Reinvesting Capital Gains In Property

Looking to invest gains made from the sale of capital assets in residential property? Read on to find out more about tax exemptions for such transactions.

KEY POINT:

According to the provisions of the Income Tax Act, 1961, assessees can claim tax exemption for capital gains made from the sale of long-term capital assets which are invested in a new residential property, provided that they do not own more than one house, other than the new house, and subject to certain other conditions.

Q) I own a house property (self-occupied) in Mumbai. I have sold some gold and land (long-term capital assets) and wish to purchase another residential property in Mumbai. Is there any tax exemption or time limit for investment in the new residential property?

- Srini Devadasan

Reply - 

Section 54F(1) of the Income Tax Act, 1961 states that:

(1) [Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, – 

(a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45;

(b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under Section 45:

[Provided that nothing contained in this sub-section shall apply where –

(a) The assessee, –

(i) Owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) Purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) Constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head ‘Income from house property’.]

For the purposes of this section,–

‘Net consideration’, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

As the section states, the benefit of exemption can be claimed if the assessee owns (not more than) one house other than the new one. Hence, you can claim exemption in respect of capital gains from the sale of gold and land in case you invest the sale proceeds in the acquisition, whether for the purchase or construction of a new residential property, even though you already own one residential property in Mumbai, provided you satisfy the other conditions under that section.