Capital gains arising on sale of property – exemptions available under the IT Act

Poorva Prakash & Divya Grover

The government has come out with certain amendments within the existing provisions of the Income-Tax Act, 1961 (the Act), especially those that provide relief for house property sellers, besides granting certain exemptions. The holding period - the period from the date of purchase/completion of property - has been reduced from 36 to 24 months for computing long-term capital gains (LTCG). Also, the base year for calculation of indexation benefit has been shifted from 1981 to 2001, thereby increasing the cost of acquisition including the cost of improvement and reducing the amount of capital gains.

LTCG are taxable at a concessional rate of 20 percent after indexation, unlike short-term capital gain (asset sold within 24 months) taxable at the applicable slab rates that can be as high as 30 percent if gain exceeds Rs 10 lakh.

Additionally, LTCG arising from sale of house property can also be claimed as exempt under the Act, exemption(s) available under the Act are as follows:

• Investment of LTCG for purchase of residential house (new property): The tax payer (individual or a Hindu undivided family (HUF)) has to re-invest the LTCG and purchase another residential property (new property) within one year before or two years after or should construct a new property within three years in India from the date of sale of property.

Exemption is limited to the extent of capital gain invested in a residential property in India. If the new property is sold/transferred within three years from the date of purchase, then for the purpose of computing capital gains on this transfer, cost of acquisition of the new property will be reduced by the amount of capital gains claimed as exempt.

In case the taxpayer is unable to purchase/construct the property before the filing of tax return, the amount can be deposited under the Capital Gains Accounting Scheme in a designated Capital Gains Bank account.

The deposited money can be used only to buy or construct a residential house within the prescribed time frame. In case the amount is not invested within three years from sale of property, then the amount to the extent not invested, will be taxed as long-term capital gain in the year in which a period of three years is completed from sale of property.

• Investment in Government-notified bonds: LTCG if invested in any bonds redeemable after three years as notified by the central government in this behalf can be claimed as exempt. The reinvestment of proceeds in specified bonds is limited to INR 50 lakh and should be made within six months from the transfer. In case where the individuals choose to transfer or take a loan against these bonds within three years, capital gains exempted earlier, will become taxable.

Considering the concessions and exemptions available under the Act, one can minimize taxes or claim exemption(s) provided factors such as the quantum of gain, timing of transfer, and TDS implications on purchase of new property are considered while re-investing the gains.

(Poorva Prakash is Senior Director and Divya Grover is Manager with Deloitte Haskins and Sells LLP)