Readers' Corner: Tax

I have two questions on capital gains about the sale of a property. What are the features of Capital Gains Account and when should a home seller keep money in this account? Second, I want to know whether the interest from capital gains bonds is taxable.

A taxpayer can claim exemption under Section 54 of the Income Tax Act, 1961, on long-term capital gains earned on the sale of house property. The exemption is available to the extent the capital gain is used to purchase a new residential house within two years after the sale or one year before the sale. The taxpayer also gets an exemption if he uses the gains to construct a new house within three years from the date of sale of property. If the taxpayer does not invest in the house property immediately, to utilise the window of two-three years to buy or construct a house, he would need to put the unutilised capital gain money in the capital gain account scheme.

Capital gain accounts are of two types. Type A is  a normal saving account wherein you will get a passbook from the bank indicating deposits, withdrawals, interest, etc. Type B is a term deposit account which is like a normal fixed deposit. You will get a deposit receipt mentioning the amount of deposit, date of maturity, maturity amount, etc. The interest from these accounts will be taxable at normal slab rates.

Kuldip Kumar

You can withdraw money deposited from this account only to purchase or construct a new house. If you fail to meet the timeline (two-three years) in using this money to purchase or construct a new house, the entire unutilised amount of capital gain will be taxable in your hands as long-term capital gains in that year. To withdraw from the account, Form C is required to be filled and the amount so withdrawn needs to be used within 60 days for the above purposes. If you want to close the account, you need to fill Form G duly approved by the jurisdictional assessing officer. 

Interest from capital gain bonds (NHAI or REC) purchased under Section 54EC of the Act is fully taxable and shall be offered to tax at normal slab rates. 

I am confused with the taxation of debt fund returns. If I redeem debt funds after three years, do I get to choose between paying tax at 10 per cent of the gains I have made or paying 20 per cent of the gains after indexation benefit? I also want to know for which capital gains do taxpayers get the option of choosing to pay a flat tax at 10 per cent or 20 per cent after taking indexation benefit.

The capital gains on debt funds held for more than three years is taxed at the flat rate of 20 per cent with indexation. There is no option of calculating tax at 10 per cent without indexation and comparing the same with tax calculated at 20 per cent with indexation in case of such funds. The proviso to section 112 Act gives an option to compute the taxes at the lower of 10 per cent (without indexation) or 20 per cent (with indexation) only for long-term capital gain arising on sale of listed securities (other than a unit) or for zero coupon bonds. 

I am a citizen of the UK. I am planning to come back to India. In the UK, I have a few tax-free investments. Once I shift to India and become a resident for tax purpose, will the UK investment continue to be tax-free even in India?

In India, the scope of taxation will depend upon your residential status of each tax year. While non-resident/not ordinarily resident individuals are taxable in India in respect of their India source income, resident and ordinarily resident (ROR) individuals are taxable on their global income. Upon becoming ROR of India, you will be liable to tax in India on your worldwide income, including income received from your investments in the UK. Since such income does not attract tax in the UK, there is no possibility to claim the foreign tax credit against the India tax liability and hence, the entire income will be fully taxable in India. Also, while it is important to tax the same while filing the return of income, you will have to report the same along with the details of the investments, the UK bank account, overseas assets details, etc, in the FA schedule.

The writer is partner and leader, personal tax, PwC India. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in