Mrinal Mitra, a Non-Resident Indian (NRI) residing in Canada, recently informed us that he expects to receive approximately Rs 15 lakh from the sale of his ancestral home in Kolkata. He plans to deposit this money into a joint account with his daughter at the State Bank of India in New Delhi. However, his daughter is currently a student in Canada.
Mrinal inquired about how he could utilize the proceeds from the sale of his ancestral property to potentially avoid long-term capital gains tax, if applicable. He also wanted to know if he could invest the money in any SBI plan.
It is assumed that the ancestral property in question was a residential house property that Mrinal inherited and qualifies as a long-term asset due to the inclusion of the previous owner’s holding period. For tax purposes, it’s important to note that Mrinal may be eligible to claim a deduction for the cost at which the previous owner acquired the property, proportionate to his share. Additionally, he may benefit from indexation.
To potentially save on long-term capital gains tax, Mrinal has a couple of options:
- Investment in Residential House Property (Section 54 of ITA):
- He can invest the capital gains amount in purchasing a new residential house property in India within specific timeframes: 1 year before the property’s transfer, 2 years from the transfer date, or by constructing a new residential house property in India within 3 years from the transfer date.
- Investment in Specified Long-Term Bonds (Section 54EC of ITA):
- Alternatively, he can consider investing the capital gains amount in specified long-term bonds issued by organizations like the National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (RECL) within 6 months from the property’s transfer date.
If the capital gains amount is not utilized for the above investments before filing the income tax return, Mrinal can still claim the tax benefit by depositing the sale proceeds in a Capital Gain Account Scheme, 1988 (CGAS) account. This amount deposited in the CGAS will be considered the cost of the new asset, making it eligible for tax exemption under Section 54 of the ITA. To do this, he can open a Capital Gain bank account with a bank notified by the government, such as the State Bank of India.
Regarding the joint account with his daughter, there may be no tax implications for his daughter as she was not the owner of the property. Any tax implications would typically apply only to Mrinal as the property owner.
