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OLM Desk - 28 February 2023

Homebuying From Share Profits Liable For LTCG

Meenakshi Iyer, Cochin

I had invested in shares 30 years ago and they  have appreciated in value now. I want to liquidate them and buy a house with the amount realised. Will I have to pay long-term capital gains (LTCG) tax on the shares even if I use the money to buy a house upfront, without taking a loan?

Starting from April 1, 2018, the sale of shares and equity mutual funds, if held for one year or more, attracts LTCG tax at a flat rate of 10 per cent over and above Rs 1 lakh of capital gains. This change in tax rules was proposed in Budget 2018 and enacted later.

That said, if you were already holding your investments in equity shares and equity mutual funds on January 31, 2018, you will not be required to pay tax on the entire capital gains. Capital gains accrued till January 31, 2018 will be ‘grandfathered’, and the amount of gains on which you are liable to pay tax will be calculated based on a formula.

According to the formula, the cost of acquisition of the shares and equity mutual funds bought before February 1, 2018 will be taken (for the purpose of calculating long-term capital gains/loss) as the higher of:

A) Your actual cost of acquisition of such asset (in this case your share), and
B) Lower of:
(i) Fair Market value of such asset as on January 31, 2018.  
(ii) Full value of consideration received or accruing as a result of transfer.

In your case, you will have to pay LTCG tax at 10 per cent over and above capital gains of Rs 1 lakh, irrespective of whether you wish to reinvest it for a house purchase without loan, or, reinvest the gains in any other asset class.

Consult a chartered accountant for further clarity on the matter.

Suhel Chander, CFPCM Handholding Financials

Naval Kishore, Jalandhar

I have inherited a piece of agricultural land from my grandfather. I am not engaged in agriculture, nor do I plan to settle there. If I sell off the land, will I be liable for capital gains tax. This is ancestral land that has been in the family for generations.

Capital gains will not arise on the sale of agricultural land in a rural area as it is specifically excluded from the definition of capital asset. But it will arise if it is in a non-rural area.

That said, you can also claim exemption from capital gains tax under Section 54B of the Income-tax Act, 1961, for investment in agricultural land. Besides the exemption under Section 54B available for reinvestment in agricultural land, the seller can also claim exemption under Section 54EC by reinvesting in specified bonds. The seller can also claim exemption under Section 54F for reinvestment in a residential house.

It would be best if you were to consult a chartered accountant to help you in understanding if the agricultural land you have inherited is in a rural or a non-rural area for the purpose of taxation.

Uma Chander, CFPCM Handholding Financials

Sanjeeb Pattnaik, Cuttack

I had taken an educational loan for my son’s MBA education. As he had just graduated and was without a job, I had to take the loan on his behalf. Now, he has secured a campus placement and wants to repay the loan. Will it be possible for him to claim any deduction on the repayment?

I am assuming you had taken the loan from a bank and you are an individual taxpayer.

Your son can claim the exemption under Section 80E of the Income-tax Act, 1961, if he is also a co-applicant in the loan. The exemption can be claimed only when you and/or he starts repaying the loan, and for eight years or until the interest is repaid, whichever is earlier.

You should obtain a certificate from the bank that segregates the principal and interest amount of the education loan remitted by you during the financial year.

Also note that the deduction is available only for the interest component of your loan’s repayment amount, not the principal part of the equated monthly instalment (EMI).

Lastly, if the student is working abroad, then this deduction cannot be claimed under Section 80E of the Act.

Hina Shah, CFPCM Financial Coach, LUHEM

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