Rishi was on cloud nine. After working in Chennai for over 10 years, he landed a ‘dream job’ in his hometown, Hyderabad. All set to move out of Chennai, Rishi had found a buyer for his house as well. During his routine Sunday morning stroll along the Marina, he met his one-time neighbour Suma.

Rishi : Hey Suma, where have you been all these years and what are you doing?

Suma : Hi Rishi, It’s so good to see you. I moved back to India from Dubai a couple of years ago. I was working for a firm of chartered accountants there and doing the same here.

Rishi : That’s great! In fact, I wanted to consult a CA regarding selling my house here. I am moving to Hyderabad for good. Do I have to pay any taxes on the money I get from the sale?

Suma : Of course, you will be taxed on the profits you make. But how your taxes will be calculated depends on when you bought your house.

Rishi : Oh it’s been a few years now. I think we picked it up in early 2006.

Suma : That’s good. Since more than three years have elapsed now, your gain is called a ‘long-term capital gain’ and will be taxed at 20 per cent plus cess/surcharge. Had this 36-month period not lapsed, you might have had to pay tax on the gains at whichever slab your other earnings such as salary is taxed - at 10/20/30 per cent.

Rishi : So the taxman is not going to leave me alone with my Rs 20 lakh….I bought the apartment for Rs 35 lakh then and was thrilled that I could sell it now for Rs 55 lakh.

Suma : Oh, don’t be so cynical. Sure, the taxman cannot leave you scot-free, but he is benevolent. He allows you to index the purchase cost to inflation. That way, your gain may be less than the exact difference between your buy and sell price.

Rishi : Then I could be taxed on an amount lower than Rs 20 lakh? I must say that is some relief. But tell me, is there no loophole in the law where I can circumvent paying these taxes altogether?

Suma : Rishi, you’re lucky here. The law itself grants exemptions from tax on long-term capital gains which arise from the sale of a residence. What are your plans for the money?

Rishi : I am not sure as of now. I may buy a house in Hyderabad later.

Suma : To avail the exemption, you have a few options. First, if you are not buying a house in Hyderabad in the next 3 years, you can invest the money in specified bonds. Tax laws allow you to invest in ‘capital gains bonds’ of REC (Rural Electrification Corporation) or NHAI (National Highways Authority of India). A maximum of Rs 50 lakh can be invested here. You will earn an interest on the investment during this period. These bonds have a lock-in of three years and can be redeemed later. So if you pull out your money in the interim, you will forego your exemption. Also, there cannot be more than a six-month gap between the time of sale of your house and the investment. There are a few other things you should be aware of. One, the interest rates on these bonds may not be as attractive as rates on bank fixed deposits. Two, these bonds may not be open for investment throughout the year. And three, the interest you earn on the investment is taxable.

Rishi : Hmmm…But what if I don’t want to lock in the money? I may want to explore good buys one year down the line.

Suma : Then, the best thing to do would be to park your money in the ‘Capital Gain Account Scheme’ in any bank. This is another route to get exemption from tax. Suppose you transfer the property this November, you can park your money in this scheme at any time before the due date for filing your return for the financial year 2012-13. That is, before July 31, 2013.

Rishi : This is again a deposit like the bonds you mentioned before?

Suma : Actually, there are two options here. You can either open a savings account or a fixed deposit account. But unlike the lock-in there, withdrawals are permitted. The withdrawals can be used towards investing in another house.

Rishi : So the idea is, instead of keeping the money in hand, paying tax and looking for a new house, I can keep the money here, be exempt from tax and still look for a new house.

Suma : Yes. But the exemption will be reversed if you do not purchase a house within two years after the date of transfer. If you are constructing one, then it has to be completed within three years of the transfer. In other words, if after two/three years, you still have not found a good house to invest in, you will pay the capital gains tax then for the sale now.

Rishi : Thanks Suma. I never knew there were so many intricacies involved. It’s a good thing that I met you. Take care.

Vardhini.c@thehindu.co.in

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