Long-term capital gains on sale of a residential house property by an individual or a Hindu Undivided Family (assessee) are exempt from tax under Section 54 of the Income-Tax Act, subject to conditions:
* The assessee has within a period of one year before or two years after the date of transfer of the property purchased one residential house property in India; or
* Constructed one residential house property in India within three years from the transfer date.
If the amount of capital gains on such a sale is more than the amount of residential house purchased or constructed, then the differential amount is taxable as capital gains for the tax year. If the cost of the residential house purchased/constructed is greater than or equal to the capital gains, then the entire capital gains is exempt. For instance, if A sells a residential house property on October 1, 2015, and the long-term capital gains on such a sale is, say, Rs 100 lakh, then the entire capital gains can be claimed as exempt, if A purchases a residential house property of Rs 100 lakh or more by September 30, 2017.
If the amount of capital gains is not fully utilised towards purchase/construction, the assessee is required to deposit the unutilised amount in a capital gains account scheme with notified banks/institutions within the due date of filing the tax return. The assessee needs to fulfil this condition before the due date of filing the return, even though he may file the return after the due date.
The amount so deposited may be utilised towards the purchase/construction of a residential house. The unutilised amount lying in the capital gains account scheme can be withdrawn after three years and shall be treated as capital gains of the tax year in which such a withdrawal is made. If the new residential house (which is purchased or constructed) is sold within a period of three years from the date of purchase, for purpose of computing capital gains in respect of the new house, the cost of such house will be reduced to the extent of capital gains claimed as exempt earlier.
In other words, the exemption claimed earlier by investing in the new house would be reversed if the new asset is sold within a period of three years.
Many people sell their property and book a new one under self-financing schemes of a development authority or book apartments which are in a construction stage. The allotment of flats in such a case could qualify as construction and an assessee can rely on circular issued by income-tax authorities to claim the benefit of a larger period of three years for construction of flats. A contentious issue that has been a source of litigation is that where an assessee, after selling his property, has entered into an agreement with a builder to buy a new flat in a building which is under construction.
Courts have held that these should be regarded as “construction” and not purchase and, thus, a larger period of three years is available to the assesse.
Sometimes, there are inordinate delays in construction of flats and it may not be complete within the stipulated three years. In such cases, judicial precedents have held that that the provisions of Section 54 are benevolent and, hence, should be interpreted liberally.
Another issue relates to whether investment in a residential property outside India / investment in multiple residential units (but used as a single residential house) would be eligible for exemption under Section 54.
Certain judicial precedents have held that Section 54 mandates investment in residential property and whether such residential property is in India or outside or even if it consists of several units, it cannot be an impediment to claiming relief under Section 54 so long as it is a residential property. However, the Finance Act, 2014, has amended Section 54 to specifically clarify that exemption is available if the amount is invested in only one residential property in India.
The writer is partner with Deloitte Haskins & Sells LLP. Inputs from Ajay Nahata, manager, Deloitte Haskins & Sells LLP