NRI's CORNER
F.E.M.A.
Exemption of Long Term Capital gains of other Assets upon investment in Residential Property

 NRIs CORNER - EXEMPTION OF LONG TERM CAPITAL GAINS OF OTHER ASSETS INVESTED  IN RESIDENTIAL PROPERTY

Long Term Capital Gains [ LTCG ] earned from sale of any movable or immovable property other than a residential house can be claimed as tax exempt if the sale proceeds are utilised  for purchase or construction of  a new  residential house under the Income Tax Act , 1961 [ I.T.Act ]. Salient features of this exemption are:
 
1.    Tax Exemption  :
.01  Entire LTCG will be exempt from tax if the sale proceeds are invested in a residential house in total.
.02  If part of sale proceeds are invested in house property, exemption will be granted on prorata basis. Say Rs. 5 mn are  invested out of sale proceeds of Rs. 10 mn for purchase of a new  house property and if the LTCG is Rs. 4 mn, then such investment will be eligible for 50% of tax exemption i.e. Rs. 2 mn of LTCG will be exempt from tax.
 
2.    Conditions :
.01  The seller should not own more than one residential house on the date of transfer of original asset.
.02  New house property is to be purchased within one year prior or two years after the sale of original asset.
.03  Alternatively New house property is to be constructed within three years after the sale of original asset.
.04  The assessed should not  purchase any other residential house within a period of two years* nor construct another residential house within a period of three years after the sale of original asset. [The Proviso  mentions One year but the Section amended since 1-4-1988 lays down a period of two years. It seems that said Proviso is not amended  erroneously ]
 
3. _ Unutilised Gains :
.01  Sale proceeds not utilised for purchase or construction of new house till the due date of filing of return of income should be deposited in a "Capital Gains Bank Account".
.02  Purchase or construction should be met out of balance held in such Capital Gains Account.
 
4.   _Tax Rates :
.01  LTCG of listed equity shares and equity schemes of mutual funds subject to security transaction tax (STT) are totally exempt from tax.
.02  LTCG from securities listed in India , Units of Indian Mutual Funds and Zero Coupon Bonds shall be taxed at 20% after indexation or tax at 10% without indexation.
.03  Other LTCG are taxed at 20% after indexation .
.04 STCG of equity shares and equity schemes of MFs subjected to STT are taxed at 15%.
.05  STCG of other assets are taxed at normal rates of applicable tax on total income.
 
5. _ Contravention :
.01  If an additional/other  residential house is purchased within a period of  two  years  or constructed within a period of three years after the sale of original asset the LTCG exempted earlier will be taxed in the year of such purchase / construction.
.02  If the new residential property so purchased is sold within the period of three years, then the LTCG exempted earlier will be taxed in the year of such sale.
.03  Balance of Capital Gains Bank Account not utilised for purchase or construction of new residential house within the stipulated time shall be charged to tax upon completion of three years from the date of sale of original asset .

6.__Capital Gains - Computation :
.01   While calculating the LTCG , indexed cost will replace the actual cost.
.02  Indexed cost is computed by adding to the purchase price the notified cost of living index for each year of holding.
.03  LTCG are arrived at by deducting such indexed cost from the sale price.
.04  In case of immovable properties,  sale price is to be replaced by the valuation of the property determined by the State Registrar for stamp duty payable by the buyer if the same is higher.
.05 In case of NRIs, Capital Gains of shares and debentures are calculated  converting purchase and sale prices into same foreign currency as was initially utilised for purchase or initial  credit in Non Resident bank account
 
7.  _Capital Gains - Meaning :
.01  Profits and gains earned upon sale of any immovable or movable  assets are taxed under the head of "Capital Gains" under the I.T.Act, 1961.
.02  Such gains are classified as "Long Term Capital Gains (LTCG)" if the assets are held for a period of more than 36 months and as "Short Term Capital Gains (STCG ) if held for lesser period. 
.03  Gains of Shares of a Company or equity , debt or balanced schemes of mutual funds are defined as LTCG if the same are held for more than 12 months.
 
8. _  Disadvantage NRIs :
.01 Non Resident  are  at a disadvantage as against  residents as re: LTCG of  all assets or STCG of listed   shares or Mutual Fund Units as the basic threshold exemption limit is not deductible in these gains  earned by non-residents.
.02  Thus a non-resident will lobe paying on gross amount of LTCG including the basic threshold exempt limit of INR 2,50,000.
.03  And as such entire LTCG will be taxed at 20% or 10% as the case may be and STCG of listed shares or Mutual Funds Units will be taxed at 15% from the first Rupee gain.
 
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