Agricultural land located in specified areas is not considered an asset

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—Deepak Kumar

Agricultural land located in specified areas is not considered as fixed assets (under section 2 (1A) of the Income Tax Act).

In the absence of information, we have assumed that the inherited land is neither agricultural land nor located in specific areas. Therefore, any such sale will have capital gains tax consequences.

In the event of inheritance, the period of ownership of the land runs from the date of acquisition of the land by the owner who has effectively acquired the said property other than by inheritance, donation, etc. Since the land has been held by you for more than 24 months from the date of acquisition, any gains, if any, resulting from the sale of the land will be qualified as long-term capital gains (LTCG) and will be taxable between your hands.

The acquisition cost is the cost at which the previous owner, who actually acquired the house other than by inheritance or donation.

In addition, since the land was acquired before April 1, 2001, you have the option of taking the actual acquisition cost or the fair market value (FMV) of the property on April 1, 2001. Therefore, when calculating the LTCG, the cost of acquisition is the price at which your father acquired the land or FMV on April 1, 2001.

The aforementioned cost of acquisition and improvement, if any, made after the purchase or on April 1, 2001 (if the fair market value on April 1, 2001 is considered a cost), if applicable, by you and your father should be increased using the applicable Cost Inflation Index (CII). The CII is the index notified by the tax authorities to take into account the effect of inflation throughout the holding period (i.e. from the date of purchase until the date sales). The ITC for the financial year concerned is notified annually.

The LTCG should be calculated as the difference between the net proceeds from the sale and the indexed cost of acquisition and improvement, if applicable. In addition, the indexed cost is calculated by applying the CII.

You can benefit from LTCG tax exemption by reinvesting the net proceeds from the sale in a new residential property located in India, within the time frame and conditions specified in Section 54F.

You can also invest the LTCG in the obligations notified under Article 54EC. The investment must be made within 6 months from the date of sale, subject to a ceiling of Rs50 lakh.

Accordingly, the LTCG balance, if any, taking into account the aforementioned reinvestment route, will be taxed at the flat rate of 20%. In addition, a surcharge (if applicable) and an education tax of 3% should be levied on this tax liability.

According to section 194-IA, when the consideration for the sale exceeds Rs50 lakh, the buyer of the property will have to deduct 1% tax, assuming you are a tax resident of India.

I had invested 13,500 Rs on February 25, 2014 in a fixed term plan, which matured on March 13, 2017. The amount received is Rs 17,251. The amount earned is Rs 3,751. ‘a debt investment, I have to pay tax on the gain. Here I need your help. How much tax do I have to pay with or without indexation?

—Pradeep Vishwas

Gains from the redemption of debt-oriented funds are taxed as capital gains. Since you held it for over 36 months, any resulting earnings would be classified as LTCG. Consequently, an indexing service will be available.

The acquisition cost should be increased using the applicable ITC as notified by the income tax department.

The LTCG will be calculated as the difference between the net proceeds of the sale and the indexed acquisition cost.

As a result, you will earn a taxable LTCG of Rs 1,077 (i.e. 17,251 minus 16,174 [13,500 x 1125/939]). The CII for FY13-14 is 939 and the CII for FY16-17 is 1125.

On this amount, you will have to pay a flat tax of 20.6% (plus a study tax of 3%). If your total income exceeds Rs1 crore in fiscal year 2016-17, a 15% surcharge will apply.

Given the amount of LTCG, reinvestment in real estate or the notified bonds was not discussed.

Parizad Sirwalla is partner (tax), KPMG

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