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Property Harvesting For Elders

Diminishing returns on savings and other pension incomes has resulted in pensioners selling their homes and moving to smaller residential units, rental properties or even old-age homes.

At times of turbulence, especially in your sunset years, your home is often the most valuable asset you could lay your hands on. But, doing so prudently is key to tiding over the difficult times.

If one sells a property sooner than 36 months after he bought it, he will make a short-term capital gain (STCG). Else, it will be long-term capital gains (LTCG). STCG is added to income for the year and taxed at the senior citizen assessee’s applicable income tax rate. LTCG will, however, be taxed at 20 per cent with indexation and at 10 per cent without it.

While calculating capital gains on the sale of house property, the sale consideration is reduced by the cost of acquisition (COA) of the property and cost of improvement (COI), if any. In computation of LTCG, COA and COI are also to be indexed (i.e., increased by the prescribed cost of acquisition) to the year of sale. If senior citizens are selling a self-purchased property, COA will be the price at which it was purchased. When there is a sale of property that is inherited or received as a gift, capital gains will be computed on the basis of the cost to the previous owner.

For example, consider a property which was purchased in 2000 for Rs.10 lakh and sold in 2012 for Rs.75 lakh. Considering the cost inflation index (CII) in the year of purchase at 389 and CII in the year of sale at 785, the indexed purchase price will be Rs.20,17,995, i.e., Rs.10 lakh x (785/389), and capital gains will work out to Rs.54,82,005. i.e., Rs.(75 lakh–20,17,995). The tax incidence from the above sale would be 20 per cent of capital gains, i.e., Rs.10,96,400, considering the highest tax slab of 30 per cent.

Tax on capital gains can be exempted if a senior citizen sells his house property and purchases another residential house (one house) with the sale proceeds of the property.  If the amount of capital gains is greater than the cost of the new house property, the tax will be calculated on the basis of the differential amount.

For example,  if your long-term capital gains from the sale of house property works out to Rs.54 lakh and the cost of the new residential property is Rs.60 lakh, you will not be taxed subject to the provisions of Section 54 of the Income Tax Act. But if your new house costs, say, Rs.53 lakh, you will have to pay capital gains tax on Rs.1 lakh.

Most senior citizens usually sell their properties and move to a smaller house that meets their requirements and put aside some spare money for future needs. It is recommended that the government should come up with a scheme along the above lines, wherein senior citizens can reinvest the sale proceeds to save on capital gains tax.

Moreover, if capital gains arising from the sale of a house property is invested in bonds which qualify under Section 54 EC of the I-Tax Act (they have 3-year, lock-in), such as Rural Electri-fication Corporation (REC) Bonds, such capital gains is exempted for capital gains tax. In addition to this, it is highly recommended that the government should extend the same to the investment made in  any other high return, tax-free bonds by senior citizens, which generally provide higher returns a year compared to the 5-6 per cent per annum from REC bonds (http://www.recindia.nic.in/download/Issue_Highlights_54EC_Series_IX.pdf).

Stable Cash Flow
In the absence of a monthly salary, availability of sustainable cash flow is very important for senior citizens. So, the government has also floated a reverse mortgage scheme for senior citizens, who have their own house property. This scheme requires senior citizen borrowers to mortgage the house property to a bank, which is required to make specific payments to the borrower during his lifetime. The senior citizen borrower is not required to service the loan during his lifetime.

The income tax provisions also exempt the amount received by an individual as a loan or lump sum consideration and the same is not treated as income of the borrower. According to the scheme notified by the central government, many banks are offering such schemes. This has proved to be one of the most constructive fiscal steps for helping senior citizens. The success of this scheme, which is intended to being beneficial for senior citizens, is, however, yet to be analysed and tested.

It has been more than 60 years since the I-Tax Act was introduced, but not much relief has been specifically granted to senior citizens willing to sell their residential properties.

Selling a house and investing the surplus is a clean solution. Most people, however, are reluctant to sell their self-acquired or inherited properties because of their emotional attachment to them.

Senior citizens are the most susceptible members of our society in terms of financial security. Though various benefits, tax exemptions and procedural benefits are provided to them, much more in this direction need to be done to provide more fiscal tax benefits and relaxations while disposing of their house properties and to further increase the exemption limits for senior citizen’s earning rental incomes.

Any constructive fiscal step by our government in this direction will definitely help in creating a spirit of belonging among the most respected strata of our society. r


The authors are senior director, Deloitte Touche Tohmatsu India,
senior manager and assistant manager, Deloitte Haskins & Sells