(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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