Tax queries: Investors in AIFs taxed at 5% on capital gains
Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers on income tax and other levies.
A year ago I had invested Rs 10 crore in units of Category I Alternate Investment Fund (AIF) in my individual capacity. I am holding 5% of the total units. During the year the fund has reported income under the head capital gain of Rs 60 lakh and interest income of Rs 24 lakh. I would like to know what will be the tax liabilities in my hand. —N SAXENA
Under the provisions of the Income Tax Act, 1961, an investment fund established or incorporated in India and registered with the Securities and Exchange Board of India (SEBI) as a Category I AIF is accorded tax pass through status, i.e., income of the AIF shall be chargeable to tax directly in the hands of its investors as per Section 115UB of the Act. In this context, the income chargeable under the head capital gain income and interest will be exempt in the hands of the AIF and same will be taxable in your hands to the extent of 5% of the income under the head capital gains and interest income.
I am a sole proprietor. I purchased a commercial office space for Rs 5 crore in 2014-15. At the time of registration of the purchase document the Ready Reckoner Value of the property was Rs 5.75 crore. I have offered the income of Rs 75 lakh (being the difference between the Ready Reckoner Value and the purchase consideration) under Section 56 (2) of the Income Tax Act. Can I claim depreciation on the said sum of Rs 75 lakh? Can I take any other advantage of the sum of RS 75 lakh on which I have paid the tax?
The difference between the Ready Reckoner Value and the purchase consideration in case of an immovable property is chargeable to tax under the head Income from Other Sources under Section 56(2). You have rightly offered the said income for taxation. However, you will not be entitled to enhance the cost of acquisition of the office premises by Rs 75 lakh to claim depreciation under Section 32. You will be entitled to claim depreciation only on Rs 5 crore being your cost of acquisition. At the time when you will sale the said business premises, while computing the short term capital gains you will be entitled to increase the written down value by Rs 75 lakh as per the provisions of Section 49(4) of the Income Tax Act.
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