However, if the property is sold after three years of purchase, the resultant gains — known as long-term gains — are taxable at a fixed rate of 20%. That apart, the taxpayer is entitled to avail the benefit of an inflated cost of acquisition of the property as prescribed. Also, you might be able to avoid paying tax on long-term capital gain arising from sale of the house, and also have an option to reducing the tax burden.
Tax provisions provide for exemptions for capital gains from the sale of a house if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years.
Recently, courts have taken a liberal view in the sense that the period of construction may extend beyond the prescribed period of three years, but substantial money should have been invested by the taxpayer in the construction of residential property. This means you cannot invest in a commercial property or land to save tax — you have to necessarily invest in a residential property. However, you should not own more than one house, that is, apart the house you are investing in.
From FY13, long-term capital gains from sale of a residential property have been exempted from tax if the sale proceeds are invested in a small or medium enterprise in the manufacturing sector. The fund should be used by the enterprise to acquire new plant and machinery before the due date of furnishing of return of income by the assessee. The pre-condition for availing this tax benefit is that the equity holding or voting power of the taxpayer in the enterprise after the investment should be more than 50%.
Further, certain instruments like capital gain bonds have been prescribed in which the profit arising from the sale of a property can be invested to avail tax exemption. These instruments have a lock-in period of three years and the maximum limit for investing in such instruments is R50 lakh.
These bonds are currently being issued by the National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (REC). If the entire amount of the long-term capital gains is invested in these bonds, the tax is fully exempted. Investments of any lesser amount will be granted proportional deduction. Now, if a property has not been identified and purchased before the tax return has been filed or before the due date of filing it, whichever comes earlier, the money has to be deposited in a special account known as the Capital Gain Account Scheme (CGAS).
Doing this conveys to the authorities that you intend to buy a property to save the capital gains tax. Any withdrawal from CGAS should only be for payments in relation to the purchase of the new property. Lastly, the new property bought has to be held for a minimum period of three years failing which the capital gains arising from the sale of the new property, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new property.
The writer is managing partner, Nangia & Co.
With inputs from Ashutosh Jain