Income Tax: No LTCG exemption if new house construction starts 2 years before date of transfer

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Published: January 31, 2018 3:03:09 AM

To claim tax exemption on capital gains arising from transfer of residential property, taxpayer has to invest capital gains either for purchase of another residential house property within one year before or two years after date of transfer or for construction of another residential property within a period of three years after date of transfer.

ltcg exemption, how to save tax, how to save tax on ltcg, tax saving tipsIt has been held in various cases that cons-truction of new house may be commenced even before transfer of the old house.

I have been constructing a new house from Sep 2015 till July 2017 with a home loan plus my own money. If I invest sale proceeds of my existing home in the under-construction house, can I save tax fully on LTCG?

– Rahul Duggal

To claim tax exemption on capital gains arising from transfer of residential property, taxpayer has to invest capital gains either for purchase of another residential house property within one year before or two years after date of transfer or for construction of another residential property within a period of three years after date of transfer.

It has been held in various cases that cons-truction of new house may be commenced even before transfer of the old house. The material condition is that construction must be completed within stipulated period from date of transfer to be eligible for exemption. There have also been unfavourable rulings where Section 54 exemption was denied because construction of the property commenced long before the date of transfer of the asset. Since there have been rulings both ways, you may be denied deduction under Section 54, since you started the construction two years before the date of transfer as the law prescribes the time limit as one year before or two years after the date of transfer even in the case of purchase.

My father bought a shop in 1990 for Rs 1 lakh in my mother’s name and I am selling it for Rs 33 lakh. She will buy a property (residential) in Delhi whose circle value is Rs 25 lakh. She has one agricultural land in her name. Will she be eligible for exemption as it will be her first residential property?

—Lalit Singh

To claim exemption on entire capital gains, under Section 54F, the entire sale proceeds from sale of capital asset must be invested. If only part of the proceeds is invested, tax exemption will be proportionate. The new property has to be purchased within one year before or two years after the date of transfer of capital asset or constructed within a period of three years after the date of transfer. Moreover, the exemption shall be allowed only if she does not own more than one residential house property on the date of transfer (excluding the new house). Thus, exemption under Section 54F can be claimed on sale of shop, by investing the sale proceeds in a residential house property.

The writer is partner, Nangia & Co LLP. Send your queries to fepersonalfinance@expressindia.com

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