If you sell a residential property or a land after holding it for more than two years, you are liable to pay long-term capital gains tax of 20 per cent after indexation. So, if you make a gain of Rs 50 lakh, you may end up paying Rs 10 lakh as tax. However, you can very well save this significant tax outflow. "An assessee can re-invest the long term capital gains amount in residential house property and claim an exemption under section 54 & 54F of the income tax act," says Archit Gupta, Founder and CEO, Cleartax. We tell you in detail as to how this exemption works and what all you need to be careful about:
What is the amount you have to re-invest?
In case of re-investment, there is always some confusion about whether to use the entire sale proceeds to buy a new property or only capital gains amount would be sufficient. "Section 54 provides that if a house property held for the long-term has been sold or transferred and the gains have been invested in an another residential house, one can get exemption either on the capital gains earned or the cost of the new asset, whichever is lower," says Gupta. Hence, you only have to invest the capital gains amount to save LTCG tax.
The maximum amount of capital gains that you can re-invest in another property and get complete exemption is Rs 2 crore. If your capital gain is higher, you will have to pay capital gains tax on the amount exceeding Rs 2 crore. Do remember that you can exercise this option only once in the lifetime. Therefore, you need to be careful and be sure that you will not need this option in future.
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You can invest in two properties
Earlier, the tax exemption was available only when you invested your capital gains in one property. However, Budget 2019 allowed people to invest their capital gains in two properties either through outright purchase or construction. But, this reinvestment option will also have to remain within the overall limit of Rs 2 crore.
Remember the timeline of reinvestment
You have two years from the day of selling your old property to buy or construct a new property to be eligible for the tax exemption. Moreover, you will be eligible to claim tax exemption under section 54F even if you buy a property up to one year prior to selling your old property. In this case, you can declare the capital gains amount that you have used to buy the property as re-investment of capital gains. If you use the capital gains amount for the construction of new property, you may get some extended time. "If the new house is under construction, the construction should be completed within three years from such sale," says Gupta.
Limitation in case of multiple properties
One of the most necessary conditions to be eligible for exemption from capital gains under the section 54F is that you should not hold any other asset than the one being transferred on the day of the transfer of your old property. In other words, if you still hold a property even after selling one, you will not be eligible for the tax exemption. However, if you have bought another property not more than one year prior to selling the old property, you can very well show it as a reinvestment property as the law allows you to re-invest in a new property even before selling the old one.
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When to use Capital Gain Account Scheme
There may have been multiple instances when people did not utilise the capital gains amount while waiting for reinvesting it. However, if the ITR filing deadline is near, you will have to keep this amount in designated account. "If one wants to use the sale proceeds after a while, they should deposit the amount in Capital Gain Account Scheme (CGAS). The amount has to be deposited under a CGAS before the due date of filing income tax return for the year in which the sale took place," says Gupta. This is likely to happen if you sell your property in March, as within four months the ITR deadline will approach. In this case, you may park the money in CGAS and file your ITR. In the case of construction, you will have longer waiting period and may need to file many ITRs; so you can use CGAS to park the capital gains.
When the exemption can be reversed
The exemption under section 54F that you avail by re-investing in a new property can only sustain if you do not sell the new property before two years. If you sell the new property before two years, the exemption will be reversed and you will have to pay the capital gains tax that had been exempted.
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