I am a resident individual. I have a property which I bought in March 2010 in a Gurgaon housing complex. I am selling it to a party in May 2014, and fully using the sale proceeds to purchase another more costly flat in the same housing complex by July 2014, that is, within a period of three months from the sale of the first /original flat. My tax-related queries are: (1) Am I fully exempted from any Long-Term Capital Gains Tax, given the fact that the entire sale proceeds will be used up in acquiring another more costly flat in the same financial/assessment year? (2) Do I need to show both the above transactions in my Income Tax Return for AY2015-16 (corresponding to FY2014-15, when both the transactions will occur)?

-Rajesh Ray

As per the provisions of Indian income tax law, a residential house is considered a long-term capital asset (LTCA) if it is held for more than 36 months. The long-term capital gain (LTCG) arising from the transfer of a LTCA, being a residential house, shall not be chargeable to tax where the assessee has purchased a residential house within a period of 1 year before or 2 years after the date on which the transfer took place, or has within a period of 3 years after the transfer date, constructed a residential house. It is important to note that the amount of the LTCG should be equal to or less than the cost of the new house, or else the exemption shall be reduced proportionately.

In your case, since the original flat was sold after holding it for a period of more than 36 months from the date of purchase and the entire capital gain will be utilised toward the purchase of a new house within the time period mentioned above, the capital gain arising on sale of the original flat shall be exempt.

However, please note if the new house property is sold within a period of three years, its cost will be reduced by the capital gains so exempt for computing the capital gain at the time of sale of the new house property. The gain shall then be taxed accordingly in the year of sale of the new house property.

Further, capital gain transactions should be reported in your income tax return in the year in which the asset is transferred. Hence, the details of the residential house sold and the exemption claimed by reinvesting the capital gains in purchase of a new house would need to be reported in your income tax return for FY2014-15.

My only source of income is from short-term capital gains made from trading in equity shares on the BSE or the NSE. In FY2013-14, I made short-term gains of ₹1.9 lakh from trading. Do I need to pay tax on short-term capital gains, given that my overall income is lower than the ₹2 lakh threshold level for taxation?

- Mani

As per the provisions of Indian income tax laws, where the total income of an assessee includes any income chargeable to capital gains arising from the transfer of a short-term capital asset, being an equity share in a company or an equity-oriented fund where such transaction is chargeable to securities transaction tax (STT), then the tax payable by the assessee on such short-term capital gain would be at the rate of 15 per cent (excluding surcharge and education cess).

Further, in the case of a resident assessee, where the total income as reduced by such short-term capital gain is below the maximum amount which is not chargeable to tax (i.e. ₹2,00,000), then such short-term capital gain shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income tax. The tax on the balance capital gain shall be computed at the rate of 15 per cent (excluding surcharge and education cess).

Since your only source of income, i.e. short term capital gain from sale of equity shares on which STT is paid, is lower than the maximum amount not chargeable to tax, you are not required to pay tax on such short-term capital gain.

The writer is a practising chartered accountant. Send your queries to >taxtalk@thehindu.co.in

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