How is the sale of a pagdi flat in Mumbai taxed after its redevelopment?

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We’ve been staying in a pagdi flat in Mumbai for over 50 years. The flat is now set for redevelopment. What will be the taxation if we sell it after redevelopment? Will the capital gains be calculated on the entire value or will there be some indexation? Also, is the investment under 54G and others for the entire amount or up to 50 lakh only? 

The house was in my deceased grandmother’s name —we have a clear line of succession but we are trying to get the house in my mother’s name who is a senior citizen with no income, or my name before selling it. How would that impact our taxes?

—Shapran

 

Based on the facts provided by you, it is assumed that your deceased grandmother had rights in the original property by way of Pagdi, a system prevalent in Mumbai. The said rights have/ will be inherited by your mother and you.

It is assumed that Pagdi of the property is only in relation to the tenancy and possessory rights to occupy the property and the same is not equivalent to the legal ownership of the property. At no stage, your grandmother/ your mother or you have legal and ownership rights to the property (pre-post redevelopment). Further, no alteration/ modification/ transfer of tenancy rights will take place at the time of redevelopment and no consideration will be received by you against the same.

In such case, the sale of Pagdi in the re-developed property may be construed as sale of tenancy rights. Since, Pagdi in the property is held for over 50 years, the same qualifies as long-term capital asset (LTCA) and gain arising from the sale will be termed as long-term capital gain (LTCG).

As per the section 55(2)(a) of the Income tax Act, 1961 (‘the Act’) read with section 49(1) of the Act, cost of acquisition in relation to a capital asset being tenancy right where it is received by under gift or will/ by succession, inheritance it should be cost to previous owner (i.e. your grandmother). As per the provisions of the Act, where the LTCA is acquired before 1 April 2001, the cost of acquisition shall be the actual cost of the asset or Fair Market Value (‘FMV’) as on 1 April 2001.

Since the tenancy/Pagdi right in property is an LTCA, you can adjust the Cost of Acquisition (CoA) based on the applicable Cost Inflation Index (CII). Further, the cost shall be increased for any expenses incurred for the improvement of asset. It is to be noted that LTCG income would be taxable as per the provisions of section 112 of the Act i.e., at the rate of 20% plus applicable surcharge and cess.

Further, one may claim the following deductions from LTCG income:

-Under section 54F, by investing the net sale proceeds in purchase /construction of another property within the specified timelines (provided that the person doesn’t hold more than one property, in addition to the new house, on the date of sale of LTCA) Where the entire net sale proceeds are not invested and only a part amount is invested, the deduction u/s 54F will be available only for the proportionate LTCG.

– Deduction under Section 54EC (where deduction of 50 lakh is available towards investment in specified bonds) should arguably not be available as the deduction is towards sale of residential house owned by the assessee and not Pagdi which is in the form of tenancy rights.

Further, assuming your mother is a resident in India and doesn’t have any other income, benefit of the unexhausted exemption limit of 3 lakh for senior citizens upto 80 years of age, shall be allowed against the LTCG earned by her and the balance gain shall be subject to tax.

Parizad Sirwalla is partner and head, Global Mobility Services, tax, at KPMG India.

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