Sell house? Know the capital gains tax
My father sold our house in October 2021 and has not invested the amount in any other residential property to date. Do we have to pay capital gains tax now?
– Vishnu, Amalapuram
Capital gains tax is imposed when individuals dispose of an asset and realize capital gains on it. The sale of a dwelling house is a sale of capital property, and the profit from the sale will be taxed as a capital gain. Under Section 54 of the Income Tax Act, an individual who sells residential property may qualify for capital gains tax exemptions if the capital gains are invested in the construction or purchase of residential property.
Section 54 grants relief to taxpayers who sell their dwelling house and from the proceeds of the sale acquire another dwelling house. In order to benefit from the exemption provided for in Article 54, the income tax department has prescribed certain conditions.
The Section 54 benefit can only be claimed by Assessed Persons or HUFs (Hindu Undivided Families). The ownership of the transferred dwelling house should be classified as a long-term fixed asset. Within one year before or two years after the date of transfer of the old house, the taxpayer must build or acquire another house within three years from the date of transfer of the old house.
The period of construction or acquisition will be determined from the date of receipt of compensation in the event of expropriation. Exemption can only be claimed for residential property built or purchased in India. If more than one home is built or purchased, the Section 54 exemption will only be available for one residential property. No exemption can be claimed in respect of residential property purchased outside India.
The 2020 finance law amended article 54 from the 2020-21 financial year to extend the benefit of the exemption concerning investments made in two residential buildings. Exemption for investment made, by way of building or buying, in two residential properties will be available if the amount of long-term capital gains does not exceed Rs 2 crore. If the assessee exercises this option, he will not have the right to exercise this option again for the same assessment year or any other assessment year. If taxpayers do not meet the above conditions, they cannot claim exemption under Section 54 of the Income Tax Act.
The u/s 54 exemption can be claimed with respect to the rollover of capital gains from the transfer of one residential property to another residential property. However, to control the misuse of the Section 54 exemption, an important clause has been inserted to safeguard the benefits of Section 54. The exemption granted under Section 54 will be withdrawn if a person assessed builds or purchases a home and claims the exemption, then transfers the new home within three years from the date of its completion of construction or acquisition.
The restriction applies if, after claiming the exemption, the new home is sold before three years from the date of completion of its construction or purchase. If the new residential property is sold prior to a period of three years from the date of completion of its construction or purchase, then, when calculating the capital gain resulting from the transfer of the residential property, the amount of the capital gain claimed as exempt will be deducted from the acquisition cost of the new residential property.
At the time of filing the tax return, if the capital gain resulting from the transfer of the house is not used (in whole or in part) to build or buy another residential property, then the individual must deposit the unused amount in Capital Gains Deposit Account System in any branch of a public sector bank, under the Capital Gains Deposit Accounts System, 1988 (referred to as the Capital Gains Account System).
The individual will benefit from the exemption if deposited in a Capital Gains Account Scheme account. The new residential property can be built or purchased by withdrawing the amount from said account within the specified time, as the case may be. The amount already incurred for the construction or purchase of a residential property, as well as the amount deposited in the Capital Gains Account Scheme, can be lumped together as a cost while claiming the deduction.
In the event that the amount deposited in the Capital Gains Account Scheme is not utilized within the prescribed period, the amount shall be treated as income relating to the previous year in which three years expire.
(The author is a SEBI Accredited Research Analyst. An alumnus of the Indian Institute of Foreign Trade (IIFT), he has held senior positions at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc.)