Capital Gain

[Ethirajan Parthasarathy]

A” is owner of property. Land is 5 years old and building thereon is only 1 year old. The said property is being sold resulting in capital gain which will be long term for land & short term for building. What is the correct method to split the sale consideration to arrive at short term and long term gain.

Sale consideration is more than prevailing guideline value of both land and superstructure put together

[YAGAY andSUN]

To correctly split the sale consideration between land and building for the purpose of calculating long-term and short-term capital gains, the following approach is typically followed:

1. Allocation of Sale Consideration:

Since the sale consideration is more than the prevailing guideline value of the property, and you have both land (which qualifies for long-term capital gain) and building (which qualifies for short-term capital gain), it’s important to allocate the sale consideration between the land and the building properly. The general methods for allocation are:

A. Proportionate Allocation Based on the Market Value:

1. Market Value of Land and Building:

Determine the market value of the land and building separately. This can be done based on:

1. • The guideline value (circle rate) provided by the local authorities (which may be different for land and building).
   • A valuation by a registered valuer, if the guideline value does not reflect the fair market value.
2. Sale Consideration Split:

Allocate the total sale consideration between land and building in the same proportion as their market values. For example, if:

• • The market value of the land is ₹80 lakhs.
  • The market value of the building is ₹20 lakhs.

Total sale consideration = ₹1 crore.

The split would be:

• • Land: ₹1 crore × (80/100) = ₹80 lakh.
  • Building: ₹1 crore × (20/100) = ₹20 lakh.

B. Consideration Based on Stamp Duty Value:

If a stamp duty valuation is available for the land and building separately, you can use that as the basis for allocation.

• Split the sale consideration between land and building according to their stamp duty values.

For instance, if the stamp duty value of the land is ₹90 lakh and the building is ₹10 lakh:

• Allocate the sale consideration to land and building based on their respective proportions.

2. Calculation of Capital Gains:

Once the sale consideration is split between land and building, you can calculate the capital gains for each component separately:

• Long-Term Capital Gain on Land:

Since the land is more than 2 years old, any gain on the sale of the land will be subject to long-term capital gains (LTCG). For long-term assets, indexation benefits can be claimed to adjust the purchase cost for inflation.

• • LTCG = Sale consideration (allocated to land) – Indexed cost of acquisition.
• Short-Term Capital Gain on Building:

The building is less than 2 years old (since it is 1 year old), so any gain on the sale of the building will be subject to short-term capital gains (STCG), and indexation is not available for STCG.

• • STCG = Sale consideration (allocated to building) – Actual cost of acquisition (without indexation).

Example Calculation:

Let's assume:

• Sale consideration: ₹1 crore.
• Market value of land: ₹80 lakh.
• Market value of building: ₹20 lakh.

Step 1: Allocate Sale Consideration

• Land = ₹1 crore × (80/100) = ₹80 lakh.
• Building = ₹1 crore × (20/100) = ₹20 lakh.

Step 2: Calculate Capital Gains for Land and Building

• For Land (Long-Term):
  • Sale consideration = ₹80 lakh.
  • Indexed cost of acquisition (say ₹50 lakh) = LTCG = ₹80 lakh – ₹50 lakh = ₹30 lakh.
• For Building (Short-Term):
  • Sale consideration = ₹20 lakh.
  • Cost of acquisition (say ₹18 lakh) = STCG = ₹20 lakh – ₹18 lakh = ₹2 lakh.

Step 3: Apply Tax Rates

• LTCG on land: 20% (with indexation).
• STCG on building: 30% (if not a residential property; otherwise, 20%).

Conclusion:

The correct method to split the sale consideration is to use a proportional approach based on either the market value or stamp duty value of the land and building. Once split, you can compute the respective long-term and short-term capital gains based on the asset type, and apply the appropriate tax rates. If the sale consideration is above the guideline value, it's essential to justify the allocation with either market value or a stamp duty assessment.

Note: This revert is not a Legal Opinion as it is a mere discussion.  Seek an Legal Opinion from your CA/Consultant by disclosing all material facts.

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AI Summary

Property Owner's Strategic Tax Split: Allocating Sale Proceeds Between Land and Building for Optimal Capital Gains Treatment A property owner seeks guidance on splitting sale consideration between land and building for capital gains tax purposes. The recommended approach involves allocating the sale price proportionally based on market or stamp duty values, distinguishing between long-term capital gains for land (over 5 years old) and short-term capital gains for building (1 year old). Proper allocation allows accurate tax calculation using respective asset holding periods and applicable tax rates.