Capital Gain Tax on Sale of Property/Land

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on the sale of property or land is determined on the basis of the nature of the long term or short term.

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Capital Gain on Sale of Property / Land

The Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
Tip
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

The income tax rate for LTCG on sale of property in India is 20% with Indexation benefit. Using the indexation benefit, the taxpayer can adjust the cost of the asset with the CII (Cost Inflation Index) List issued by the Income Tax Department. The Indexed Cost of Acquisition is used to calculate the Capital Gains. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54, 54EC, 54F (XXXX)
  Long Term Capital Gain XXXX
  • Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
  • Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
  • Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
  • Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain is taxed as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the exemption under Section 54 to 54F is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Carry Forward Loss on Sale of Immovable Property

  • The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

Capital Gains on Sale of Property before Possession

Let’s understand the situation first: You have booked a property which is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

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Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under section 54F and Section 54EC will be available.
    • You can not claim the exemption under section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and may result in scrutiny.
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ITR Form & Due Date for Income from Sale of Immovable Property

  • ITR Form: Taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
  • Due Date – 31st July of the Assessment Year
    • Up to FY 2019-20 – 31st July
      31st July – for taxpayers to whom Tax Audit is not applicable
      30th September – for taxpayers to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for taxpayers to whom Tax Audit is not applicable
      31st October – for taxpayers to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

FAQs

What is section 54F under capital gains?

Section 54F, exemption of capital gain is made available in the situation of long term capital assets transfer against the investment one makes in a residential house. he capital gain that arises for transferring any long term capital assets that is other than the residential house.

How can I save capital gains tax on the sale of my property?

By Investing in Capital Gains Account Scheme and while filing your return on Income Tax Portal you can claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.

How do you calculate long term capital gains on sale of property?

Long term capital gain is calculated as the difference between net sales consideration and indexed cost of the property. The benefit of indexation is allowed to set off the impact of inflation from gains made on the sale of the property so that the actual gains on the property will be taxed.

Capital Gain Exemption

Capital Gain Tax arises on the sale of Capital Asset by a taxpayer. The Income Tax Act allows a total / partial exemption from Capital Gain under different sections. However, the capital gain exemption amount can not exceed the total amount of capital gain. Following are the most common capital gains exemptions:

A taxpayer can claim the exemption while filing ITR for that particular financial year. An individual taxpayer needs to file ITR 2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

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List of Capital Gain Exemption

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden.

Section Description Applicability Deduction Amount
54 Sale of House Property (LTCA) by Individual/HUF Purchase/Construction of New House Property. Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54F Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF Purchase/Construction of New House Property. Cost of new asset * Capital Gains / Net Consideration
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds.  Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset. 
The investment amount can not be more than Rs. 50 lakhs. 
54B Sale of Agricultural Land (LTCA/STCA) by Individual/HUF Purchase of new Agricultural Land.  Lower of
Cost of New Agricultural Land 
OR
Capital Gains
Purchased within 2 years from the sale of land. 
Land sold must be used for agriculture purposes for 2 years prior to sale. 
54D Compulsory acquisition of land and building (LTCA) used in an industrial undertaking Purchase of land or building for shifting or re-establishing the industrial undertaking.  Lower of
Cost of New Asset
OR
Capital Gains
Purchase within 3 years from the date of compulsory acquisition. 
Land/Building acquired must be used for industrial undertaking purposes for 2 years prior to transfer. 
54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities.  Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc. 
An investment made within 6 months from the sale of an asset. 
54EE Sale of any LTCA by any taxpayer Investment in units of a specified fund. The investment amount can not be more than Rs. 50 lakhs.  Cost of new asset * Capital Gains / Net Consideration
Specified fund include units notified by the central government 
An investment made within 6 months from the sale of an asset.
54G Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in Rural Area.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 
54GA Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in SEZ.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 

 

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FAQs

How to claim exemption if we wish to buy the house property next year?

Taxpayer can claim exemption u/s 54, 54F depending on asset sold. An exemption can be claimed by putting the amount in Capital Gains Account Scheme (CGAS) before the due date of filing of ITR in the year of sale. And claim the same as exemption while filing ITR.

Can we claim exemptions on sale of Short Term Capital Asset(STCA)?

The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

Section 54B : Exemption on Sale of Agricultural Land

Exemption under section 54B of the Income Tax Act is available on Capital Gains on sale of agricultural land and purchase of new agricultural land. The amount of Exemption under Section 54B will be lower of:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

A taxpayer can claim the Capital Gains Exemption under Section 54B exemption while filing ITR for that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Who can Claim an Exemption Under Section 54B of the Income Tax Act?

A taxpayer can claim exemption u/s 54B if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The agricultural land sold is a Long Term Capital Asset (Sold after 24 months) or Short Term Capital Asset.
  3. The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer.
  4. New Agricultural land is purchased within 2 years from the sale of the agricultural land.
  5. A new Agricultural land should be in India.
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
Tip
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.

What is the Amount of Exemption available Under Section 54B of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54B will be least of the following:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

Example: Palak sold agricultural land in FY 2019-20 for Rs. 60,00,000. The same was purchased in FY 2013-14 for Rs. 30,00,000. And she purchased a new agricultural land worth Rs. 45,00,000. Palak will be able to claim deduction under section 54B as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 20,59,091
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
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What Happens to Exemption in the case of sale of Agricultural Land?

The lock-in period of 3 years is applicable when exemption u/s 54B of the income tax act is claimed. And the following situations can arise:

Situation 1

When new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 54B is withdrawn. And the total sales value of agricultural land will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2

When new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54B is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54B) while calculating capital gains.

Situation 3

When new agricultural land is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54B is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Long Term Capital Gains on agricultural land sold.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

Can I claim an exemption if I buy new agricultural land in the name of my spouse?

No. In order to claim exemption u/s 54B, the land purchased has to be in the name of the seller. The exemption is not available if new land is purchased in the name of the spouse.

Can NRI claim exemption u/s 54B on land purchased?

Yes, NRI can claim exemption u/s 54B of the Income Tax Act. Provided the agricultural land sold and purchased is situated in India.

Is capital gain exempt in the case of compulsory acquisition of agricultural land by the government?

Yes. Capital gain arising from compulsory acquisition of agricultural land under any law and the consideration of which is approved by the central government or RBI received on or after 01/04/2004 is fully exempt from tax. It is exempt u/s 10(37) of the income tax act.

Section 54EC of the Income Tax Act

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long term capital asset being land or building or both and invested in NHAI or REC Bonds. The amount of Exemption under Section 54EC will be lower of:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Budget 2018 Update

The proposed amendment u/s 54EC in the budget 2018 has inter alia proposed an amendment to Section 54EC. The government has proposed to amend the section by restricting its scope only to capital gains arising from long term capital assets, being land or building, or both. Furthermore, it is also proposed to provide the long term specified asset, for making any investment under the section on or after the 1st day of April 2018 shall mean any bond, redeemable after five years against the earlier three years and issued on or after 1st day of April 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment is to take effect from the 1st of April 2019. It will apply in relation to the AY 2019-20 and subsequent assessment years.

Who can Claim an Exemption Under Section 54EC of the Income Tax Act?

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

  1. Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
  2. The asset sold is a Long Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
  3. Capital Gains are invested within 6 months from the date of transfer.
  4. Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
  5. The investment amount can not be more than Rs. 50 lakhs during the current and succeeding financial year.
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.
Tip
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.

What is the Amount of Exemption Available Under Section 54EC of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54EC will be least of the following:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.
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Example: Jay sold land in FY 2019-20 for Rs. 60,00,000. It was purchased in FY 2013-14 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2019-20. Jay will be able to claim deduction under section 54EC as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 20,59,091
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
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What happens to exemption if bonds are sold?

The lock-in period of 5 years is applicable when exemption u/s 54EC of the income tax act is claimed. And the following situations can arise:

Situation 1:

When bonds are sold within 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2:

When bonds are sold after 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on bonds sold.

FAQs

Can I invest in Capital Gains Account Scheme (CGAS) and claim exemption u/s 54EC?

No. The Benefit of investing in CGAS is not available under section 54EC. The taxpayer needs to invest in bonds within 6 months of the date of transfer of asset.

Can NRI Claim exemption u/s 54EC?

Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54EC is not claimed?

LTCA are taxed at special rates. Land and Building are considered as movable assets and taxed at 20% with Indexation.

Section 54F of the Income Tax Act

Exemption under section 54F of the Income Tax Act is available on Capital Gains on sale of any long term capital asset other than house property and invested in purchase/construction of house property. The amount of Exemption under Section 54F will be lower of:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is extended to 10th January 2021 (in case tax audit is not applicable).

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Who can Claim an Exemption Under Section 54F of the Income Tax Act?

A taxpayer can claim exemption u/s 54F if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA) other than House Property.
  3. On the date of sales, the taxpayer does not own more than one house property.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the long term capital asset, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.

What is the Amount of Exemption Available Under Section 54F of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54F will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold gold in FY 2019-20 for Rs. 15,00,000. It was purchased in FY 2012-13 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2019-20. Ajay will be able to claim deduction under section 54F as follows:

Particulars Amount
Sales Consideration 15,00,000
Less: Index Cost of Acquisition (5,00,000*289/200) (7,22,500)
Long Term Capital Gains 7,77,500
New House Property Purchase Price 35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 7,77,500
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.

What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54F of the income tax act is claimed. And the following situations can arise:

Situation 1

When a new house is sold within 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2

When a new house is sold after 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property sold. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

What is Net Consideration u/s 54F?

Net Consideration is the full Sales value/consideration received on sale of Long Term Capital Asset reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.

Can NRI Claim exemption u/s 54F?

Yes, NRI can claim exemption u/s 54F of the Income Tax Act. Provided the LTCA sold and house property purchased is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54F is not claimed?

LTCA are taxed at special rates. It depends on the type of asset sold.
Movable Asset: 20% with Indexation,
Shares/Securities: 10% u/s 112A (above Rs. 1,00,000).

Section 54 of the Income Tax Act – Capital Gains Exemption

Exemption under section 54 of the Income Tax Act is available on Capital Gains on sale of one house property and purchase/construction of another house property. The amount of Exemption under Section 54 will be lower of:

  1. The Cost of new Residential House Property
  2. The Capital Gains on the sale of a property

A taxpayer can claim the Capital Gains Exemption under Section 54 while filing ITR for that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Who can Claim an Exemption Under Section 54 of the Income Tax Act?

A taxpayer can claim exemption u/s 54 if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (Sold after 24 months).
  3. The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.
Tip
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.

What is the Amount of Exemption Available Under Section 54 of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54 will be least of the following:

  1. The Cost of New Residential House Property OR
  2. Capital Gains arising on the sale of a property.

Example: Ravi sold a house property in FY 2019-20 for Rs. 60,00,000. The property was purchased by him in FY 2013-14 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 20,59,091
Refer Index Cost from here.
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What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54 of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

Can I claim exemption if I buy new property in the name of my spouse?

No. In order to claim exemption u/s 54, the property purchased has to be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.

Can NRI claim exemption u/s 54 on House Property purchased?

Yes, NRI can claim exemption u/s 54 of the Income Tax Act. Provided the house property sold and purchased is situated in India.

Is exemption allowed if the builder of a property fails to hand it over within 3 years?

Yes. The exemption is still allowed to the taxpayer u/s 54. Even when the builder of a property fails to hand it over to him.

ESOPs Taxation in the hands of an Employee

What are ESOPs?

ESOP (Employee Stock Ownership Plan) is an Employee Benefit Plan provided by the company/employer. ESOP allows an employee to buy a stock of their company at a below-market price. It also offers ownership interest to employees. ESOPs can be issued in as Direct Stock, Profit-Sharing Plans or Bonus. ESOPs is the three-step process:

  1. The company/employer decides to issue shares,
  2. The employee decides to exercise/buy issued shares,
  3. The employee decides to sell shares.

Before granting ESOPs to employees, an employer needs to follow Rules and Regulations relating to ESOPs are as per the Companies Act 2013.

An employee needs to understand ESOP taxation before exercising the option. ESOPs are taxed twice in the hands of an employee:

  • At the time of exercising right i.e purchasing the shares,
  • At the time of selling the shares.

Hence it is important to understand the tax implications of ESOPs before filing ITR of that financial year.

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Prerequisites of ESOPs

Following are the prerequisite of ESOP:

  • An employer has the right to decide who can avail ESOP,
  • An employee needs to go through the pre-defined vesting period ie., an employee has to work for the company until a part or the entire stock options could be exercised,
  • The company/employer grants ESOPs to its employees for a Specified Number of Shares of the company at a Pre-determined Price after the option period (a certain number of years).  

Employer: Contributions to the ESOP are tax-deductible as they are made to repay the loan amount. Both principal and interest are tax-deductible. But once ESOPs are executed, the employer/company needs a proper administration including the third-party administration, trustee, valuation, legal costs. Hence it will be the burden of ongoing cost for a company/employer.

Benefits of ESOPs

The purpose of ESOP is to give benefit to both the Employer/Company and Employee. Startup eco-systems widely use ESOPs.

Following are the benefits of ESOP to the Employer/Company:

  • For attracting and retaining high-quality employees,
  • Making employees stakeholders of the company,
  • The company can avoid cash compensation as a reward, thus saving on immediate cash outflow.

Following are the benefits of ESOP to an Employee:

  • The benefit of acquiring the shares of the company at the nominal rate, and sell them (after a defined tenure set by his employer) and make a profit,
  • Compensation of hard work in the form of ownership interest in the company.

Tax Implications of ESOPs

It is important to understand the tax implications of ESOPs in India before the employer considers implementing an ESOP scheme.

Employee: ESOPs are taxed at the following two times:

  1. At the time of Exercising ESOP: It is considered as a Prerequisite under Salary Income Head. Hence when an employee exercises his option, the difference between Fair Market Value (FMV) as on date of exercise and the exercise price is taxable as a prerequisite.
  2. At the time of Selling: It is considered as Capital Gain. An employee might sell his/her shares after buying them. In case he/she sells these shares at a price higher than FMV on the exercise date, he/she would be liable for capital gains tax.

ESOPs Taxation on Purchase of Shares

When an employee buys the shares of a company, it is treated as Perquisite. The shares are credited to a Demat Account of an employee once shares are purchased. Following are the tax implications when you buy the shares:

  • Perquisite is the difference between the Fair Market Value (FMV) and exercised price/buy price.
  • Perquisite is a part of taxable salary and taxed under the Salary Income Head.
  • It will be taxed in the year in which ESOP is exercised by an employee. An employer/company will deduct TDS on the same.
  • Form 16 issued by an employer/company will reflect the prerequisite amount and TDS on the same.

Example: Neha works in a startup in India. During FY 2019-20 her company announces ESOPs for all the current employees. Neha decides to exercise her option to buy the shares of the company. Under this scheme, Neha received 2000 shares at INR. 20 per share. The FMV of the shares is INR. 65 per share. Following are the tax implication on the above transaction:

Purchase Price: INR. 20

FMV: INR. 65

Perquisite: INR 45 (65-20)

Taxable Perquisite Amount: INR. 90,000 (2000X65)

Now the company will treat INR. 90,000 as a taxable salary of Neha and will deduct TDS on the same. While filing her ITR Neha needs to show INR. 90,000 as Perquisites under Salary Income Head.

In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.
Tip
In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.

ESOP Taxation on Sale of Shares

When an employee sells the shares, it is treated as Capital Gains. Following factors are considered for calculating Capital Gain Income:

  1. The Period of Holding: In case of ESOPs period of holding is from the exercise date up to the date of sale. Short Term or Long Term Capital Gain is determined by taking into account the period of holding.
  2. Taxable Amount: The difference between Sale Price and FMV on the exercise date is taxed as Capital Gains.

The tax treatment is different depending on whether the company is listed on the stock exchange or not.

Tax Treatment on sale of Listed Shares

  • Long Term Capital Gains(LTCG): Taxed at a special rate of 10%. (Shares held for more than 12 months).
  • Short Term Capital Gains(STCG): Taxed at a special rate of 15%.(Shares held for less than 12 months).

Tax Treatment on Sale of Unlisted Shares

  • Long Term Capital Gains(LTCG): Taxed at a special rate of 20% with Indexation (Shares held for more than 24 months).
  • Short Term Capital Gains(STCG): Taxed at applicable slab rate (Shares held for less than 24 months).

Example: Arya is a salaried individual. She works for a startup(listed Company) She received 2000 shares from her company under the ESOPs scheme in FY 2018-19. And she sales the shares on 20/01/2020. Following are the information to keep in mind:

Date of Purchasing Shares/Exercising the ESOPs: 25/02/2019

FMV as on 25/02/2019: INR. 50

Sales Price as on 20/01/2020: INR. 75

In the above case, the following will be the taxability:

Period Of Holding: 25/02/2019 to 20/01/2020 i.e, less than 12 months (Listed Company). Hence there will be Short Term Capital Gains.

Taxable Amount: INR. 50,000 [2000X25(75-50)]

Tax Rate: 15%. Since this is STCG from shares of Listed Company it is taxable at a special rate of 15%.

Tax Amount: INR. 7,500 (50000 X15/100)

FAQs

Under which head of Income-tax is ESOP taxable and which ITR is to be filed?

-When an employee buys the shares of a company, it is treated as Perquisite. And thus taxable under the head Salary. In this case, the taxpayer is required to file ITR-1.
-When an employee sells the shares, it is treated as Capital Gains and thus taxable under Capital Gain head. In this case, the taxpayer is required to file ITR-2.

How do I report employee stock options on tax return?

Since you’ll have to exercise your option through your employer, your employer will usually report the amount of your income as ordinary wages or salary and the income will be included when you file your tax return on Income Tax Portal.

What happens when you leave an ESOP?

If you quit or are laid off, the ESOP distributions are deferred for six years . Once those six years pass, you may receive the value of your ESOP shares in either one lump sum, or in basically equal payments made over five years. 

Capital Gains and Taxes : A Complete Guide

What is Capital Gain?

Capital Gain is simply the profit or loss that arises when you transfer a Capital Asset. If you sell a Long Term Capital Asset, you will have Long Term Capital Gain and if you sell a Short Term Capital Asset, you will have a Short Term Capital Gain. If the result from sell is negative, you will have a capital loss. The Capital Gain will be chargeable to tax in the year in which the transfer of Capital assets takes place.

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What is a Capital Asset?

Capital Asset means any kind of property owned by you, whether or not connected with your business or profession. It includes movable assets, immovable assets, tangible/intangible assets, rights and choices in actions, etc.

Some of the examples of Capital Assets are House Property, land, building, goodwill, patent, trademark, rights, machinery, vehicles, jewelry, etc.

However, the following assets shall not be considered as Capital Assets:

  • ​Any stock in trade, consumables, or raw material held for the purpose of business or profession.
  • ​Any personal effects like clothes or furniture etc. Which is held for your personal use.
  • Agricultural land which is not situated within:
    • the jurisdiction of the municipality or cantonment board which has a population between 10,000 and 1,00,000.
    • 6 KMs of municipality or cantonment board which has a population between 1,00,000 and 10,00,000.
    • 8 KMs of municipality or cantonment board which has a population of more than 10,00,000.
  • Gold Bonds, Special Bearer Bonds & Gold Deposit Bonds issued by Government of India.

Meaning of Transfer

Any profit or gain that arises from the ‘transfer’ of a capital asset is a capital gain. Transfer includes:

  • Sale, exchange, relinquishment (Surrender) of the asset,
  • Extinguishment of any rights in the asset (reducing any right on asset).
  • Compulsory acquisition of an asset,
  • Conversion or treatment of any capital asset into or as stock in trade of a business
  • Maturity or redemption of zero coupon bonds
  • Any other transaction which allows to take or retain the possession of an immovable property in part performance of the contract as per sec 53A of the transfer of Property Act,
  • Any other transaction which has the effect of transferring or enabling the enjoyment of an immovable property whether by way of becoming a member, or acquiring shares in a cooperative society , company or any other association by way of any agreement or arrangement.

Note: If any capital asset is transferred by way of gift or will or inheritance, this shall not be treated as transfer. Further, if the asset transferred is not a capital asset, provisions of capital gain shall not apply.

What is Long Term and Short Term Capital Asset?

If a Capital Asset is held by the assessee for more than 36 months prior to its sale, then it is a Long Term Capital Asset. On the other hand, Short Term Capital Asset means the asset held by an assessee for not more than 36 months prior to its sale.

However, in the following cases, the assets will be considered Short Term if they are held for 12 months or less instead of 36 months:

  • ​Equity or Preference shares
  • ​Debentures or Government securities
  • Units of UTI
  • Units of the equity-oriented mutual fund
  • Zero-coupon bonds

If the above mentioned assets are held for more than 12 months, they will be considered as Long Term Capital Assets.

As per the above discussion it is clear that different assets have different periods of holding to be called short term and long term. The table given below defines period of holding for different classes of asset in order to be classified as short term or long term:

Asset Period of holding Short Term / Long Term
Immovable property < 24 months Short Term
>24 months Long Term
Listed equity shares <12 months Short Term
>12 Months Long Term
Unlisted shares <24 months Short Term
>24 months Long Term
Equity Mutual funds <12 months Short Term
>12 months Long Term
Debt mutual funds <36 months Short Term
>36 months Long Term
Other assets <36 months Short Term
>36 months Long Term

Note: Determination of period of holding is important because it impacts the method of calculating Capital Gains and also the tax rates.

How to determine the holding period if the asset was gifted?

  • In case the asset was acquired as a gift, or through a will, succession or inheritance, the period of holding by the previous owner will also be included to determine the total holding period.
  • For eg., A gifted a watch to B on 01/12/2015. This watch was acquired by A on 01/12/2013. So for B, the total period of holding the watch will be from 01/12/2013 until the sale of the watch.
  • In case of bonus shares or right shares, the period of holding will be calculated from the date they were allotted.

Capital Gain Calculator

Calculation of Capital Gains is different in case of Long Term Capital Assets and Short Term Capital Assets. Here are some of the terms you need to know:

  • Full Value of Consideration: 
    • It is the amount received or to be received by the seller when he sells (transfers) the asset to the buyer. Capital Gain will be chargeable in the year in which the asset is transferred, even though consideration is received later on.
  • Cost of Acquisition: 
    • It is the purchase price at which the seller acquired the asset.
  • Cost of Improvement: 
    • It is an expense that is incurred to make any improvements or repairs or enhancements to the asset. Improvement costs will be considered only if they are incurred after 1st April 1981.
  • Indexation: 
    • It is derived with the help of the Cost Inflation Index. Cost Inflation Index is simply the measure of inflation and it is notified by the Central Government every year. Indexation is a technique to adjust income/payments by means of a price index, in order to maintain the purchasing power of the public due to inflation.
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How to Calculate Short Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.​​
Cost of Acquisition.
​Cost of Improvement.

​(XXX)

​​(XXX)​
(XXX)
Less: exemption under section 54B (XXX)
Short Term Capital Gain (1-2-3) XXXX

How to Calculate Long Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.
​​Index* Cost of Acquisition.
Index* Cost of Improvement.

(XXX)
​​
(XXX)
​(XXX)
Less: exemption under section 54, 54EC, 54F, 54B (XXX)
Long Term Capital Gain XXXX
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Can I claim any expenses as a deduction from the full value of consideration?

Expenses which are wholly and exclusively incurred in relation to the transfer of property, are allowed to be deducted from sales consideration. So here are different sales transactions and the allowable expenses for the same:

Sale of shares/stocks

  • ​Brokerage or sales commission
  • ​Securities Transaction Tax (STT) is not allowed as a deduction

Sale of House Property

  • ​Commission or brokerage paid to the property agent
  • ​Stamp duty paid on transfer of property
  • ​Any traveling expenditure incurred in order to complete the sales transaction may be allowed as a deduction
  • ​In case the property is transferred as a result of inheritance, any legal charges related to obtaining a succession certificate, executor fees, etc., may also be allowed as a deduction
  • ​In the case of compulsory acquisition, litigation expenses for claiming the enhanced compensation are allowed as a deduction

All these expenses are allowed as deduction only for the purpose of calculating the Capital Gains. Please note that these expenses are not allowed as a deduction from any other heads of income.

The cost of acquisition and cost of the improvement is also allowed as a deduction from the sales consideration.

Taxation on Long-term and Short-term Gains

Type of Capital Gain Tax Rate
Long Term Capital Gain (when Securities Transaction Tax is not applicable) 20% + Surcharge and Education Cess
Long Term Capital Gain (when Securities Transaction Tax is applicable) 10% over and above INR 1 lakh
Short Term Capital Gain (when Securities Transaction Tax is not applicable) Normal slab rate applicable to Individuals
Short Term Capital Gain (when Securities Transaction Tax is applicable) 15% + Surcharge and Education Cess

Taxability of gains from the sale of Equity and Debt mutual funds are different. Funds with more than 65% of the portfolio consisting of equities are called Equity Funds.

  Short Term Capital Gain Long Term Capital Gain
Debt Funds Normal slab rate applicable to Individuals 20% with Indexation + Surcharge and Education Cess
Equity Funds 15% + Surcharge and Education cess Exempt

Note: Unlike Equity mutual funds, debt funds have to be held for more than 36 months to qualify as Long Term Capital Assets.

Capital Gain Exemption

The Income Tax Act allows a total / partial exemption from Capital Gains under different sections. It is possible to avail of multiple Capital Gains Exemption under these sections. However, the aggregate amount of exemption cannot exceed the total amount of Capital Gain.

Section Type of Asset Sold Type of Asset Purchased Taxpayer Type
Section 54 House Property (LTCA) House Property Individual/HUF
Section 54F Any asset other than House Property (LTCA) House Property Individual/HUF
Section 54EC Land or Building or both (LTCA) Bonds of NHAI/REC Any Taxpayer
Section 54B Agricultural Land (LTCA/STCA) Agricultural Land Individual/HUF

Documents for Capital Gains

  • Income Tax Department (ITD) issues PAN. It is an alphanumeric ID of a taxpayer who is liable to pay taxes. PAN enables the department to link all transactions of the “Person” with his “Income”. Hence it is the most essential document while filing ITR.
  • Aadhaar (Aadhaar Card) a 12 digit unique identification number issued by the UIDAI (Unique Identification Authority of India). It is mandatory for Resident Individuals to provide details of Aadhaar while filing ITR.
  • Following details are required to calculated Capital Gains and file ITR:
    • Purchase date
    • Sale date
    • Period of holding the asset
    • Transaction or brokerage charges (if any)
  • Any salaried individual, whose TDS has been deducted from his salary by the employer, receives Form 16 from his/her employer. It is a detailed statement that shows the salary earned during a Financial Year along with deductions, exemptions, and tax deducted from the salary in that year.
  • Form 26AS is a consolidated Tax Credit Statement.  It provides the following details to a taxpayer.
    • ​Details of taxes deducted from the taxpayer’s income.
    • ​Details of taxes collected from taxpayer’s payments.
    • Advance Taxes, Self Assessment Taxes and Regular Assessment Taxes paid by the taxpayers.
    • Details of the refund received during the year.
    • Details of any high-value transactions (for eg. Shares, Mutual Funds, etc.).
  • A taxpayer can claim the deduction of certain Investments and expenses while filing ITR. Investments proofs are required to claim Chapter VI-A deductions. These investments reduce the net taxable income of a taxpayer.

FAQs

Can you apply tax losses against capital gains?

A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains. However it cannot be offset against income of a revenue nature.

How many years can you carry forward capital losses?

If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was computed.

In case I have sold a house that I had purchased 4 years ago, should I pay tax on any profits that I have earned?

If you sell a house, it comes under long-term capital assets. Therefore, any profit that is made is taxable under Capital Gains.

Which ITR Form should I file if I have only Income from Capital Gain?

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gains or only Capital Gains are required to fill ITR-2 on Income Tax Portal”

Clubbing of Income under section 64

​​Normally, a person is taxed in respect of income earned by him only. However, in certain special cases the income of other person is included (i.e. clubbed) in the taxable income of the taxpayer. In such a case he will be liable to pay tax in respect of his income (if any) as well as the income of other people too. The situation in which the income of another person is included in the income of the taxpayer is called clubbing of income.

What is Clubbing of Income under section 64 of the Income Tax Act?

Clubbing of income means income of other person included in assessee’s total income. This is allowed under Section 64 of the IT Act. This means that a person cannot divert his income to any other person. For example: If the income of your spouse is included in your total income and also taxed in your hand, then this is known as clubbing of income.

However, there would not be any clubbing of the income, earned from the investment of clubbed income. For example, Hari transfers INR 10,000 to his wife Priya and Priya invests the money in an FD scheme. Now the interest earned on this FD would get clubbed in the total income of Hari and he would be liable to pay tax on the same. However, if Priya re-invests the interest earned (i.e. clubbed income) in some FD or any other investment scheme then the income from such re-investment would be taxable in the hands of Priya only. This interest income from reinvestment will not be clubbed with Hari’s income.

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Specified persons to club income

We cannot club income of any person on random basis while computing total income of an individual and also not all income of specified person can be clubbed. As per Section 64 of Income Tax Act, there are only certain specified income of specified persons which can be clubbed while computing total income of an individual.

When does Clubbing apply?

In case of following situations, clubbing provisions will apply:

Section Specified person Specified scenario Income to be clubbed
Section 60 Any person
Transfer of Income without transfer of Assets either by way of an agreement or any other way,

– Any income from such asset will be clubbed in the hands of the transferor.

– Irrespective of whether such transfer is revocable or not.

Section 61 Any person Transferring asset on the condition that it can be revoked Any income from such asset will be clubbed in the hands of the transferor
Section 64(1A) Minor child Any income arising or accruing to your minor child [Child includes step child, adopted child and minor married daughter] – Income will be clubbed in the hands of higher earning parent.
Note:
If marriage of child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year

– If minor child’s income is clubbed in the hands of parent, then exemption of INR 1,500 is allowed to the parent.

– Exceptions to clubbing
Income of a disabled child (disability of the nature specified in section 80U)

– Income earned by manual work done by the child or by activity involving application of his skill and talent or specialized knowledge and experience

– Income earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’.
Section 64(1)(ii) Spouse If your spouse receives any remuneration irrespective of its nomenclatures such as Salary, commission, fees, or any other form and by any mode i.e., cash or in-kind from any concern in which you have a substantial interest

–  Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing).

The exception to clubbing: – Clubbing is not attracted if the spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience

Section 64(1)(iv) Spouse Income from assets transferred directly or indirectly to the spouse without adequate consideration. – Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property.

– Exceptions to clubbing No clubbing of income in the following cases:

a. Where the asset is received as part of the divorce settlement

b. If assets are transferred before marriage

c. No husband and wife relationship subsists on the date of accrual of income

Section 64(1)(vi) Daughter-in-law Income from the assets transferred to son’s wife for inadequate consideration Any income from such assets transferred is clubbed in the hands of the transferor
Section 64(1)(vii) Any person or association of person
Transferring any assets directly or directly for inadequate consideration to any person or AOP to benefit your daughter-in-law either immediately or on a deferred basis
Income from such assets will be considered as your income and clubbed in your hands
Section 64(1)(viii) Any person or association of person Transferring any assets directly or directly for inadequate consideration to any person or association of persons to benefit your spouse either immediately or on a deferred basis Income from such assets will be considered as your income and clubbed in your hands
Section 64(2) Hindu Undivided Family In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property Income from such converted property shall be clubbed in the hands of individual

Transfer of income without transfer of an asset to any person

Clubbing applies when you (transferor) transfer your income to some other person without transferring the ownership of the asset from which the income is derived. Therefore the income so transferred will still be included in your total income and also taxable in your hands.

For Example: Pranav transferred the income from his rental property, to his wife Divya. The property is in the name of Pranav only and ownership of the property is not transferred to Divya. In this situation, rental income will be taxed in the hands of Pranav only.

Transfer of asset (revocable transfer) to any person

  • In case of a revocable transfer* of asset the clubbing will apply and hence the income from such asset will be taxable in the hands of transferor even though asset has been transferred.
  • Clubbing not applicable if transfer by way of trust which is irrevocable during the lifetime of beneficiaries/ transferee

*Revocable transfer of asset means where a transferor retains the right or power to re-acquire the whole or any part of the asset or the income from such asset at any time in future during the lifetime of the transferee.

For Example: If in the earlier example, Pranav transfers the rental income as well as the property to Divya, with a condition that he can re-acquire the property whenever he wishes. In this situation, rental income from the property will be taxed in the hands of Pranav only.

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Clubbing of Spouse Income

Income earned by your Spouse from the firm/company in which you have substantial interest

  • Your spouse income from such a firm/company will get clubbed with the income of the person (you or your spouse) having a higher total income. While comparing the total incomes, income from such a firm/company should be ignored.
  • A person is said to have substantial interest if he/she individually or along with his/her relative holds 20% or above shares of the company or exercise the voting power of 20% or above. In the case of a firm if a person is entitled to have a share of 20% or above in profits.
  • However the above clubbing provision shall not apply if the income earned by your spouse is due to practical application of professional/technical skill he/she possesses.
  • Income other than salary, commission, fees or remuneration is not clubbed under this clause

Eg: Pranav holds 51% of the shares in a private limited company. His wife Divya is getting a salary of Rs. 20,000 per month from the same company. She is not an active employee and does not contribute towards the company’s operations. Pranav’s total annual income is Rs. 10,00,000 whereas Divya’s total income (Excluding salary from the company) is Rs. 5,00,000. In this situation, Divya’s annual salary of Rs. 2,40,000 will be clubbed with Pranav’s income and it will be taxable in the hands of Pranav.

Income from the asset transferred to the Spouse against inadequate consideration

  • The above income will get clubbed in your total income and you would be liable to pay tax on that income.
  • However, the clubbing shall not apply if the above transfer is in a connection with an agreement to live apart or divorce.
  • Let us understand the above provision with the help of the below examples:
    • First Scenario: Rohan transferred an asset worth Rs.1,50,000 to his wife for a consideration of INR 50,000. Here ⅔ rd (two-thirds) of the income from the asset would get clubbed in Rohan’s income and he would be liable to pay tax on this income. However, balance ⅓ rd will be taxable in the hands of his wife as she has paid INR 50,000 being 1/3rd (one-third) of the value of the property.
    • Second scenario: Mr. Aksh gifted INR 5,00,000 to his wife. She invested this amount in the fixed deposit and received interest of 4,500 INR p.a. (Gift received from husband is exempt in the hands of his wife.) Since cash (asset) received was converted into another asset (FD) by Mrs. Aksh, the interest earned of INR 4,500 would be clubbed in the income of Mr. Aksh as per Section 64(1)(iv) of the Income Tax Act.

Note: As per the judgement in R Dalmia Vs CIT (1982) and few other judgments, pin money (i.e. an allowance given to the wife by her husband for her personal and usual household expenses) is not taxable. Further, if the asset is acquired by the spouse out of pin money then the income from such assets cannot be clubbed with the income of her husband.

When an asset is transferred to any person or association of person for the immediate or deferred benefit of Your Spouse

In such a situation, any income out of such an asset would get clubbed in your total income and you would be liable to pay tax on the same.

Clubbing of Income of Son’s Wife

When asset is transferred to Son’s wife

Income earned by your Son’s wife from the asset transferred to her against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it. Cross transfers are also covered.

When an asset is transferred to any person or association of person for the immediate or deferred benefit of Son’s wife

Here the Income earned from the asset transferred against inadequate consideration would get clubbed in your total income and you would be liable to pay tax on it.

Note: Clubbing would be applicable only when your relationship with spouse and Son’s Wife exist both at the time of transfer of asset and at the time when income is earned.

Clubbing of Income of a Minor child

Any income earned by a minor child (including married minor daughter) will get clubbed with income of the parent whose total income is higher (before inclusion of income of minor child).

In case of a minor child, whose parents are living apart because their marriage relationship does not exist, any income earned by such minor child would get clubbed in the total income of the parent who is maintaining the child.

The income of a minor child would not be clubbed in following circumstances:

  • The minor child has earned income through his/her manual work
  • The minor child has applied his/her skill, talent, specialized knowledge and experience for earning the income.
  • If the minor child is suffering from any disability (disability defined as per section 80U)
  • In case of transfer of House property to married minor daughter, the clubbing will not apply here. Hence any income generated by House property would not be taxable in the hands of Parents.

Clubbing of Income of a Major child

There will not be any clubbing of the income earned by major child (18 years and above) with the total income of the Parents. Whether the major child is earning using his own specialization/skill or on investment of money or asset transferred to him by his Parents.

For example: Rohan who is 18 years old gets Rs. 50,000 as gift from his Father/Mother. He invest the money in a FD scheme. Now the interest income on FD would be taxable in the hands of Rohan only. It would not get clubbed with the total income of the Parents.

Clubbing of Income from H.U.F Property

If you are a member of a HUF and you transfer your property to the common pool of such HUF for inadequate consideration then the income from such property will get clubbed with your total income and you would be liable to pay tax on it.

However, when this transferred asset gets distributed among family members as a result of the complete or partial partition of HUF, the income from the asset received by your spouse would get clubbed in your total income and you would be liable to pay tax on it.

FAQs

How to show clubbed income in ITR?

Except for ITR-1 & ITR-4S, every other ITR contains a section where you can add the income of other persons included in your income. The details which you have to provide are:
– Name of person
– PAN of a person (Optional)
– Relationship
– Nature of Income
– Amount
You also need to make sure that whatever income you enter over here has already been added to the incomes in their respective heads while filing ITR on Income Tax Portal.

Can losses be clubbed?

Clubbing provisions will be equally applicable for losses because: For example, if a person has incurred some loss, in such a situation, such a loss is not allowed to be transferred to anyone and it will be clubbed in his/her own income.

Do any clubbing provisions exist in case of a revocable transfer?

​​Revocable transfer is generally a transfer in which the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.
As per section 61​, if a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.