Managing gains from property
is not an easy task
| Returns from property may be exciting but keep an eye on the tax
implications. |
Like equity markets, the property market makes investors
churn their investments when prices reach peak levels.
However, in the case of property, managing gains is not easy.
There are different options and hence even tax treatment depends on the
option investor chooses. It always helps when you keep an eye on the rules
related to capital gains before you make decision to sell the property.
Just like equity markets, the gains made from the sale of property are
classified under two heads – short term and long term. The tenure, however,
differs as income derived from sale after three years from the date of purchase
is termed long-term gains.
In the case of equity, this tenure is much shorter at 12 months.
The tax liability for short-term gains depends on the income slab of the
individual.
However, when the property is sold after three years from the date of
purchase, it comes under long-term capital gains.
Long-term gains
Unlike capital gains made out of equity, long-term gains made from property
comes under tax. The good thing is that the investor gets the benefit of
inflationary effect while computing the long-term gains through the process of
indexation.
What it means is that the purchase value of the property does not remain to
be the initial price paid for the property but could also prove higher because
of inflation.
As a result, the amount that is taken into account for the purposes of
long-term gains is actually much lower than the real gains.
For instance, a property purchased at a cost of Rs. 20 lakh in the year 2000
and sold in 2006 for Rs. 50 lakh results in a gain of Rs. 30 lakhs. But when
indexation method is factored in, these gains could be much lower (if inflation
was at a higher level) and hence even the tax liability is lower.
Tax-liability
However, investors have the choice when it comes to tax liability. If they
choose to opt for indexation method, the tax rate would be 20 per cent and it is
lower at 10 per cent if the indexation method is not used. For the purposes of
calculating tax, the lower of the two is taken into account.
For instance, if the tax liability using indexation method works out to Rs.
10 lakhs and without indexation to Rs 9.2 lakhs , the latter would become the
tax liability for the individual.
Paying income tax is not the only option when it comes to treating capital
gains arising out of property sale.
The investors can also choose to park their gains in tax free bonds and thus
avoid the tax liability.
As per Section 54 of Income Tax Act, capital gains can be invested in
specific bonds issued by agencies such as REC (Rural Electrification
Corporation), NABARD and NHAI (National Highways Authority of India).
These companies regularly announce mobilisation of capital gains bonds and
when investors make investment in these bonds, there is no need to pay income
tax on capital gains. As a result, the interest offered on these bonds also
tends to be much lower.
Since these bonds are available for subscription for a limited period of
time, investors sitting on their capital gains should keep an eye on these
schemes.
Capital gains bonds
Generally, most investors tend to park their money in capital gains bonds to
avoid tax liability. Capital gains bonds are an ideal option when the amount
involved is large.
When the gains are less, investors can probably look at the option of paying
tax and look at other investment products for parking gains. For instance, when
the capital gains is Rs. 10 lakhs, you can look at the option of paying a tax of
Rs.1 lakh (at the rate of 10 per cent without indexation) and look at investing
the balance amount of Rs. 9 lakhs in other products such as equity, balanced or
fixed deposits.
In such a scenario, the corpus of Rs. 9 lakhs can provide a return of over
10-12 per cent which is equivalent to the tax out-go.
The returns can be much higher if the investor chooses to invest in pure
equity funds.
However, one should be prepared to invest for a minimum period of 3-5 years
while choosing the equity option. However, capital gains bonds would be a safer
option for investor who is not willing to take risks.
SRIKALA BHASHYAM
Courtesy: Property Plus, The Hindu
http://www.hindu.com/pp/2007/06/02/stories/2007060251800300.htm
