This article deals with the exemptions available on long term capital gains arising on sale of a residential house which is held for more than 36 months [(reduced to 24 month wef Fy 2017-18)] if you invest the capital gains in specified assets. The amount to be invested is the indexed capital gains and not the plan gains.
- Purchase of another house property(section 54)
Among options available for claiming exemptions on long-term capital gains, reinvestment in the purchase or construction of another residential house is frequently used by the taxpayers. You can claim exemption from long-term capital gains if you have purchased a new residential house within one year prior to your date of sale of the old house or within two years after sale of the old house. You can also get a new house constructed within three years from the date of sale of the old house and claim the exemption.
If you book a residential property under construction the construction should be completed within three years or at least substantial payments be made for such purpose. In this case, construction by a builder will also allow you to claim an exemption.
It is also not necessary for you to actually use the funds received from sale of your house for the purchase of new house property even a home loan taken for this purpose will be eligible for it. What law requires is that you purchase a new property for an amount equal to the capital gains.
For claiming exemption, the brokerage, the stamp duty, registration charges and transfer charges, etc, paid by you will also be included in the cost of the new house property purchased/constructed.
In case you intend to claim the exemption by purchasing or constructing a house and the full investment in the house is not made by the due date for filing your income tax returns, you have to deposit the unutilised money in a [capital gains account] with a authorised bank. The money so deposited can be withdrawn for purchasing or constructing a new house. In case you plan to buy an under-construction property (through booking), please ensure that you get the possession of the property within a period three years as specified above to avoid any litigation.
The new house should not be transferred within a period of three years otherwise capital gains exemption allowed earlier will be taxed as shorter term capital gain in the year in which you transfer the new house. The house has to be purchased in India and the exemption can only be claimed for purchase of one house only.
Please note that there is no exemption from long term capital gains on purchase of a commercial property; however you can always use a residential property for commercial purposes.
- Purchase of specified bonds
If you do not want to invest in the purchase of a new house, you can invest your indexed long- term capital gains in bonds of the National Highways Authority of India or the Rural Electrification Corporation.(With effect from Fy 2017-18 other institute will also be added) You need to hold these bonds for minimum of three years.
This indexed capital gains have to be invested within a period of six months from the date of sale of your old house property, unlike reinvestment in buying a new house, where you get extended time for investment. This investment has to be made even if you have not received your full sale consideration in respect of the old house sold. You can not claim exemption for more than 50 lakhs in a year as you are not allowed to invest more than 50 lakhs in a year.
In case you transfer the bonds within three years from the date of purchase, the capital gains exemption availed during earlier years will be taxed in the year in which you transfer such bonds. It may also be noted that even if you take a loan or advance against the security of such bonds, it is treated as transfer and you forfeit the exemption availed.
Availing exemption under one avenue does not disentitle you from availing benefit under other avenues so you can use either one or a combination of both avenues available for claiming exemptions on capital gains tax. You may also claim exemption partly by investing in the house and/ or bonds and partly pay the proportionate income tax to the extent of capital gains, which have not been invested as above.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)