If I sell my flat, will it impact the capital gains exemption?

According to the Income Tax Act, the property on which the capital gains tax exemption is claimed cannot be sold before three years of its purchase.

Q. My two brothers and I want to enter into a partnership. Two of us already have small businesses. How do we decide our stakes and divide the profits in the new enterprise?

Kuldeep Sharan

In case of a partnership, the terms and conditions have to be decided by the persons forming it through a deed. The percentage of the profit to be shared is based on numerous factors such as the capital invested or the technical expertise in the work undertaken in the business. So a person may have invested less initially, but could be more proficient at his work. Also, the deed should specify the nature of business for which the partnership has been established, the capital brought in by each partner and the share in the profit or loss. The partners who bring in the capital may have an interest paid to them on it (the rate of interest is decided mutually) and the monthly salary can be fixed for active partners. According to the income-tax laws, the interest payable to the partners should not exceed 12% a year. The remuneration to sleeping and non-working partners is not allowed as a deduction.

Q. I have been working with an MNC for the past three years. Now, the company is shutting down and I am moving to a new job with a private firm. Should I withdraw the money from my provident fund or transfer the balance to my new account?

Rakesh Ranjan

The taxability of the provident fund amount withdrawn depends on the duration for which the employee contributes to it. If he has worked for more than five years with the same company, the amount withdrawn from the provident fund is exempt from tax. If he has worked for less than five years, the entire amount withdrawn is taxable. As you have been with the firm for only three years, it is advisable to transfer the balance to your new employer. This will help consolidate your provident fund money and you will not have to pay any tax.

Q. I receive rental income from two residential properties and frequently bear their repair cost. Can I claim deduction for this cost from the rent that I receive?

Subhodh Sule

The Income Tax Act allows a flat standard deduction of 30% from the gross rent received for the maintenance of a property. This deduction can be claimed irrespective of the actual repair work carried out by the landlord, which may amount to less than this value.

Last year, I sold a property that I had been holding for four years and bought a flat from the sale proceeds. Now, I want to sell the flat and buy a bigger apartment. If I sell the flat, will it impact the capital gains exemption that I had claimed last year?

Rakesh Kumar

Yes, the sale of your existing flat will impact the capitals gains exemption that you had claimed earlier. According to the Income Tax Act, the property on which the capital gains tax exemption under Section 54 is claimed cannot be sold before three years of its purchase. If it is disposed of, the entire capital gains exempted earlier becomes taxable in the year of sale. So you need to retain your existing flat for at least three years. If you sell the flat after this period, the previous exemption shall not be impacted and you will again be eligible for tax exemption on capital gains if you reinvest the proceeds to buy a new residential property.