-05 (previous year 2003-04) would be Rs 10,75,030 [Rs 12,50,000 - (Rs 65,000 x 463/172)]. This would qualify for an exemption under Section 54F provided the following conditions are fulfilled:

The assessee does not within a period of two years purchase or three years construct any residential house other than the new house.

The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

The quantum exempt under Section 54F will be computed on the following basis:

If the amount invested is more than or equal to the net consideration then the entire capital gain.

If the amount invested is less than the net consideration then the amount invested x capital gain/net consideration.

In the reader's case if the conditions are fulfilled, the entire capital gain would have been exempt as the amount invested in the new flat is more than the net consideration of Rs 12.50 lakh. This exemption would be available regardless of whether the money has been paid out of borrowed funds or otherwise. The repayment of the loan taken by the reader from his daughter will not make a difference in relation to the exemption. If the conditions stated above are not fulfilled the reader cannot claim the exemption under Section 54F. In this case he would be liable to pay tax on capital gains computed above. It would not be possible to claim any deduction in respect of repayment of the loan by the reader to his daughter. It may be noted that the cost inflation index for the financial year 1989-90 is 172 and that of the financial year 2003-04 is 463.

If the reader wishes to recalculate the capital gains since the assumptions as to the purchase and sale of the land are not correct the same may be done by applying the cost inflation indices of the financial years 1988-89 and 2002-03 which are 161 and 447 respectively. It may also be noted that if the land has been sold before 01.04.2003, the capital gains would arise in the assessment year 2003-04 (previous year 2002-03).

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When your daughter lends money...