-P P Varkey, ERNAKULAMSince you have disposed off a long-term capital asset, you are entitled to the benefit of determining and applying the indexed cost of acquisition to arrive at your deemed cost of acquisition. Whereas the index for the year beginning April 1, 1981 was 100, the index for the year ended March 31, 2000 was 389. The current year's index has still to be determined and notified by the government. However assuming that it is 410, your indexed cost of acquisition of the property inherited by you would be Rs 10.25 lakh. In other words, that is your capital gain.

However if you invest the entire sale proceeds in a new house within the two financial years following the year of sale you will be exempted from payment of capital gains tax. As pointed out by you, the cost of acquisition of a new apartment at Ernakulam including registration charges and stamp duties will be Rs 17 lakh only, therefore you will be liable to payment of capital gains tax on a pro rata basis. The pro rata gain amount being (10.75 x 4 and divided by 21 lakh) about Rs 2.05 lakh.

You can invest this amount in any approved instrument falling under section 54 EC of the Income Tax Act with a lock-in period of three years and thus avoid payment of capital gains tax altogether. You could also deposit the capital gains tax of Rs 41,000 along with your next installment of the advance tax but in any case prior to filing your income tax returns for the current assessment year.

Although you can gift the surplus amount after payment of capital gains tax to your wife (to enable her part-finance the purchase of another apartment in her own name), you cannot rule out the possibility of your and your wife's income being clubbed for tax purposes. I would therefore suggest that you give the amount to your wife as a loan carrying interest on the same rate as you would have earned had the amount been placed in a fixed deposit account with a nationalised bank.

Should you decide to adopt this course of action, it would be advisable to execute a loan agreement on stamp paper and also ensure that the terms of repayment of the principal loan amount and the interest accrued thereon are adhered to. It is also always open to you to partially finance your own apartment by raising a loan from a term lending institution and avail tax exemptions available under section 24 and 88 of the Income Tax Act.

This can be done by limiting your own investment in the apartment to the extent of deemed (indexed) cost of acquisition of the ancestral apartment that has now been disposed off by you. This would, of course, mean that you will either have to invest your capital gains in approved instruments like NABARD or National Highway Authority Bonds with a minimum lock-in period of three years or else pay the capital gains tax.

In the event you adopt this mode of investment then you could also give your wife a loan from the amount attributable to deemed cost of acquisition at a relatively lower rate of interest. She would be entitled to claim income tax deductions in respect of repayment of principal loan amount and the interest paid by her to service this loan under section 24 and 88 of the Income Tax Act provided the money received from you has been exclusively utilised for the purchase of a residential unit in her individual name.

But you on the other hand will have to show the interest earned on loaned amount as your income from other sources and will be liable to pay income tax on it.