My grandfather bought a one-room kitchen in the Pagdi system at Goregaon West in Mumbai for Rs. 6,000 in the 1960s. Now the original owners of the building have sold the building along with its land to a builder. The builder gave an amount of Rs. 27 lakh to my grandmother (my grandfather expired about 35 years ago) to leave the premises. How will this amount received from the builder be taxed as income tax in his hands? My grandmother is 85 years old and has no other income. How can we save tax on this amount?
Answer: A person has to pay capital gains tax on profits made from the sale / transfer of capital. This may be a long-term capital gain or a short-term capital gain depending on the length of time the asset is held. Basically, the Pagdi system is a system whereby a rental right to a building is purchased and which can be transferred for a price, with the consent of the owner. So what your grandmother transferred is her rental right which is a fixed asset. Any money collected in addition to the cost of the rental right should be subject to tax as a capital gain. Occupancy rights having been acquired more than 3 years before the date of transfer, the profits would be treated as long-term capital gains.
In addition, since the lease rights were acquired by your grandfather before April 1, 2000, your grandmother has the option of taking the Fair Market Value (FMV) of the lease right on April 1, 2001 as the cost of the rights. lease and apply the cost inflation index on that cost to calculate capital gains. To arrive at the fair market value of the rental rights, you can obtain a certificate of appraisal from a chartered appraiser. The difference between the money received and the indexed FMV is a long-term capital gain on which the tax is payable at the flat rate of 20% beyond 5 lakh of basic exemption because it has no other income.
She can save tax on these long-term capital gains by investing the net consideration for the purchase / construction of a residential house in her name within a specified time frame. The available capital gain exemption will be reduced proportionately if it does not invest all of the consideration received. Since the rental right in a dwelling house is not the same as a dwelling house, it therefore cannot benefit from the exemption under section 54 by investing the capital gains indexed, but will have to invest the net consideration to benefit from the exemption under Article 54F. Since the rental right is neither land nor building, it cannot benefit from the tax exemption by investing in capital gains bonds under Article 54EC.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant @ gmail and @jainbalwant on Twitter.
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