Can’t reinvest before ITR filing? Keep capital gains in CGAS

By Neeraj Agarwala

I sold a flat with capital gains of Rs 90 lakh. I plan to invest in a new under-construction property that will be ready after two years. Do I have to open a special account with a bank?

—Gautam Kumar

As per Section 54 of the Income-tax Act, 1961, you can claim an exemption on long-term capital gains (LTCG) on sale of residential flat, provided the gains are reinvested in purchasing or constructing another house within the specified timeline. Since you are investing in an under-construction property, the exemption applies as long as the construction is completed within three years from the date of sale of your original property. If you plan to use the entire LTCG amount as part payment for the new property, you can make the payment directly to the builder from your normal bank account before the due date for filing your income tax return. In this case, opening a  with a bank is not necessary. However, if you are unable to utilise the entire LTCG amount before the tax filing deadline, the unutilised portion must be deposited in a Capital Gains Account Scheme (CGAS) account with a designated bank to remain eligible for the exemption. If the funds are not used within the prescribed period, the amount will become taxable in the subsequent financial year.

I had an agricultural land of 4 acres in a rural area in Telangana which was acquired by a goverment undertaking in 1985. Aggrieved by the low compensation amount, I, went to court. In December 2024, I was paid a compensation of Rs 6 lakh. The interest under Section 28 of Land Acquisition Act was Rs 32 lakh  and TDS of 10%  was deducted. What will be the tax treatment of the interest?

—Karthik Santhil

This is the overall tax treatment:

Compensation: Agricultural land located in rural areas is not classified as a capital asset. So, gains arising from its sale are not subject to taxation under the head “Capital Gains.”

Interest: As per Section 56 of the ITA, interest received on  compensation or enhanced compensation is taxable under the head ‘income from other sources’. The tax will be calculated as per your applicable slab rate based on your total income, including the interest from compensation.

You can adjust the TDS amount against the final tax liability at the time of filing your return.

The writer is partner, Nangia & Co LLP.

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