Category: Blog

13 Jul 2021

Sold a house or flat lately? Hope you’ve calculated the payable tax correctly on your profits?

A year back, Col AK Nijhawan (retd) sold his Noida flat which he had acquired in 2002. In spite of the current real estate market conditions, where the prices haven’t moved for years now, he still got a fairly decent profit on it. He was happy because this money was going to meet the expenses of his daughter’s higher education abroad and his son’s marriage due shortly. The family too felt relieved that the sale of flat helped them do what they had actually planned for years.
And then came the rude shock – an Income Tax notice asking them the details of tax paid on this big transaction was received! And if no tax had been paid, then the tax with late penalty of about Rs 11.5 Lakhs was required to be paid within the next 15 days.
Col Nijhawan, in his exuberance of disposing off the flat, never even thought of the tax to be paid and had already used up all the money got from the sale of the flat.
Is this a unique, isolated incident? No.
We come across many such incidents regularly and the family is put to a lot of inconvenience, anxiety and financial hardships due to lack of awareness about this important issue.

What is this tax when you sell a residential house?

When you sell your residential property that is owned by you for more than two years, any gain arising from such a sale is called long-term capital gain (LTCG). If the period of holding is less than two years, it is called short-term capital gain (STCG).
In case of STCG, the sale price (less brokerage etc) minus the cost of purchase (cost of flat + registration charges + brokerage + stamp duty) is your profit. It is added to your total income for the year and taxed as per your tax slab.
In case of LTCG, the procedure is slightly lengthier but could give you a lot of tax saving. LTCG is calculated as the difference between net sales consideration and ‘indexed’ cost of property.
‘Indexation’ is the process which takes into account the inflation (महंगाई) while calculating the actual gains you have got. Eg, the Govt says that if you bought something for Rs 100 in 2001, then the value of those Rs 100 is really Rs 317 now.
So, if you sold that item for say, Rs 500, then your ‘real’ profit is Rs 500 – 317 = Rs 183 and not 500 – 100 = 400. The tax then to be paid is on Rs 183 and not Rs 400. Thus, LTCG can save a lot of tax for you.
Options with you to save this LTCG Tax
This aspect gets covered under Income Tax Section 54 (Section 54(f) for plots and others, ie those which are not residential house or flat).

Under Section 54, any LTCG arising to an individual or HUF, from the sale of a residential property (whether self-occupied or on rent) shall be exempt to the extent such capital gains (not the full amount but only the calculated gains part) is invested in:

  1. Purchase of another residential property within 1 year before (previous) or 2 years after the transfer of property sold from the owner, and/or
  2. Construction of residential house property within a period of 3 years from the date of such transfer of property; provided that the new residential house property so purchased or constructed is not transferred within a period of 3 years from the date of acquisition and/or
  3. Investing the LTCG into buying Capital Gains bonds (maximum up to Rs 50 lacs) under IT Section 54EC issued by authorized agencies within Six months of such property transfer.

There are also some other rules like depositing the amount of capital gain not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the ITR under the capital gains account scheme. Please properly research other relevant details before taking a final decision.

Key points to remember:

  • Current Long Term Capital Gains tax rate is 20%.
  • You are allowed to adjust your purchase and sale consideration for any brokerage, commission, registration charges, and stamp duty that you paid at the time of property sale.
  • You are allowed to deduct any expenditure on any brokerage, commission, registration charges and stamp duty, construction, and home improvement of permanent nature incurred during the period you held the asset. This expenditure is also allowed to be adjusted as per the Cost Inflation Index (CII) published by Reserve Bank of India.
  • Any LTCG amount balance after taking care of property investment and/or 54EC bonds will be taxed with indexation.
  • You can choose a combination of property purchase, and/or, 54EC bonds, and/or, paying tax as suitable to you but each option or combination of options will have its own timelines for action too. Do not slip up on that.
  • Sometimes it may be more advantageous to simply pay the tax than buying property (since there has been no appreciation in property for years now and nor is it visualized for some more years to come) or get into the 5-year lock-in of 54EC bonds at the taxable low-interest rate.

Illustration: Col SK Singh sold his property in January 2016 at Rs 50 Lakh, which he had purchased in December 2011 at Rs 30,00,000. As per his income, he falls in the 30% tax rate slab. He spent around Rs 2 Lakh on house improvement in January 2013 and also paid a brokerage of 0.5% of the sale price of the house at the time of selling the house. What will be his taxable Capital Gains and what is the tax amount payable by him?

Solution: In the above illustration, the buyer held the property for more than two years and hence, the gain earned on selling this property will be considered as LTCG which will be taxed at the rate of 20% after indexation. Calculations for this transaction are as below:

Particulars Amount Rs
Sale price of the house 50,00,000
Less: Any transfer expenses such as brokerage, commission etc. 25,000
Net Sale Consideration 49,75,000
Less: Indexed acquisition cost of the house: 

(Purchase Price in FY2011-12 adjusted to FY2015-16 Cost Index) i.e. Rs 30 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2011-12 (184)

Less: Indexed house improvement costs ( Home Improvement Expenditure in FY2012-13 adjusted to FY2015-16 Cost Index) i.e. Rs 2 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2012-13 (200) 2,54,000
Long Term Capital Gain (LTCG)  5,79,696

(Contributed by Team Vikrant of Hum Fauji Initiatives)


26 Apr 2021
Savers have no choice now! Get into Stock Markets ASAP…

Savers have no choice now! Get Into Stock Markets ASAP….

31st March 2021. Govt announced the following rates for small savings:-

rates for small savings

All hell broke loose – Twitteratti, Whatsappers, media and more were livid. Govt rolled back the cuts the next day. Probably not because of the outcry but realising the official faux pas – elections in 7 states!

How long will the old rates hold? Probably till the next quarter or maybe one more.

Please realise that cutting interest rates so drastically was an act of fiscal desperation. Read on – why?

Why are the interest rates going down? Aren’t they low enough already?

Long story, will try to make it simple.

Let us introduce a very important metric here:

Debt to GDP Ratio =  Total Debt of a Country
Total GDP of the Country

​What is this and why is it important?

The Debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). It basically measures the financial leverage of an economy. A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called ‘public debts’), which are any balances owed to outside lenders. This impacts its Sovereign Credit Ratings (published by Standard & Poor (S&P), Moody’s, Fitch etc regularly), external capital coming into the country, interest rates that outsiders will charge for lending to the country and its public institutions, or even the sentiment of investing in the country as a whole.

All countries like to keep this ratio healthy and thus keep a high Sovereign Rating. But what happens when a crisis like the Covid pandemic strikes?

Government Debts shoot up to support the economy and the people, as we all already know. Most of the emerging economies have government debt that is around 40% to 50% of their GDP. Compared to that, our debt has traditionally been around about 70% of the GDP, which already used to be on the higher side. And this number is now inching up to 90% of GDP, which is not sustainable. India had a fiscal deficit of Rs 18,45,655 crores (9.5% of GDP) in Financial Year 2020-21 and there is likely to be a further additional deficit of Rs 15,06,812 crores this financial year on top of it – these are really huge amounts of fiscal deficits.

So, what can the Govt do to reduce the Debt to GDP Ratio?

It cannot do anything to the ‘Debt’ part because the economy and the poor people have to be supported right now. So, it does something with the GDP. We call the process as ‘Window Dressing’!!

GDP cannot be increased on its own right now since even the economic activity is very low due to the pandemic. But if somehow the prices of the same things can be increased, the total GDP increases.

It will be good to bring out here what is GDP? GDP (Gross Domestic Product) is the final value of the goods and services produced within the geographic boundaries of a country during a year. If the prices increase, the GDP increases even if the actual goods produced remain the same! Hence, the Govt is likely to allow the inflation to go up more and not control it as aggressively as it has done in the past, of course within certain parameters. This increases the overall prices of same amount of things. The Debt/ GDP ratio improves then.

But then, letting inflation run amok is also suicidal. So, Debt also has to be decreased.

Which is the easiest place to decrease Govt debt? Decrease interest rates on borrowings which Govt takes directly from the citizens, that is, the small savings, given in the table at the beginning of this article.

So, you have inflation going up – you’ve already seen it happening – it was 4.06% in Jan 2021 and the forecast for Apr 2021 is 5.6%, ie, about 37.9% up.

And small savings rate is going down. Thus Govt’s borrowing rate goes down and GDP goes up, thus window dressing the Debt / GDP ratio.

What does it do to you? Double Whammy!

Please look at the chart below to find out whether you’re gaining or losing by investing in so-called safe avenues after the above window dressing by the Govt?

What does it mean? You are losing by investing in any of these avenues. Instead of safe investments, they turn out to be ‘assured risk’ to your money!

Above is the real picture as it will play out for you over the next few months. The choice is up to you – whether you accept it or not. If you feel you’re ready to accept the above figures – “at least the money (or whatever is finally left of it in its real value) is safe with the Govt” – that is a conscious choice you make, with nobody else to blame later.

But what do you do if you don’t like the above picture?

You have really no choice but to go into growth assets. There is no assured safety anywhere but a calculated risk is what is warranted now.

And there is really only one inflation-hedge in the long term. The stock markets.

Most people consider stock markets as risky. We just call them volatile with our long experience.

If you go into equity products with your eyes and ears open, keep a control on your emotions (staying away from the ‘Fear and Greed’ cycle), DO NOT FOLLOW THE HERD, do not watch too much of the 24-hour business channels (our CEO, Col Sanjeev Govila, last watched any of them about 8 years back), do not read too much of ‘prediction-based’ articles on the internet – you are likely to not only protect the ‘purchasing power’ of your hard-earned money but also be able to grow it into a decent wealth over a period of time.

We’ll give you very good and practical ways to go about it in our next episode, due next Saturday.

10 Apr 2021
FD or growth

Who do you align with – Mr Hardcore FDs (HFD) Or Mr Growth Bhai (GB)?

The past year has been extremely volatile for most people. Many people lost their loved ones. Many others lost their jobs or other sources of livelihood. Two friends many of us have in common – Mr Hardcore FD (HFD) and Mr Growth Bhai (GB) – also faced some challenges in their own lives.

Before the pandemic struck, they lived in the same city, but as with many of us, they too relocated to their hometowns in the last one year due to the facility of working from home. They did keep in touch over calls and texts, often sharing news with each other they found mutually interesting.

In March 2020, when the equity market was tumbling down each passing day, HFD kept prodding GB to sell-off his equity holdings and move to safer asset classes like bank deposits (FDs)! GB did feel the stress but held on to his horses. Over time, his faith in equities was strengthened as the equity markets almost doubled over the next one year.

BSE Sensex movement from 1 Jan, 2020 to 1 April, 2021.

BSE Sensex movement from 1 Jan, 2020 to 1 April, 2021. Source: BSE

In March 2021, the markets again witnessed some volatility and took a fall of almost 10%. As HFD again started sending signals to GB to get out, the latter decided to have a detailed discussion instead to try and change his friend’s thought process.

“You need to stop panicking all the time, HFD. It is fine that you are a little conservative in your investment approach, but have you tried understanding the other side?” GB asked HFD.

HFD replied with conviction, “GB, I have learnt my finance lessons from the elders in my family and have trust in instruments like FDs that have implicit sovereign guarantee. I know what you are saying, but my elder brother tried his luck in equity till 2008 and burnt his fingers badly. Hence, I am even more cautious.”

GB was aware of such a mindset as he had had similar conversations with many people in the past. “Your brother burnt his fingers because he was trying to make fast bucks without a solid understanding of stock markets. When markets tanked, he panicked. You need to understand some basics of stock markets before you close out this excellent avenue from your investment basket,” he started.

Those who sell in panic, lose out much more. The market crashed in 2008, and then sharply recovered.

BSE Sensex between 1 April 2008 and 1 April 2010.

 BSE Sensex between 1 April 2008 and 1 April 2010. Source: BSE

“But people like me who invested in safe instruments like FDs did not lose out!” HFD retorted.

“At what cost? Look at the long-term trend. Time and again, several analyses have proven that long-term returns in equity are in double digits. On the other hand, FDs, though safer, always give a low return,” GB said.

“But still I count more on safety of capital,” HFD said.

To this, GB replied, “But HFD, when inflation and taxes are taken in to account, which anyway you cannot avoid, the returns from FD comes down even further. In fact, your FDs then become ‘assured risk’ – do you realise that?”

“Hope you are aware that the current FD returns are around 5% and the inflation is higher than that. This means that you are actually losing money. Add the tax that you have to pay on interest income at your slab rate, and your real returns go heavily negative. On the other hand, long-term returns from equity, implying what you invest for just more than 365 days, are not taxed up to Rs 1 lakh in a year, and even beyond that the tax is only 10%,” he said.

India Retail Inflation.

India Retail Inflation. Source:

These numbers made HFD uncomfortable and he came back with the comfort and convenience argument. “It is a hassle to keep track of the equity market and understand when to invest and when not to invest or when to exit.”

“I would agree with you if you were talking about direct equity investment. However, we now have very convenient options like Mutual Fund that take care of all those aspects,” GB said, explaining how mutual fund managers take care of most of the aspects of equity investing. The rupee cost averaging through SIP investments, and investors being able to increase or decrease investments as per their own comfort and cash-flow, being some other big advantages.

“But a fall of 40-50% in a matter of weeks, like the one in March last year, still haunts me. What about safety of investment?” HFD asked.

“You are right, there should be some element of safety. For that you need asset allocation and invest some amount in safer investments like FDs or debt mutual funds. But putting all the money in FDs is actually a disservice to your hard-earned money. You are losing out on the growth in equity markets. The fall you referred to was mainly because of panic among investors, just like your brother in 2008. When so many people sell something, it is obvious that its price will crash. Anybody who looked it at that time as an excellent investment opportunity is right now smiling all the way to his bank” he said.

“Does it mean that I stop using FDs?” HFD asked.

“Not at all, HFD. This does not mean that you put all your money in equity or large amount in equity all of a sudden. But certainly, it deserves some more attention in your portfolio even if you are conservative” GB said.

HFD promised GB that he will think about the discussion.

Both agreed to discuss the details again next time, with some more real numbers from their own experiences.