Question 4 (a)
Long-term capital gain on a residential house with sections 50C, 54 and 54EC (as set, 1961 Act, AY 2016-17)
6 marks
- Time to write
- About 12 minutes
From an older CBCS paper
Question
Question 4 (a) · 6 marksIn March 2006 Mr. Albert acquired a residential house for Rs. 8,00,000, Expenditure on improvement (being construction of an additional floor) incurred during 2011-12 is Rs. 6,00,000. In September 2015 he sold the house property for Rs. 90,00,000 (its stamp duty value: Rs. 92,00,000). A residential house was acquired by him in March 2016 for Rs. 15,00,000. Rs. 10,000 was invested by him in capital gains bonds issued by the National Highways Authority of India (NHAI) during December 2016.
Calculate the capital gain that is chargeable to tax for the assessment year 2016-17.
The cost inflation index is as follows: F.Y. 2005-06 = 497
Financial Year 2011-12 = 785
F.Y. 2015-16 = 1081
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2016-17 (previous year 2015-16), with the dates as printed. Marks printed: 6. "Rs. 8,00,000, Expenditure on improvement" (a comma, then a capital E) and "stamp duty value: Rs. 92,00,000" stand as printed. The investment in capital gains bonds "during December 2016" falls after the previous year 2015-16 and more than a year after the sale in September 2015; it stays as printed. The Hindi twin prints the sale price as 9,00,000 where the English has 90,00,000; the English figure is kept.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- CalculateHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Nature of the gain and section 50C 1½ marks 2 min
- 2 Indexed cost of acquisition and of improvement 2 marks 3 min
- 3 Exemptions under sections 54 and 54EC 2 marks 3 min
- 4 Chargeable gain and the other reading ½ mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The house was acquired in March 2006 and sold in September 2015, more than 36 months later, so it is a long-term capital asset (section 2(42A)) and the gain is a long-term capital gain, computed with indexation (section 48, second proviso, and Explanation (iii) and (iv)).
The house was sold for ₹90,00,000, but the stamp duty value is ₹92,00,000. For land or building, a consideration below the stamp duty value is replaced by that value (section 50C(1)), so the full value of consideration is ₹92,00,000. The tolerance of 5% now in the third proviso to section 50C(1) was inserted only with effect from 1 April 2019, so it does not apply to this year. (Because the stamp duty value governs, the Hindi version's sale price of ₹9,00,000 would give the same result.)
Computation of the capital gain
| Particulars | ₹ |
|---|---|
| Full value of consideration (stamp duty value, section 50C) | 92,00,000 |
| Less: indexed cost of acquisition, ₹8,00,000 × 1081 ÷ 497 | 17,40,040 |
| Less: indexed cost of improvement (additional floor, 2011-12), ₹6,00,000 × 1081 ÷ 785 | 8,26,242 |
| Long-term capital gain | 66,33,718 |
The cost inflation index of the year of transfer (2015-16, 1081) is applied to the index of the first year the asset was held (2005-06, 497) and of the year of the improvement (2011-12, 785). For this year the base date for the index was 1 April 1981 (a footnote to Explanation (iii) of section 48 shows 1 April 2001 substituted only from 1 April 2018); an asset bought in 2006 is unaffected. Indexed figures are rounded to the rupee.
- Section 54. An individual who sells a residential house held long-term (its income being chargeable as house property) and buys one residential house in India within one year before or two years after the transfer is exempt up to the cost of the new house. The new house was bought in March 2016, within two years after the sale, for ₹15,00,000, so ₹15,00,000 is exempt (section 54(1)(i)). If the new house is sold within three years, its cost is taken as nil for that later sale (same clause).
- Section 54EC. The investment in bonds must be made within six months after the date of transfer (section 54EC(1)). The sale was in September 2015, so the last date was in March 2016. The bonds were bought in December 2016, as printed, well after that, so no exemption is allowed under section 54EC.
Capital gain chargeable for assessment year 2016-17
| Particulars | ₹ |
|---|---|
| Long-term capital gain | 66,33,718 |
| Less: exemption under section 54 | 15,00,000 |
| Less: exemption under section 54EC | — |
| Long-term capital gain chargeable | 51,33,718 |
The gain is taxable at 20% under section 112(1)(a).
If the bonds were bought in time
If the bond date is a misprint and the ₹10,000 was invested within six months of the sale (by March 2016), section 54EC exempts ₹10,000 too, and the long-term capital gain chargeable is ₹51,23,718.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Nature of the gain and section 50C | 1.5 |
| 2 | Indexed cost of acquisition and of improvement | 2 |
| 3 | Exemptions under sections 54 and 54EC | 2 |
| 4 | Chargeable gain and the other reading | 0.5 |
| Total | 6 |
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