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Reviewed by Nov 18, 2022| Updated on
The taxpayers can minimize or avoid paying tax by reinvesting capital gains from residential house property under the Income Tax Act, 1961. The taxpayer can either reinvest the capital gains in bonds or in a residential property. The taxpayer needs to fulfil a few conditions in both of the options to gain tax benefits.
Under Section 54 of the Act, the individual/HUF can save their taxes by reinvesting the capital gains in a single residential property. The new house must have purchased one year before the sale of the previous house or two years after the sale. When the taxpayer intends to construct a house, he has to build it within three years.
Under Section 54F of the Act, the individual/HUF can also claim the tax exemption on all capital gains from the sale of assets other than residential property. The taxpayers must invest the entire proceeds from the sale. When the taxpayer invests only a portion of it (to buy or build a new house), tax exemption is available only for that sum of investment. Further, they can reinvest only the capital gains and not the entire sale proceeds to avail the tax benefit as specified in Section 54 of the Act.
The taxpayer has to deposit sale proceeds under the Capital Gain Account Scheme (CGAS) in a separate bank account if he plans to purchase a house within two years. Even if he is building a house, he can deposit the money in CGAS to take advantage of the tax gain. Withdrawals can only be made as per the progress in construction, and not for any other purpose.
The new house should be built in India, and it should be a residential property only. Also, the taxpayer should not buy another new house (other than the current one) within two years or build another house within three years from the sale date of the previous house. He also can not sell the new house within three years of buying or constructing it.
As per Section 54EC of the Act, all taxpayers can avail tax benefit on the capital gains from the sale of residential property by investing bonds. Taxpayers need to invest in these bonds within six months of the transfer date of the land, or before the due date of filing the tax return for the relevant financial year.
The maximum amount that the taxpayer can invest is Rs 50 lakh. Each owner is eligible for a separate limit of up to Rs 50 lakh if the property is under joint ownership. Taxpayers must keep the investment for at least three years in those bonds. If taxpayers redeem the bonds or even take out a loan/advance against these bonds within three years, the tax benefit will be revoked.