Sold ancestral property? Know the rules for parking or investing sale proceeds to save tax

Selling a residential property is a huge task. You not only have to work hard to find the right buyer at the right price but also look for ways to park or invest the sale proceeds to save capital gains tax. For instance, Ashok Kumar recently shared with us that he sold his ancestral property in July 2023 and wants to invest the amount received from the sale in a flat to save capital gains tax.

However, Ashok is currently not sure of which property to buy. So he wants to park the sale proceeds in a bank for some time but he is again not sure as to which bank he should choose to park the sale proceeds. Further, he also wants to know whether he will become eligible to earn interest on the amount parked in a bank and whether there are other ways to save capital gains tax other than investing in bonds.

“I have sold my ancestral property in July 2023. I wish to invest in a flat to save the capital gains tax. So I wish to park the money for some time till I decide on the property I wish to buy. Kindly advise me in which bank I can park the funds till the new property is bought. Further, will I be eligible for interest on this amount? Please also suggest ways to save capital gains tax other than investing in bonds,” Ashok said in an email sent to FE Money.

Sudhakar Sethuraman, Partner, Deloitte Touche Tohmatsu India LLP, and Shruti K.P, Partner, INDUSLAW, have answered Ashok’s queries:

Sudhakar Sethuraman: On the assumption that the ancestral property sold was used for residential purposes and it resulted in long-term capital gains, the Income-tax laws allow taxpayers to purchase another house property within two years or construct another house property within three years from the date of transfer.

The money can be deposited in a bank under the Capital Gains Deposit Account Scheme (CGAS). However, it is essential that the amount is invested before filing of Income-tax return (ITR) i.e. by 31st July.

In case the investment in the CGAS is not utilized either fully or partly for house purchase/construction within the timelines stated above then the amount so deposited shall be treated as income in the year in which the period of three years from the date of transfer of the property expires. In addition, the taxpayer would be entitled to withdraw the amount from the CGAS scheme.

The sale proceeds from the ancestral property can be deposited in all branches of public sector banks (except rural branches). Yes, you would be eligible for interest on the amount deposited under the CGAS scheme.

Taxpayers can save long-term capital gains by either investing in another house property or by investing in bonds.

Also Read: I sold my flat for Rs 36 lakh. Where can I park this money before buying REC Bonds to save tax?

Shruti K.P: We assume that the ancestral property referred to here was a residential property. As per Section 54 of the Income Tax Act (ITA), an individual is allowed to park the sale proceeds on account of the sale of a residential house property under the Capital Gain Account Scheme, 1988 (“Scheme”) before furnishing the return of income and in any case not later than the due date to file an original return of income under section 139(1) of the ITA (generally 31st July of assessment year).

The amount so deposited under this Scheme shall be deemed to be the cost of the new asset and shall be eligible for the purpose of claiming exemption under Section 54 of the ITA. However, if the amount deposited under this Scheme is not utilised, wholly or partly, for the purchase or construction of the new house property within the specified period, then such unutilised amount shall be chargeable to tax in the previous year in which the period of three years from the date of the transfer of the original asset expires, and you shall be entitled to withdraw the unutilised amount in accordance with the Scheme.

It is pertinent to note that the maximum amount of exemption under section 54 is Rs 10 crore.

You can open a capital gain bank account in any of the banks notified by the government, which are typically scheduled banks such as the State Bank of India. Further, you would also be eligible to receive interest on such deposit amount as per the rates notified by the Reserve Bank of India from time to time.

The rate of interest can be confirmed with the respective banks before depositing the amount under this Scheme. Assuming you have transferred a residential house property, you can save tax by investing in another residential house property in India within the prescribed time limit under Section 54 or by investing in the bonds prescribed under Section 54EC of the ITA.

It is also important to take the jurisdictional assessing officer’s approval for closure of the capital gain bank account.

Have any home loan, property, income tax or other personal finance-related queries? Write to fe.money@financialexpress.com. We will get relevant queries answered by personal finance experts. 

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