capital gain

Buying a new Property by selling an old one allows you to get tax exemptions, but there are some conditions that need to be fulfilled.

 

The sale of your old Property would result into Capital gains. However, under Section 54 of the Income Tax Act 1961, the same can be exempted because of the new Residential Property you propose to buy. This section provides that the income from the present Property should be subject to tax under the head "income from house property".

 

 

Also, the property must be held for more than 36 months. The new house should be acquired no more than one year before, or two years after, or three years after the date of transfer of the old property.

 

If these conditions are fulfilled, the capital gain on your old Property will be exempt to the extent of the capital gain invested in the new property. Also, there would be a lock-in period of 36 months on the sale of new property. If you sell it earlier, the exemption granted to you on the capital gain would be withdrawn and you will be asked to pay the tax.

THANK YOU SIR FOR YOUR TIMELY ADVICE

Before to take any further decision wait for more replies

Dear Mr Ahmed,

Your pithy clarification is excellent. I have a querry in this regard.

I am selling a house and buying a house using the capital gain wihtin 6 months duration. But I do not wish to show the long term capital gain or property transaction in my income tax file. In case I am subject to IT scrutiny lateron, anyway I wouldn't have to pay any penalty as there wasn't any tax evasion in the first place. Or would I become liable for any penalty then solely on this ground ?

Thanks.

 

 

 

 

Answer to query of Lina:

 

You are eligible for exemption but u/s 54F of the Income Tax Act as the propoerty being sold is not a residential house. The main difference between the provisions of this section and section quoted by Mr Ahmed is that here you get relief of that proportion of computed long term capital gain as is equal to the ratio of funds invested in new house vis a vis the sale consideration of the old property. Further as on date of investment in new house, you should not own more than one residential house (of course excluding the new house).

DEAR VINEET,

DIFFICULT FOR ME TO UNDERSTAND WHAT YOU HAVE WRITTEN,PLEASE TELL ME  IF I SELL MY commercial property ,WHAT WILL BE THE BEST WAY TO SAVE ON CAPITEL GAIN.

Please advice

You purchase a Residential House within two years of date of transfer of older property or construct a new residential house within 3 years of date of transfer to be eligible for exemption u/s 54F of the Act. However, as on date of purchase or construction of new house, you should not own more than one residential house. Further you should not not buy another house other than newly purchased house within one year of transfer of sold asset. You will be eligible for full exemption from Long Term CApital Gain only if you invest the entire sale consideration in new house. Otherwise it will be proportionate exemption. I hope you now understand this. The exemption mentioned by Mr Ahmed is not available to you as what you have sold is commercial property and not a resdential property.

Dear Vineet 

Thank you lots for your clear reply