In case you sell your house property within two years from the date of purchase, it will be hard for you to save tax on the gains, if any. This is because such gains are treated as short-term capital gains (STCG) and may only be adjusted against capital loss. Any unadjusted gains will be added to your income and will be taxed as per your income tax slab.
However, if you sell your house after two years from the date of purchase, the gains, if any, will be treated as long-term capital gain (LTCG) and you will have many options to invest the gain amount to save tax.
The investment options to save tax on LTCG on house property are –
Purchase / Construction of up to two Houses: You may get relief on paying tax on LTCG by investing the gain amount in buying one or two houses one year before selling the old property or within two years after selling it. You may also save the tax by constructing a new house within three years from the date of sale of the old house.
Deposit in Capital Gain Account: To claim the tax benefit on LTCG, however, you have to either buy or construct the new house(s) before filing the Income Tax Return (ITR) for the year in which you sold your house, or you have to deposit the gain amount by opening a Capital Gain Account in a public sector bank before filing the ITR to avail the opportunity of buying the new house(s) within two years or to construct within three years.
Other Investment Options: The other investment options allow you to save tax on LTCG from sale of house property by investing in the eligible Capital Gain Bonds eligible u/s 54EC of the Income Tax Act and in eligible small or medium enterprises or start-ups u/s 54GB of the Act. Under such investment options, however, the limit for single investment is Rs 50 lakh.
“Section 54EC and Section 54GB of the Income-tax Act, 1961 (“the Act”) provide for income-tax exemption against capital gain income arising from transfer of house property on investment in specified reinvestment avenues. The house property sold / transferred can be land or building or both which was held for a period of more than 24 months before its transfer i.e. long-term in nature,” said Dr. Suresh Surana, Founder, RSM India.
“Section 54EC requires the taxpayer to make investment in certain specified bonds of Rural Electrification Corporation of India (RECL), Power Finance Corporation Limited (PFCL) or Indian Railways Finance Corporation Limited (IRFCL) within a period of 6 months from the date of transfer of property,” he added.
The exemption allowed under this section would be lower of the following:
- Capital Gain; or
- Amount invested; or
- Rs. 50 lakh
“In case of section 54GB, it requires the taxpayer to make an investment in equity shares of a specified eligible company or an eligible start-up wherein the said start-up utilises the investment amount to purchase certain plant & machinery, any office appliances or any vehicle within a period of one year. Section 54GB does not specify any ceiling limit as mentioned in Section 54. Thus, the exemption provided in Section 54GB would be restricted to the amount so invested or the amount of net sale consideration, whichever is lower,” said Dr. Surana.
Can one choose only one investment option, or can use more than one option, if the LTCG is higher than the investment limits?
“The Income-tax Act does not restrict the taxpayer from claiming exemption under the Section 54 series simultaneously in respect of capital gain provided the taxpayer satisfies all the conditions specified in the respective sections i.e. the taxpayer can claim exemption simultaneously by investing in one or more options available,” said Dr. Surana.
“Such rationale has been provided by the judgement of ITAT Mumbai in the case of ACIT vs Shri Deepak S Bheda (ITAT No. 5011/Mum 2010) wherein the taxpayer was allowed to claim simultaneous exemption under section 54EC and section 54 in respect of a particular capital gain,” he added.