Period for reinvestment of capital gains from sale of residential property extended to March 2021

In a breather to property owners who plan to sell their residential properties and invest the capital gained in startups, Finance Minister Nirmala Sitharaman on July 5 extended the deadline for investment by two years.

"The provision which allows exemption of capital gains from the sale of residential property on investment of net consideration in equity shares of eligible start-up shall be extended by two years. Thus the benefit shall be available for sale of residential property on or before March 31, 2021," Sitharaman said in her Budget speech.

Presently under Section 54GB(5) of the Income Tax Act, 1961, long term capital gains on the sale of residential property will be exempt if the sale proceeds are invested in a eligible startup,  provided such transfer took place prior to March 31, 2019.

This has now been extended to March 2021.

"Considering the specific requests from startups to extend this timeline and in line with the intention of the government to liberalise the startup regime, the Union Budget has proposed changes to Section 54 GB(5) of the Income Tax Act, 1961, in terms of which, the period of exemption of capital gains arising from sale of residential house for investment in startups, has been exempted of March 2021," Atul Pandey, partner at Khaitan & Co, told Moneycontrol.

It has also been proposed that the condition of minimum holding of 50 percent shares in the startups be relaxed to 25 percent.

The current rule also states that the startup shall use the amount invested to purchase assets and should not transfer asset purchased within five years.

However the finance minister has also proposed to relax the condition restricting transfer of new asset being computer or computer software from the current five years to three years.

According to experts, the condition of holding new computer and software for five years was not reasonable at all as computers and laptops etc are likely to get obsolete in three years.

"To keep continuing the investment momentum by founders in startups, Budget 2019 has proposed to extend the investment period from March 31, 2019 to March 31, 2021," said Gaurav Chadha, tax partner, EY India.

The industry also expects this move to promote the growth of startups as people will be encouraged to invest in the sector for even for tax exemptions.

Out of over 30,000 estimated start-ups in the country, over 16,500 have been recognised by the government as on March 2019.

Startups in the country raised $3.9 billion in funding from venture capitalists in the six months ended June 30. During the same period of the previous year, the investment stood at $2.7 billion.