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Money received from a health insurance policy may be taxed...

LiveMint logoLiveMint 10-07-2017 Parizad Sirwalla

My wife was diagnosed with a critical illness last year, which was covered by the critical insurance policy. On raising the claim, I received the sum assured as per the policy conditions. Also, as per her employer’s corporate insurance policy, she gets a portion of the salary if the employee is on leave without pay because of the illness. She received around Rs1 lakh from the insurer.

Will this amount be subject to tax? Do I need to mention this during tax filing?

—Vishwas Gupta

There is no express provisions on taxability of proceeds received under a health insurance policy. However, there is a prevailing view that the claim settlement received by you may not to be treated as taxable, being a reimbursement of medical expenses incurred by you.

Regarding the payments received under the corporate policy for loss of pay, there is a school of thought that the same should be taxable.

My father bought a piece of land in January 2007 for Rs22 lakh in Siliguri, West Bengal. He started construction of a small hotel on it in 2010. The construction was done on and off for the next 3 years. He passed away in December 2013. I inherited this property along with my mother and brother in equal proportions and we restarted the construction. Now it is near completion but we are yet to get a completion certificate. My mother wants to transfer her share so that I and my brother own 50% each.

A buyer wants to buy my 50% share. What will be the tax implications if I accept the deal? How can I save on tax? Will it be better to sell before receiving completion certificate? Also, we have not kept any record of the money that we spent on construction.

—Name withheld on request

The property inherited by you, your mother and your brother from your father and the part subsequently gifted to you and your brother by your mother will be considered as held for more than 24 months and therefore will qualify as sale of a long term capital asset (LTCA) when sold. The gains resulting from the sale would be taxable as LTCG.

LTCG is computed as the difference between net sale proceeds and the indexed cost of acquisition and/or cost of improvement of the property. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income-tax department for the financial year (FY) of purchase by your father, in which construction costs have been incurred as compared with the CII in the fiscal of sale. The LTCG arrived on basis o fthe above calculation is subject to tax at 20.60% (plus applicable surcharge). Since you do not have adequate records with you as proof of construction costs incurred by you or your mother, the claim for deduction of indexed construction costs may be disputed by the tax authorities.

You can claim an exemption from such capital gains tax, under section 54F of the Income-tax Act, 1961, if the net sale proceeds from the property are re-invested in the purchase or construction of a residential house in India (new asset). This exemption does not apply if you already own or have invested in any other residential house (other than the new asset), within prescribed timelines.

If the new asset is not purchased or constructed by the due date for filing your tax return, you can temporarily park the LTCG in a designated capital gain account scheme before filing the return to claim the exemption. If the amount parked is not utilized for the purchase or construction of the new asset, taxes would be payable by you.

Alternatively, you may invest the LTCG in specified bonds for claiming exemption from taxes up to Rs50 lakh.

I, my brother, my mother and sister have decided to sell our house which was bought in June 2010. This house is on my late father’s name. We had bought the house at Rs17 lakh and are selling it for Rs64 lakh. Can you tell me how much tax each of us will have to pay? Can you please advise us on how we can save tax on this? If I take this house as a gift and sell it to a third party, will it reduce my tax liability?

—Satish

The sale of the house property inherited by you and your family will attract capital gains tax. As the property is inherited, the period you have held this property would include the period of holding by your father. Since the property was held for more than 24 months, the gains resulting from the sale would be taxable as (LTCG). You will be taxed in respect of your respective share of LTCG at 20.60% (plus applicable surcharge), in respect of your share. Each person’s share will be decided based on the amounts distributed to each individual as sale proceeds.

Each one of you can claim an exemption from such capital gains tax, under section 54 of the Income-tax Act, 1961 (the Act) if the LTCG is re-invested in the purchase / construction of a residential house in India.

Alternatively, you may invest the capital gains in specified bonds for claiming exemption from taxes, up to Rs50 lakh.

If the property is gifted to you by your family, you will become the sole owner of the property and will need to pay taxes on the entire LTCG instead of paying taxes only on your share of the LTCG arising from the sale.

Parizad Sirwalla is partner (tax), KPMG.

Queries and views at mintmoney@livemint.com

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