Tax talk: Reinvest to make capital out of tax exemptions

Published: February 24, 2015 12:06 AM

Gains from sale of a long-term capital asset are eligible for exemption if they are invested in notified bonds of NHAI or REC within six months from the date of transfer

A slice of every penny that we earn gets caught in the tax net. However, there do exist some tax-saving provisions. Gains arising from sale of capital assets are subject to tax with certain exemptions, which are usually proportionate to the re-investment in specified assets. Some of them are as follows.

Investment in house property

Exemption for gains from sale of any long-term capital asset, not being a residential property, is available when the proceeds are reinvested in the purchase or construction of another residential property. The capital gains would be exempted wholly if the total amount of net sale consideration is invested. If the entire sale proceeds are not reinvested, the exemption is available on a proportionate basis, i.e., in the same ratio that the amount re-invested bears to the total sale proceeds.

However, the person shall not own more than one residential house (excluding the new house invested) on the date of transfer and shall also not purchase in next two years or construct within three years any other new residential house other than the house for exemption. If the new house is sold within three years from the date of purchase/construction, the exemption claimed earlier will be chargeable to tax besides the short-term capital gains from the sale of the new house.

Similarly, any long-term capital gain (LTCG) from sale of a residential property is exempt from taxation if the amount of capital gain is invested in another residential house property. The exemption is available to the extent of the amount invested in the new house or the capital gains, whichever is lower. If the new house is sold within three years from the date of purchase/construction, the LTCG claimed would be reduced from the cost of acquisition of new house while computing short-term capital gains.

For availing these exemptions, a person can either purchase a residential house within a year before the sale or two years after the date of sale, or construct a residential house within three years from the date of sale. As per recent amendments to laws, exemption is available only if the investment is made in a residential property situated in India.

Further, if the new house is not purchased/constructed before the due date for furnishing the return of income, the unutilised portion of gains/net consideration has to be deposited with any authorised bank in an account under the Capital Gains Account Scheme (CGAS). Such deposit shall be made before the due date for filing the It return. The amount deposited can be withdrawn for acquiring the new house within the time limit specified above. The unutilised portion in the deposit account shall be chargeable to tax, if the same has not been utilised within the timeline.

Other exemptions

Gains from sale of a long-term capital asset are eligible for exemption if they are invested in notified bonds of the National Highways Authority of India and the Rural Electrification Corporation within six months from the date of transfer. Exemption is available to the extent of capital gains or amount invested, whichever is lower. The value of investment in notified bonds during the financial year in which the original asset is transferred and in the subsequent financial year shall not exceed R50 lakh.

By Ashlesh Varma

The writer is partner Deloitte Haskins & Sells LLP. With inputs from Ratna K, senior manager & Shahansha D, deputy manager, Deloitte Haskins & Sells LLP

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