I have three properties. The first is an independent house in Sector 40 Gurugram for which possession was received in 2011. The second one is a flat in Manesar, Gurugram, possession of which was received in 2015. This property was purchased by selling a commercial property. The third property is a flat in Sector 85 Gurugram bought in December 2022. Now I want to sell my first property i.e. independent house for approximately Rs 5 crore. The indexed capital gain on it will be around Rs 3 crore. I want to buy two residential properties: one a flat for Rs 1.5 crore and another a piece of land for Rs 1.65 crore and construct a house on this land within three years. Will I have to pay any tax?
Reply by Balwant Jain, an investment and tax advisor
Since you have held the first property that is being sold for more than 24 months, the profits on the sale shall be treated as long-term capital gains. You can either pay tax on indexed long-term capital gains at 20% plus cess and surcharge or claim exemption under section 54 and/or 54EC of the Income Tax Act.
As per section 54 of the Income Tax Act long-term capital gains on the sale of a residential house shall be exempt for an individual and a HUF if such indexed long-term capital gains are invested to buy a residential house in India within two years from the date of sale of the residential house. Even a residential house bought in India within one year before the date of sale of the residential house being sold will also qualify for such an exemption. In case you decide to go for self-construction of the house or go for an under-construction house, you get an extended period of three years within which the construction needs to be completed and possession obtained. The long-term capital gains not so utilised by the due date of filing of the ITR need to be deposited into a Capital Gains account under the Capital Gains Account Scheme by the due date of filing the ITR.
Though the law allows investing in one residential house to claim this exemption, the law also offers once in a lifetime opportunity to claim an exemption under section 54 for buying two residential houses provided the taxable long-term capital gains on the sale of the residential house do not exceed Rs 2 crore. Since your long-term capital gains exceed the threshold of Rs 2 crore you are not eligible to avail this once-in-a-lifetime opportunity to claim exemption from long-term capital gains on the sale of one house by investing the capital gains in two houses.
Additionally, you can claim an exemption under section 54EC by investing such indexed long-term capital gains in capital gain bonds of specified financial institutions within six months from the sale of the house up to a maximum of Rs. 50 lakh.
For the balance long long-term capital gains not so utilised, you will have to pay tax at a flat 20% and cess and surcharge.
(The views expressed are of the expert his/her own)