(August 29, 2007)The tax rate
on long-term capital gains earned
on sale of property is 20%.
In case, the value goes over
Rs 10 lakh, the tax rate increases
to 22.66%. The rule remains
same for both Non Resident Indians
(NRIs) and India residents.
Serving as a savior, Section
54 of the Income Tax Act exempts
those capital gains which are
invested in a residential house
within a year before to two
years after the sale. In case,
an investor wants to build a
house, the time limit is increased
to within three years of the
date of sale.
The exemption would be proportional
if only a part of the capital
gain gets utilized and the excess
will be liable to tax. NRIs
can benefit from the rule as
it is not mentioned that the
new house purchased should be
located in India. This gives
NRIs the liberty to purchase
a house in their host country
abroad and yet save tax here.
However, this is simply a theoretical
possibility based on a plain
reading of the law. There are
possibilities of extending the
exemption offered by Sec 54
to a property bought abroad,
says Income Tax Tribunal.
The Mumbai Tribunal verdict
in case of Mrs. Prema P Shah
vs ITO 282ITR (AT) 211 [2006]
is critical to shed the light
on the law. Outlined below are
the facts of the case:
Mrs. Prema P Shah is a NRI,
who sold her house purchased
in 1983 for Rs 6 million in
1992. She bought another property
in London on 150 years lease,
and claimed exemption u/s 54
of the IT Act.
The A.O. did not permit the
claim because of following reasons:
The assessee had only bought
the tenancy right.
Only the individual investing
in India can claim the exemption.
The sale proceedings were not
used for buying the residential
property.
The argument was rejected by
the Tribunal based on the facts
of the case.
In the UK, property is granted
long term leases rather than
being allowed to buy. In the
given case, the residential
property was taken on a lease
of 150 years, which clearly
is in perpetuity and the assessee
was the property owner.
The same amount of capital
gains may or may not be used
to purchase the property. Indeed,
the assessee is allowed to buy
it even on mortgage and is liable
to exemption if it complies
with the conditions mentioned
in Sec. 54. For that reason,
the borrower instantly becomes
the property owner of properties
purchased through mortgage.
Now, NRIs can think about buying
property abroad and claiming
tax benefits in India.
Source: Real
Estate Trends
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