fbpx

What is Capital Gain Account Scheme?

In our earlier blog, we have discussed some of the ways in which you can reduce your capital gains while selling a house - but what if you are unable to reinvest your capital gains before the specified duration to benefit from the exemption available? To address this, the Capital Gains Account Scheme(CGAS) concept was introduced.

For example, Mr A sold a residential property in January 2022 and he intends to claim capital gains exemption by purchasing a new residential house. To claim the capital gains exemption, he must purchase the new residential house within 2 years i.e. before January 2024. However, the due date of filing of ITR for the Financial Year 2021-22 is 31st July 2022 and the gains arising on the sale of the property are required to be reported in the ITR.

In such cases, the govt prescribes that the amount to be reinvested be deposited in a Capital Gains Account before the filing of the ITR. The seller does not immediately have to deposit the amount in the Capital Gains Account and he can do so at any time before the due date of filing of ITR i.e. before 31st July for non-audit cases and before 30th Sept for audit cases.

By claiming this Capital Gains Exemption, the taxpayer would be able to save the 20% Long Term Capital Gains Tax which he would be required to pay in case he does not intend to claim this exemption.

What is a Capital Gains Account Scheme?

Capital Gains Account Scheme (CGAS) allows you to safeguard your long-term capital gains until you are unable to invest it in a house before the due date for filing an income tax return (July 31 after the given assessment year)  and before the income tax returns are furnished.

But to benefit from this, you need to ensure that you utilise the amount deposited in the capital gains account within 2 years of the sale of the property. If this is not done, the unutilised amount will be subject to capital gains tax in the fiscal in which the deadline ends.

Also note, You are not permitted to hold a joint account under this scheme but up to 3 Nominees can be nominated). The proof of deposit into the CGAS account should be attached along with the income tax return for you to be able to claim exemption from long term capital gain tax for the financial year during which the transfer was made.

Where can you open a Capital Gains Account?

You can open a Capital Gains Account in any branch of the authorised banks recommended by the Government which includes Central Bank of India - State Bank of India and the public sector banks like Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, as well as Union Bank of India are some of the 28 permitted banks. However, these facilities are unavailable for their branches in rural areas.

What are the different types of deposits available?

There are two different types of deposits that you can avail of under the Capital Gains Account Scheme. 

Type A: Referred to as a savings deposit, this capital gains account is similar to a regular savings account. It even earns a similar interest rate. The interest is credited at regular intervals, and you will receive a passbook to record all your transactions. Like a savings account, this type of deposit is highly liquid, so you can easily withdraw at any time.

Type B: Referred to as term deposits, this type of deposit is similar to fixed deposit schemes of banks. The rate of interest, terms of investment, and restrictions are also very similar to that of a fixed deposit. This type of account has a maximum term of 3 years if you are constructing a house, and 2 years if you plan to buy a ready house, and it will not auto-renew at the end of the term  - any premature withdrawal will attract a penalty. Like you would with a fixed deposit, you will receive a deposit certificate, which will be required when you need to withdraw. The term deposits can be cumulative or non-cumulative.

For both types of deposits, the RBI fixes the rate of interest periodically. Based on your plan of investment and rate of interest, you can select the deposit type that best aligns with your requirements.

Generally, it is Prevailing Interest Rates as applicable to general Saving Bank and Term Deposits shall also apply to Savings and Term Deposit opened under CGAS.

Withdrawl from Capital Gains Account Scheme

Withdrawal is a slightly complex process. You cannot withdraw money freely from your Capital Gains Account, you can utilise it only for the purpose for which the deposit was made. Such purpose needs to be submitted to the bank in Form C while withdrawing money from Account A whereas to withdraw money from Account B, you need to transfer the balance amount from Account B to Account-A and then according to the CGAS provisions you can withdraw the amount. Also, you need to make payment through crossed demand draft for withdrawal of more than INR 25,000.

The amount withdrawn should be utilized within 60 days of such withdrawal. The unutilized amount should be again re-deposited into the CGAS account. In case the withdrawal amount is not utilized and not deposited back within 60 days then you will lose the benefit of exemptions i.e. it becomes taxable.

At the time of closure of all accounts, the depositor will have to produce a specific authority letter/ certificate from the Income Tax Officer of the respective jurisdiction. The closure would be allowed on the terms mentioned in the letter of authority.

What happens if you were not able to construct or buy a new house till maturity?

If the amount not utilized remains in the Capital Gain Deposit Account Scheme even after a specified period of 2/3 years, 100% of the not utilized amount will be taxed as long term capital for the financial year in which the specific period gets over.

Things to note:

No loan facility against this deposit is available. This term deposit can neither be accepted as margin money for non-fund based nor as collateral to any type of fund-based facilities.
On your own desire, you can apply for a transfer of your account from one deposit office to another deposit office of the same bank.
Closure of both Type A and Type B accounts require prior approval from the jurisdictional income tax officers.

In case of closure of the account due to the death of the account holder, the legal heirs can claim the deposit through Form H. Please note, that the legal heir can withdraw the amount without any tax implications.

Wealth Cafe Advice 

Purchasing a new residential property may take time. You have to find a preferred home/apartment that you like to buy, negotiate with the seller and complete paperwork – all of which can be time-consuming. Investing in capital gains accounts gives you temporary relief. Consider this as parking your capital gains tax safely for the time being, while you scout for a new property.

Ways to reduce your capital gains while selling a house

Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. It is said that one has to strip naked financially to invest in a house - and if you are going through the same - you can join us on 28th May 2022 where we shall help you in your dream of buying a house.

However, if you already own a house and wish to sell it - no matter what your reason is - tax is levied on the same depending on the asset type and the duration you hold it for. 

Firstly, let us understand which portion of the income is taxable on sale of real estate. Tax is payable on the profits you earn from selling the real estate - i.e. cost of acquisition - sales proceeds.

Nature of TaxShort-term capital gains TaxLong-term capital gains tax
Period of Holding held for less than 24 months held for  24 months or more
Tax applicable as per the Income Tax Slab Rates  20%

Now before we jump directly on how you can save your taxes - let us first understand the various types of real estate that you can own:

  1. Residential Property: This is one of the most popular ones-such properties fill one of the basic human needs as well as reflect your dearest aspirations. Both reconstruction and resale homes are included in residential property. 
  2. Commercial Property:  Commercial property includes vacant land for commercial use or existing business buildings. Office spaces, showrooms, retail outlets and warehouses are just a few examples of such properties
  3. Agricultural/Open Land: Agricultural land is typically land devoted to agriculture - you cannot use this land to build residences unless the government grants you permission to do that. Under the provisions of the law in India, fertile agricultural land could only be used for agricultural purposes and nothing else.

Now that you understand the various type of property - let’s check some of the ways in which you can save your taxes from the sale of your property:

1. Under Section 54:

Section 54 of the Income Tax Act allows the lower of the two as exemption amount:

  • Amount of capital gains on transfer of residential property, or
  • The investment made for constructing or purchasing new residential property

You can avail this exemption by selling a residential property, which is a long term capital asset and buying another residential house property only. You cannot benefit from this in the case of the sale of commercial property or agricultural land. Only the balance amount from the capital gains (if any) will be taxable at 20%. However, you can save tax on that as well by reinvesting the remaining amount under section 54EC within six months of transfer subject to other conditions to save tax (discussed below).

Also, you should have necessarily purchased a residential house either two years after the date of transfer/sale or one year before the date of transfer/sale and in case the house is under construction – the time limit is 3 years from the date of sale. You cannot purchase any residential house out of India to claim an exemption under this section.

You can club capital gain from multiple properties to buy one property but you cannot invest capital gain from a single property to buy multiple properties. However, as an exception to this rule, the purchase or construction of two residential houses is allowed only if the gain is less than INR 2 crore. But, you can exercise this option only once in a lifetime.  For all other years, investment should be made in the construction/ purchase of 1 residential house only.

2. Under Section 54EC

Section 54EC states that if the profit made on the sale of Land or Building (whether Residential or Non-Residential) – is invested by you in ‘long-term specified assets within 6 months of the sale, then the capital gains are exempt from taxation. 

The ‘long-term specified assets’ referred to above are Capital Gain Bonds issued by the government organisations like the National Highway Authority of India and Rural Electrification Corporation. These bonds are AAA-rated with an interest rate of approx 5.25% p.a. The Principal invested becomes tax-free after the lock-in period but the interest continues to remain taxable.

The maximum that you can invest in these bonds is Rs. 50 lakhs and the investment comes with a lock-in period of five years.

You may want to buy capital gain bonds only if the amount you have made as capital gains is low. If the amount is large enough to buy or build a house, the residential property would be a better investment because of greater capital appreciation.

3. Under Section 54B 

No Capital Gains will arise on the sale of Agricultural Land situated in a Rural Area as it is specifically excluded from the definition of Capital Asset. However, Capital Gains will arise on the sale of Agricultural Land situated in a Non-Rural Area. Nevertheless, the exemption can be claimed from such Capital Gains under Section 54B. Under this section, capital gains, both short-term and long-term, that arise from the transfer of agricultural land into another agricultural land are exempt from Income Tax.

This benefit is available only to an individual or a HUF. Also, to benefit from this exemption the land should be used for the agricultural purpose at least for two years. If the cost of new Agricultural Land is equal to or greater than capital gains, then entire capital gains are exempt. Moreover, if the cost of new Agricultural Land is less than capital gains, capital gains to the extent of the cost of new agricultural land are exempt.

Can a capital gain tax exemption get reversed?

You can avoid paying the capital gains tax on the property if you reinvest the amount in a new property. But, the exemption will sustain if you hold the new property for at least two years. If you sell the property before 24 months, the exclusion will be reversed, and you would be liable to pay the capital gains tax that was exempted earlier.

Wealth  Cafe Advice:

If you are unable to reinvest the gains in another house or bonds before filing your tax return for the year in which the sale took place, deposit the balance in the Capital Gains Account Scheme so that you are eligible for the deduction. Capital Gains Account Scheme (CGAS) allows you to safeguard your long-term capital gains until you are unable to invest them in a house before the due date for filing an income tax. 

Blog Article 2022 (2)

Should You Buy A House Using EPF?

Buying a house is one of the biggest/most expensive purchases for most of us.

You may lack the funds required to make a purchase even when property prices remain stable or fall. As we all say one has to strip naked financially in order to buy a house and in such a situation the thought of breaking your EPF investment may come across your mind.

But is funding your house using EPF a good idea? Let's discuss it

Firstly, let us understand the withdrawal rules of EPF

You are allowed to withdraw EPF accumulations to make down payments to buy a house or for paying EMIs of a home loan. Let us understand it individually:

For Purchasing or constructing a New House-

  • In accordance with Section 68B of The Employees’ Provident Funds Scheme, 1952 (‘EPF Scheme’), you can withdraw: 24 months of basic salary plus dearness allowance (DA) or actual cost of the plot - whichever is lower
  • For this, you should contribute in your EPF account for at least five years.
  • The minimum balance in the EPF should be INR 20,000, either individually, or together with your spouse, if he/she is also a member of EPFO.
  • The house in question should be in your name or jointly with your spouse.
  • You would need a letter of authorization from your employer for PF withdrawal if you have not verified your Aadhar Card.

For Repaying Home Loan-

  • For the purpose of repaying the outstanding home loan, the PF member is allowed to withdraw up to 90% of the corpus if the house is registered in his or her name or held jointly.
  • For this, you should have at least three years of service after opening the EPF account.
  • If PF/EPF withdrawal is done before 5 years of opening the account, then the amount is taxable.

The provident fund scheme allows you to withdraw funds, only up to 36 months of your basic salary plus DA  for any of the above purposes. Also, you can withdraw from it only once in your lifetime.

Does breaking EPF for buying a house make sense from your entire financial planning perspective?

EPF is an opportunity to accumulate money for the post-retirement period. You keep contributing a small fraction of your salary to the EPF and your employer matches your contribution. As the salary increases, the contributions do go up. That makes a large corpus in your hand for your retirement, provided you do not withdraw it for any other purpose. You let the magic of compounding work for you by investing regularly and consistently in your EPF corpus.

For example, an EPF contribution of 16,000 per month from the age of 25 - increasing at 10% per annum would become a corpus of INR 3.27 crore on retirement. Now, if you withdraw 90% of the corpus at 30 i.e. INR 17.1 lakhs amount. At 60, your corpus will only be INR 2.29 crore.

You are reducing your actual retirement corpus by INR 98 lakhs approx.

Hence, you should not withdraw your investment from EPF before its maturity as this could jeopardize your retirement by exposing you to the risk of leaving no funds/reduced funds for your retired life. Remember, no one will give you a loan for your retirement but for a home, you can manage.

We do understand that a house is a necessity and in the Indian context ‘owned house’ is a social and psychological need for many of us. But, short-term thinking’ focused on immediate gratification must be avoided at any cost.

How to arrange for the downpayment of your house?

It is better to make a plan for home buying. Start saving money to accumulate the down payment amount over three to five years. If the home prices go up or your investments yield less than expected, you may want to delay the home buying by a year or two. Avail of the home loan after you make the down payment but do not touch your EPF money. That is your retirement security.

Wealth Cafe  Advice

Do not break your one goal to achieve another. Especially when it is the retirement goal. Do not break your EPF for home buying, unless you have other means to secure your retirement. Plan ahead and plan properly.

Check our course - Money & Makaan - to learn to plan for home buying

Article headers6

Things To Remember Before Taking A Loan Against Property

Hello all!

We’ve all thought about purchasing property. If not now, then maybe sometime in the future. And we’re here to tell you that it’s not as easy a process as you might think. Many people consider that where they have a property, they can easily take a loan against it. Read this article to know some points you can keep in mind, before you approach your bank for the same.

A loan against property (LAP) is a secured loan that banks, housing finance companies and NBFCs provide against residential or commercial property. These loans are usually offered at a lower interest rate as compared to a personal loan or business loan and are disbursed at a reasonable time. Anyone with a pre-owned property can avail such loans, whether they are salaried or self-employed in a business or professional setup. The quantum of loan sanctioned is also higher than what may be offered in other available options.

The demand for LAP is increasing among individuals because of three primary reasons:

  • It is cheaper than a personal loan.
  • The applicant can continue to occupy his or her property even after the loan is availed.
  • The loan can be used for a variety of purposes such as unforeseen medical expenses, children’s higher education and marriage, or setting up a business.
  • Besides, existing customers of a bank or housing finance company need not go through the document verification process again.

A loan against property is a boon for both business owners and salaried employees. Self-employed who are seeking funds for expansion of their business can make use of this facility. Salaried professionals facing a sudden medical crisis that may require long-term treatment, including expensive surgery, or sending children to a foreign university for higher studies can avail the facility for raising funds. A LAP not only leaves one’s savings intact, but it also comes at low-cost EMIs with repayment tenures of as long as 15 to 20 years. The low-interest rates on such loans dilute the repayment burden.

All these and other benefits help in the growth of the business or safeguard the financial future of both the loan applicant as well as his or her family. The only criterion for availing of a loan against property is that the loan should be for a legitimate purpose.

While it is relatively easy for existing customers to receive a loan against their property, new customers will have to furnish the necessary documents as well as credit history, repayment capacity and marketability of the property to be mortgaged.

An existing customer can also apply for a ‘top-up’ loan, but this would depend on factors such as repayment history of a preexisting home loan and outstanding balance on that loan, monthly income and loan to property value ratio. However, a fresh property appraisal is not required as the property is already mortgaged with the lender.

While these are the basics of a loan against property, there are other aspects to the loan that applicants must know. These are:

Loan repayment:

Since the loan amount that can be availed of against property is high, it is important that the borrower fulfils the required income criteria to repay the entire loan. It can be repaid over a period of 12 months up to 20 years, though the tenure varies from one lender to another. 

Property valuation:

loan against property is provided against collateral; i.e., an immovable property such as a constructed residential/commercial property. Before deciding the eligibility and amount of loan, your lender will appraise your property. The amount will depend on the prevailing fair market value, not the past or potential future value. Housing finance companies usually provide up to 50-60 per cent of the market value of a property. Therefore, you should analyse the loan-to-value (LTV) ratio provided by your lender.

Ownership of property:

The lender will approve the loan only after it is convinced that your property has a clear and marketable title. Further, the co-owners need to be part of the loan and meet the criteria.

Any loan against property comes with a longer repayment tenure compared to a personal loan. The EMIs are spread over many years and the rate of interest is much lower. A longer tenure means lower EMIs, which reduces the monthly repayment burden.

Repayment Capacity:

The lender will evaluate your repaying capacity with the help of your income statements, repayment history, ongoing loans etc.

To sum up, a loan against property offers greater flexibility, lower interest rates, higher loan amount, and a longer repayment tenure and feasibility of end use. While the long-term advantages of this type of loan make it a much better option than personal loans, it is important to remember that if the borrower defaults on repayments, his or her rights over the property are transferred to the lender.

 

Disclaimer: - The emails are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



Income tax Feature Image

Income-Tax Relief For Home Buyers

Hello fellow investors
 
As a part of various relief measures taken by the Government in response to the economic slowdown post-COVID-19, the Finance Minister (FM) has announced a very attractive income tax relief for home buyers (new residential properties of value up to Rs 2 crore). Here is what you need to know.  
 
Income Tax relief for home buyers 

In case the declared purchase consideration of the land/building is less than the stamp value (circle rate) by up to 20%, there will be no additional tax outgo for both the seller and the purchaser for the period 12th November 2020 to 30th June 2021. Earlier, the acceptable difference was 5% which was to be enhanced to 10% with effect from 01 st April 2021.

This move will also help developers in selling off their unsold inventory at up to 20% below the circle rate and the buyers in getting cheaper homes without any additional tax burden on either party. Let’s look at the relevant provisions of the Income Tax Act to understand the applicable tax relief.

Section 43CA of the Income-tax Act - for the seller

This section provided for deeming of the stamp duty value (circle rate) as sale consideration for the transfer of real estate inventory in the case the circle rate exceeded the declared consideration. The circle rate is the minimum rate per unit area fixed by the state governments for the sale of land or property and is
aimed at reducing stamp duty evasion by declaring lower sale values in the sale-purchase deeds.

Thus, even if the real estate was sold at a price below the circle rate, the circle rate was considered as the sale value for the calculation of the business profits of the seller. For example, if a house is sold by a developer for Rs 80 lakh but its value as per the circle rate is Rs 96 lakh, the developer is supposed to take Rs 96 lakh as the sale value for
calculating his profit.

Through Finance Act 2018, a difference of 5% between the two rates was declared to be acceptable. This was increased to 10% through Finance Act 2020. Now, the FM has raised this acceptable difference to 20%. Thus, in the above case, the difference is exactly 20% as seen below and the developer can consider Rs 80 lakh for calculating his profits from the sale. 

Section 56(2)(x) of the Income-tax Act for the buyer

This section is applicable to the buyer and provides for stamp duty value to be deemed as purchase consideration even if the purchase was made at a lower price. As per the above example, the buyer is deemed to have received Rs 16 lakh (the difference between the stamp value and the sale consideration) and was supposed to declare this amount as ‘Income from other sources and pay tax on the same. Now, he will not have to pay any tax if the difference is up to 20% as is the case in the above example.

 

In summary, this announcement by the FM comes as a major relief to real estate developers who were struggling to offload their inventory due to lower demand in the market. The benefit is applicable, however, only for the primary sale of residential properties and not for commercial and secondary sales.



4

'Investing' in Real Estate?

Hello fellow investors!

Roti - Kapda - Makaan has been the three needs of us Indians and we strive to make that makaan a reality. Once the makaan works as a shelter it becomes our personal asset. When you go for the second or the third property for investment reasons then you should consider the following points before proceeding.

Yes, the returns are good in real estate. We have always stated that investments are not all about returns, it is about building your portfolio to become financially free. So instead of just comparing past returns of both asset classes and claiming equity is better than real estate or vice versa, we would like to consider other important aspects.


1. Real Estate will skew your Asset Allocation

Investing is all about the right asset allocation. Investing a major portion of your investments in real-estate could skew your allocation in that direction for a very long time.

Once the Real estate is added to your investments, your allocation is considered with 4 assets, Real Estate, Gold, Equity & Debt. Once you choose to buy real estate, it may take a few years for other asset classes to occupy a significant portion of your portfolio. Hence, you should check and consider the reasons for investing in Real-estate.

2. It is hard to assign “present value” and calculate ‘growth’

Most people talk about how much their property is worth without actually speaking to potential buyers. It is only when you do so, you realize what is the real selling price of it. People would rather wait and enjoy lower returns than sell their properties at a price lower than what they want/wish to receive.

There is no designated market price. He who haggles the best wins here. Because of the lack of such a standard price, it makes real estate risky as most times people are stuck with a price they have in their mind without actually checking it for real.

3. It is not liquid enough that you can sell whenever you want.

I am sure you have heard of this, you cannot sell a bathroom to meet a financial emergency unlike Equity, mutual funds, and some debt options which can typically be traded in small amounts and on any business day.

You need to have other liquid assets (i.e. have a balance allocation) to take care of your financial needs.

4. TAX cost, buying another property.

The tax on capital gains from real estate in a way encourages you to go ahead to buy another property. As per the law, if you want to avoid capital gains tax on real estate you should necessarily reinvest the same in another property or in section 54EC bonds (with low returns) for 3 years to ensure the capital gains are tax-free.

5. Difficult to sell emotionally

Many people post-retirement do not have enough fixed income and other liquid investments to manage their every day cashflows. They are still not able to liquidate their properties for cash and use it for a more relaxed late age. They have an emotional attachment towards it and then it gets rationally difficult to decide to sell.

6. Risk of renting out

No guarantee of regular income. One may need to constantly look for tenants. Issues with paying property and water tax, and the legal hassles associated with tenants not moving out!

We do not intend to discourage you from purchasing houses for the purpose of investments but it is about becoming aware of what are the issues you can face when you do so. Before taking the decisions about investing in real estate, do calculate your returns, the money you would make from the investments in real - estate, and know your numbers. A close analysis for real-estate purchases should be done in a similar way as you would do for any other asset.

Analyze your risk-taking capacity and your goals before you make the final decision.

Happy Investing!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.





Wealth Cafe Financial Services Pvt Ltd is a AMFI registered ARN holder with ARN -78274.

Wealth Cafe Financial Services Pvt Ltd is a SEBI registered Authorised Person (sub broker) of Motilal Oswal Financial Services Ltd with NSE Regn AP0297087003 and BSE Regn AP0104460164562.

 

Copyright 2010-20 Wealth Café ©  All Rights Reserved