I’m selling an apartment and buying another. Income tax rules explained

I have two small residential apartments. One was bought in 2001 and we lived there until 2017, then we moved to a smaller apartment bought in 2016 by taking out a housing loan. Now we want to buy a bigger house for self use and therefore plan to sell our old flat from 2001 in March 2022. The provisional Long Term Capital Gains (LTCG) on our old flat is around 65 Lakh (after indexing) and the new flat will cost us 160 Lakh. Can you tell me if I can take advantage of this capital gain to buy a new house for personal use? Please note that I already own an apartment on the date of the sale of the old apartment. I am retired.

Since you sold the old apartment after more than 24 months of ownership, the profits from the sale of this apartment are taxable as a long-term capital gain. The tax laws contain provisions allowing exemption from long-term capital gains tax if the investment is made in certain specified assets. Pursuant to Section 54 of the Income Tax Act, an individual and a HUF may claim a long-term capital gains exemption resulting from the sale of a residential home by investing the indexed capital gains for the purchase of another residential home within a specified period. The exemption is available if the investment is made within two years for the purchase of a house. In case of self-construction of a house or reservation of a house under construction, a longer period of three years is available. Long-term capital gains not so invested by the filing due date of the income tax return (ITR), the unused amount must be deposited into an account under the Capital Gains Account Scheme and which can be used to make payment for the acquisition of the dwelling house within the time allowed. If the amount is not used within the prescribed period, it becomes taxable in the year in which the period has thus expired.

There is no restriction on the number of dwelling houses you can own on the date the property is sold to qualify for an exemption under Section 54.

Since you plan to invest more than indexed long-term capital gains, you won’t have to pay any tax. However, if the long-term capital gains are not fully invested, the exemption will be available to the extent of the investment and on the balance you will have to pay a 20% flat tax.

Thus, if you sell your apartment before March 31, 2022, you will have to buy the new apartment before July 31, 2022, which is your deadline for filing your ITR. If you are unable to do so, you will need to deposit the unused money into the capital gains account. If possible, I would advise you to execute the deal next year so that you have a longer period until July 31, 2023 to invest the LTCG.

Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on Twitter.

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