Are you planning to sell your assets and are concerned about the income taxes you may be liable to pay? Here is what you may want to know and understand for shielding your gains from the tax.
The Income tax Act provides for tax deduction for the reinvestments made consequent to sale of long-term capital assets (LTCAs). An asset is said to be an LTCA if the period of holding such asset before transfer exceeds 36 months from the date of acquisition. The period of holding for a particular category of listed securities, equity-oriented mutual fund units and bonds is only 12 months instead of 36 months.
Section 54F of the Income Tax Act grants deduction in respect of Long Term Capital Gain (LTCG) arising on sale of any LTCA, other than residential house property, upon reinvestment of sale proceeds in a residential house property and fulfilment of certain conditions.
These provisions were introduced in 1982 to encourage investments into residential house properties. Ironically, in its original avatar in 1982, deduction was not available if a person already owned any residential property as on the date of transfer of the LTCA. It is only in 2000, the amendment was made, so as to accommodate the deduction even when a residential house property is already owned at the time of transfer; but this is limited to owning not more than one residential house property other than the new residential house property that one is intending to invest.
Ways of re-investment
Purchase of residential house property: Purchase needs to be made within one year prior to the date of transfer of LTCA or within two years from the date of transfer of LTCA. The construction of property needs to be made within three years from the date of transfer of LTCA. Tax provisions have been ambiguous and were debated on two main issues; whether one can claim deduction for investments made in more than one house and whether such house can be situated outside India?
These two issues were clarified with a landmark amendment made in the Finance Act of 2014 in which the tax wordings were substituted with ‘one residential house in India’. This means that the purchase/construction can be made only in one residential house property and that too in the house located in India.
Deposit into CGAS
If the tax payer is unable to utilise the entire net sale consideration for the purpose of purchase or construction of new house within the due date for filing the tax return, then the unutilised amount has to be deposited in a separate account with any authorised bank under the Capital Gains Account Scheme (CGAS) to avail the deduction. This deposit has to be made within the due date for filing the return of income of the year in which capital gains have accrued. Funds can be withdrawn from CGAS account only for purchase or construction of house.
Quantum of deduction available
Net sale consideration (i.e. full value of sale consideration minus indexed cost of acquisition minus expenses on transfer), if fully utilised for purchase/construction of new asset, entire capital gains would be exempt. However, if the same is partly used, only the proportionate capital gains would be taxed, i.e. deduction would be available in the same ratio that the amount reinvested bears to the net sale consideration.
Reversal of deduction
Deduction claimed earlier would be revoked and brought under tax net, if another residential property is purchased within one year or constructed within three years from the date of transfer of the LTCA, or where the new house, in which the sale consideration is reinvested, is transferred within three years from the date of purchase/construction.
The writer is partner, Deloitte Haskins & Sells LLP. With inputs from Ratna K, senior manager and Shruthi K, assistant manager, Deloitte Haskins & Sells LLP