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“Invest in property now, keep it for a few years and then sell it off for a higher price”. This has been the mantra for individuals who look for secured, less risk and less volatile investments.
However, while designing their strategies, many a time the most important component – tax planning is often forgotten. You can plan a sale of immovable property and reinvestment with planning for tax exemptions.
The due date to make compliances for claiming exemption under section 54 to 54GB, such as investment in bonds, purchase or construction of the property, the deposit of money, etc., is extended. The compliances, of which the last date falls between 1st April 2021 to 29th September 2021, may be completed before 30th September 2021.
Union Budget 2019 outcome:
Budget 2019 extended the applicability of capital gain exemption under Section 54 by allowing the purchase or construction of 2 residential houses (previously one 1 was allowed), provided the gain is less than Rs. 2 crore. This option can be exercised only once in a lifetime.
Firstly, let us understand which portion of the income is taxable on sale of the property. Is it the entire amount received on sale of property?
The answer is NO.
In simple words, it is only the profit earned by the individual on sale of the property that is taxable. Profit is the difference between the sale price and the cost of the asset.
A sale of a residential house is a sale of a capital asset, and the profit gets taxed as a capital gain.
The definition of capital asset under section 2(14) of the Income Tax Act includes property of any kind movable or immovable, tangible or intangible held by the assessee for any purpose.
As per the income tax act, for the purpose of capital gains, assets are classified into 2 types depending on the holding period of the asset:
The major benefit of an asset being termed as a long-term capital asset is that the assessee is eligible for the benefit of indexation. Moreover, certain exemptions are eligible only for long-term capital assets.
Under Section 54 the IncomeTax Act, an individual or HUF selling a residential property can avail tax exemptions from Capital Gains if the capital gains are invested in purchase or construction of residential property.
Taxpayers such as partnership firms, LLP’s, companies or any other association or body cannot claim tax exemption under section 54. The conditions that need to be satisfied to avail the benefit of the said section are as follows:
The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller cannot avail the benefit of the exemption under Section 54.
With effect from Assessment Year 2020-21 corresponding to FY 2019-20, a capital gain exemption is available for purchase of two residential houses in India. However, the exemption is subject to the capital gain not exceeding Rs 2 crore. Also, the exemption is available only once in the lifetime of the seller.
The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
|Capital gain on transfer of residential house||45,00,000.00|
|Less: Investment made in residential house property||20,00,000.00|
|Balance – Capital Gains||25,00,000.00|
The exemption will be lower of the Capital Gains (Rs 45,00,000) or investment in new property (Rs 20,00,000), so the exemption will be Rs 20,00,000.
If the new house is sold within 3 years from the date of purchase or construction, then the exemption claimed earlier under section 54 shall be indirectly taxable in the year of sale of the new house property. Let’s consider two scenarios when the new house is sold within 3 years from the date of purchase or construction:
Case 1: Cost of the new house purchased is less than the capital gains computed on the sale of the original house.
Generally, when a house is sold, the profit is considered as capital gains. However, when the new house is sold within 3 years from the date of purchase or construction, then the cost of acquisition will be considered as Nil. Hence, there will be an indirect increase in taxable capital gains
Mr Y has sold residential house property in May 2015 and the capital gains amounted to Rs. 30,00,000/- In June 2015, Mr Y purchased a residential house property worth Rs. 18,00,000/-
Mr Y sells the new residential house property (Purchased in June 2015) in December 2016 for Rs. 35,00,000/-
Based on the facts mentioned above, lets compute the taxable capital gains for Mr Y . FY 15-16 (Property sold in May 2015)
|Capital gain on transfer of residential house||30,00,000.00|
|Less: Investment made in residential house property||18,00,000.00|
|Balance – Taxable Capital Gains In FY 15-16||12,00,000.00|
FY 16-17 (Property sold in December 2016)
|Consideration for transfer (Sale Consideration)||35,00,000.00|
|Less: Cost of Acquisition||NIL|
|Balance – Taxable Capital Gains In FY 16-17||35,00,000.00|
As the new property for which deduction was claimed under Section 54 was sold in December 2016 (ie within 3 years from the date of acquisition), hence it’s cost of acquisition was considered as NIL.
As a result, the entire sale consideration was considered as capital gains. Had the property been sold after 3 years , ie after June 2018, then in such case the cost of acquisition would be available as a deduction and capital gains would reduce.
Case 2: Cost of the new house purchased is more than the capital gains computed on the sale of the original house
If the cost of the new asset purchased is greater than the capital gains, then it is obvious that there will be no capital gains as the entire capital gains will be exempted. However, if the new house is sold within 3 years, then cost of the new house will be computed as follows:
|Less : Capital gains claimed for the earlier house property||XXXX|
|Cost of the new house||XXXX|
Let’s understand the above case with the help of an example Mr Z has sold a residential house property and the capital gains is Rs 25,00,000/- in June 2015.
In October 2015, Mr Z purchased a new residential house property of Rs 40,00,000/- In January 2017, Mr Z sold the new residential house Property for Rs 55,00,000/-
Based on the capital gains mentioned above, let’s compute the taxable capital gains for Mr Z FY 15-16 (Property sold in June 2015)
|Capital gain on transfer of residential house||25,00,000.00|
|Less: Investment made in residential house property||40,00,000.00|
|Balance – Taxable Capital Gains In FY 15-16||NIL|
FY 16-17 (Property sold in January 2017)
|Consideration for transfer (Sale Consideration)||55,00,000.00|
|Less: Cost of Acquisition (Refer Working Note Below)||15,00,000.00|
|Balance – Taxable Capital Gains In FY 16-17||40,00,000.00|
Working Note 1: Computation of cost of acquisition (As the property was sold within 3 years of purchase and Section 54 was claimed)
|Cost of Acquisition||40,00,000.00|
|Less: Capital gains claimed for earlier house property||25,00,000.00|
|Cost of the new house (to be considered)||15,00,000.00|
If the asset is sold in the PY, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.
The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.
However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).
Earning income automatically casts a responsibility on the taxpayers to discharge income tax on such income and so is the case with capital gains too. However, the income tax laws allow taxpayers to claim certain exemptions against capital gains, which will help reduce their tax outgo.
Two such very crucial exemptions one can claim are under Sections 54 and 54F. As discussed above the exemption under Section 54 is available on long-term Capital Gain on sale of a House Property. Exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.
|Section 54||Section 54F|
|To claim full exemption the entire capital gains have to be invested.||To claim full exemption the entire sale receipts have to be invested.|
|In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains.||In case entire sale receipts are not invested, the exemption is allowed proportionately.|
[Exemption = Cost the new house x Capital Gains/Sale Receipts]
|You should not own more than one residential house at the time of sale of the original asset.|
|This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from the sale of the new property will be taxed as short-term capital gains.||This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.|
|If the capital gains does not exceed Rs.2 crores, a once in a lifetime exemption is available for investment in 2 properties.||No such exemption available|