LTCG on sale of residential property and other than residential property

LTCG on sale of residential property and other than residential property

Here we discuss….

Short term capital gain

Long term capital gain

Tax aspects of the sale to residential house property U/S 54

Tax aspects of sale to other than residential house property U/S 54F

Introduction

Now, we explain which part of the income is taxable on the sale of the residential property or other than residential property. Is it the entire amount received on the sale of the 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.

As per the income tax act, for the purpose of capital gains, assets are classified as follows,

1. Short-term capital asset

2. Long-term capital asset

What is short -term capital asset?

An asset held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property.

What is Long–term capital asset?

An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to the movable property such as jewelry, debt-oriented mutual funds, etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of the date of purchase).

The assets are:

  1. Equity or preference shares in a company listed on a recognized stock exchange in India.
  2. Securities (like debentures, bonds, govt securities, etc.) listed on a recognized stock exchange in India.
  3. Units of UTI
  4. Units of equity-oriented mutual fund
  5. Zero Coupon Bond

When the above-listed assets are held for a period of more than 12 months, they are considered as a long-term capital asset.

Capital Gain on sale of Residential House Property u/s 54 of Income Tax Act, 1961

As per section 54 of the Income Tax Act, 1961 the owner of a residential property with relaxation from the capital gains tax, if the gain from the sale is used to acquire another residential property. Owners of residential property in many cases sell their property only to purchase another property due to different reasons like moving from jobs, retirement, etc.

In such a case, a property is sold by a taxpayer not for gains from the earning, but for other reasons. Hence, when a taxpayer sales a residential property and purchases another property, he or she is exempt from capital gains under Section 54 of the Income Tax Act.

While claiming benefit under Section 54 has to concern with the income tax consultant. The home purchased or constructed must be in India only means a property cannot purchase abroad.

Eligibility under Section 54 of the Income Tax Act

The following conditions satisfied by the taxpayer to claim benefits under Section 54 of the Income Tax Act:

  1. The taxpayer is an individual or HUF. Exemption under Section 54 is not available for companies or LLP register companies.
  2. The asset transferred should be a long-term capital asset, being a residential house property as defined under the act.
  3. Within a period of 1 year before or 2 years after the date of transfer of the old house, the taxpayer should acquire another residential house or should construct a residential house within a period of 3 years from the date of transfer of the old house. In the case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

A taxpayer can claim benefit under Section 54 of the Income Tax Act for one residential house property purchased or constructed in India only. If a taxpayer is involved in more than 1 such transaction during his/her purchased or constructed must be in India only.

Budget 2019 announcement!

Amendments to Section 54 – Capital Gains Exemption

Assessees can get an exemption by investing long term capital gains from the sale of house property in up to two house properties against the earlier provision of investment in one house property with the same conditions. However, the capital gains on the sale of house property must not exceed Rs.2 crores.

Transfer of Property after claiming benefit under section 54

If a taxpayer claims benefit under Section 54 of the Income Tax Act and purchases or constructs a new house, he/she must hold that property for a minimum period of three years. If the taxpayer sells the property before the end of 3 years, then the benefit granted under Section 54 will be withdrawn and the taxpayer would have to pay the capital gains due to the previous transaction.

Amount of Exemption

The amount of capital gains exemption under Section 54 of the Income Tax Act will be the least of the following…

  1. Amount of capital gains on transfer of residential house property.
  2. Investments made in the purchase or construction of a new residential house property.

Home Loan for Purchase of House Property.

The tribunal has ruled that the tax deduction cannot be denied on the basis that the taxpayer has taken a home loan to make the purchase.

Capital Gains Deposit Account Scheme

Under Section 54 of the Income Tax Act, a taxpayer having long-term capital gains from the sale of a residential property can avoid the same by purchasing or constructing a residential property 1 year before or 2 years after (in case of purchase of property) or after 3 years (in case of construction of property).

In some cases, the proceeds from the sale of the residential property would not have been invested by the taxpayer at the time of filing of income tax return (Due date of Income-tax filing as per section 139(1). In such cases, the capital gains benefit under Section 54 can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank. The new house can later be purchased or constructed by withdrawing the deposits from the account within a time frame of 2-3 years. If the deposits are not utilized within the stipulated period for the purpose of purchase or construction, the amount deposited will be taxable in the hands of the assessee.

Section 54F of Income Tax Act

The CA in Mumbai explains this As per provisions of section 54F of the Income Tax Act, 1961, exemption of capital gain is available in case of transfer of long term capital assets against investment in residential houses. The features for availing exemption under section 54F are detailed hereunder –

  1. The exemption under section 54F is available only to individual and HUF;
  • Capital gain has arisen on account of transfer of any long term capital assets other than a residential house;
  • Net consideration arisen on account of transfer of long term capital assets has been invested as follows –

Net consideration has been re-invested in purchase of one residential house within a period of 1 year before the date of transfer or within a period of 2 years after the date of transfer; or Net consideration has been re-invested in construction of one residential house in India within a period of 3 years from the date of transfer.

Meaning Of ‘Net Consideration’

Net consideration of the transfer of capital assets means the full value of consideration received on account of transfer of the capital assets as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

Net consideration = Full value of consideration (-) expenditure

Section 54F also applicable to on sale of Land or Commercial Property

The following conditions need to be satisfied in case of sale land and are planning to buy a residential home.

  • Use the entire sale proceeds (received by selling a plot/land) to buy a new house or to build a new residential house.
  • If using a part of the money, the deduction will be the proportion of the invested amount to the sale price.
  • The time-frame for investment is the same as that for capital gains from residential property.
  • You should not own more than one residential house prior to this investment.
  • The deducted capital gain (from the sale of land) becomes taxable if you buy another house within two years of the transfer of the original asset or construct a new one within three years.
  • If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
  • This new house purchased or constructed must be situated in India.
  • The proceeds should not be invested in a commercial property or in another vacant plot.

Circumstances Under Which Exemption under Section 54F Not Available

Following are the circumstances under which exemption is not available under section 54F of the Income Tax Act, 1961 –

  1. The assessee owns more than 1 residential house property as on the date of transfer of the original assets. However, the residential house property bought for claiming an exemption under section 54F is exempted from the same.
  2. The assessee purchases additional residential house within a period of 1 year from the date of transfer of original asset. The new asset purchased for claiming an exemption under section 54F is exempted from the same.
  3. The assessee constructs additional residential houses within a period of 3 years from the date of transfer of original asset. The new asset constructed for claiming an exemption under section 54F is exempted from the same.

Where Part of the Amount of Net Consideration Is Invested

  1. In the case where only part of the net consideration is invested in the purchase / construction of a residential house, then, an only proportionate amount of long term capital gain would be exempted under section 54F. A proportionate amount of exemption can be calculated on the basis of the following formula.
  2. Exemption under section 54F = Long term capital gain x Amount re-invested / Net consideration.
  3. In case the full amount of net consideration is invested in the purchase / construction of the residential houses, then, the full amount of long term capital gain would be exempted under section 54F.

Capital Gain Deposit Account Scheme

In case the net consideration is not re-invested within the last date of filing a return of income tax under section 139, then, the amount should be deposited in the capital gain deposit account scheme. The amount so deposited in the capital gain deposit account scheme should be used for the purchase / construction of the residential house within the specified period.

In case the amount as deposited in capital gain deposit account scheme is not utilized for wholly or partly within the specified period for purchase or construction, as the case may be, then, in such case on expiry of the period, the unutilized amount shall be treated as a capital gain

Consequence on Transfer of New Asset

In case there is a transfer of new purchased residential house or constructed residential house before expiry of a period of 3 years of its purchase or construction, as the case may be, then, the capital gain exempted under section 54F shall be taxable as long term capital gain of the previous year in which the new asset is transferred.

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Swapnil S

CA in Mumbai

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