Tax Talk

SANJIV CHAUDHARY | Updated on August 31, 2013 Published on August 31, 2013

I own a residential flat and intend to sell it and utilise a portion (Rs 10 lakh) for my wife’s higher education in a foreign university. What are the tax implications for this transaction?

- Bhaskar Choudhury

According to the provisions of the Income Tax Act, 1961 (the Act), you would be liable to pay tax on capital gains, if any, arising from the sale of your residential flat. In case your flat qualifies as a long-term capital asset, you can avail an exemption from long term capital gain (LTCG) tax by reinvesting the LTCG in a new residential property or in specified bonds, subject to fulfilment of other conditions prescribed.

There is no specific provision under which you can claim deduction of expenditure on higher education of spouse in a foreign university. The interest on a loan taken for higher education is allowed as a deduction under section 80E of the Act, subject to fulfilment of other conditions prescribed there in.

I had purchased a residential property in August 2012 with the sale proceeds of my agricultural land. In February 2013, I sold a residential property in a district headquarters town. There is an element of capital gains arising out of the sale made in February 2013. Please advise whether I can purchase another residential property and claim exemption of tax on the capital gains arising out of the sale.

- Prabhakar Rao

In this case, it is assumed that you had two house properties in February 2013 i.e. the one purchased in August 2012 and another house property situated in district headquarters town.

On sale of the flat in the district headquarters town, depending on the period of ownership, any gains would be liable to capital gains tax as per the provisions of the Income Tax Act, 1961 (the Act). If the period of ownership exceeded 36 months, it would be long-term capital gains (LTCG). In case of LTCG, you may avail an exemption from LTCG tax, by reinvesting it in the purchase or the construction of a new residential property, within the timelines prescribed under the Act. These timelines are one year prior to the sale date or two years from the sale date in case of purchase of a new property and three years from the sale date in case of construction of a property. If the amount of LTCG cannot be fully utilised (in purchase or construction) within the due date of filing the tax returns (pertaining to the financial year in which original property was sold), then the unutilised amount is required to be deposited in a capital gains account scheme with a specified bank before the due date of filing the return, in order to be eligible to claim the exemption of LTCG tax. The said exemption would be governed by other conditions specified in the Act, namely the period of utilisation of funds and restriction on disposing off the new residential accommodation.

(The author is a practising chartered accountant)

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Published on August 31, 2013
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