Investing in properties involves a large chunk of money. In some cases, investors may liquidate other assets to acquire a property. The Indian tax law recognises this and grants exemption to individuals who wish to sell or invest in house property assets. These exemptions are available in the form of capital gains.
Tax saving exemptions: Investment in realty upon sale from another real estate property:
If an individual wishes to reinvest the gains from the sale of house property to acquire a new house, he will be eligible for an exemption under section 54. Let’s take a look at a quick example to fully understand the scope of section 54.
Anil had purchased a house on January 10, 2013 for Rs 4,000,000; he sold this house for Rs 9,000,000 on June 20, 2018. He decided to invest the proceeds of this sale to buy a new house property for Rs 3,000,000. The calculation of the capital gains and the exemption would be as follows:
Please note that to claim this exemption, a taxpayer should have held the property which is being sold for more than two years.
The ambit of this exemption is now extended with effect from April 1, 2019 to investment in two residential properties (only once in a lifetime benefit), the one condition being that the gains do not exceed Rs 2 crore.
Investment in real estate upon the sale of any other asset
In case an individual has made a profit from the sale of any other capital asset and wishes to invest it in a residential house, he will be eligible for an exemption under Section 54F of the Income Tax Act. The exemption for capital gains is allowed in the proportion which the investment in new house bears to the sale amount. Let’s take a look at an example to understand this section better.
Rita sells a plot of land on June 20, 2018 for Rs 9,000,000 which she had purchased at Rs 3,000,000 in January 2013. With the proceeds of the land, Rita purchased a new residential house for Rs 8,100,000. The calculation of the capital gains and the exemption would be as below:
In case the taxpayers want to claim full exemption of long term capital gain, they must invest the entire sales proceeds of Rs 90 lakh. Additionally, to claim this exemption the property which is sold should have held by a taxpayer for more than two years. Also, as on the date of sale, the taxpayer should not own more than one house property; this is apart from the new residential house.
Other conditions attached to exemptions Period available for investment
A taxpayer can acquire a residential house within a span of two years. However, a residential property that has been purchased a year before the sale will also qualify for an exemption. In the case of under-construction properties, taxpayers have a total of three years to complete the construction provided the property is situated in India.
Deposit in Capital gains account scheme
Taxpayers who are unable to invest the proceeds/capital gains can deposit the amount of gain/sale consideration in a Capital Gains Account Scheme (CGAS). The deposits can be made to any branch of a public sector bank. However, this must be done on or before the due date for furnishing of the income tax return of the year in which property was sold. If they fail to utilise the whole amount of CGAS within three years from the date of sale of property, they will have to pay tax on the gains which were earlier exempted at the end of specified time period.
Archit Gupta is the founder and CEO of ClearTax.