Sale of a built-up house

It is important to know that LTCG is arising. If you incur LTCG by selling your residential property, you can get benefit under Sec 54.

It exempts the long-term gains arising from a sale of a residential house if the investor buys a residential house either one year before or within two years from the sale of the earlier house. One can save capital gains tax by investing all the sales proceed in a residential house as Sec 54F exempts you from capital gains if you invest all the sale proceeds in a residential house again within the stipulated time period.

However, if you do not want to invest in another residential property, still you can save capital gain. Under Sec 54EC, you can save capital gains tax by investing in certain bonds.

This section exempts you from the payment of capital gains tax if the gains are invested within six months of sale of the capital asset in bonds issued a few organisations such as National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC).

However, this has a ceiling of up to Rs 50 lakh per individual per financial year. But there is a catch. If one has sold a capital asset in the second half of a financial year then it may be possible for that individual to invest Rs 50 lakh in the current financial year and another Rs 50 lakh in the next financial year – as long as it is done within six months of sale, the total exemption can be up to Rs 1 crore.

But these bonds are not always on sale. One must not forget that income earned by investment in these bonds is fully taxable.

Dear Mr Moga

1. No need for any certification from Chartered Accountant regarding computation of Long Term Capital Gains.

2. You have to deposit only Long Term Capital Gain amount in the Capital Gains Account maintained with specified bank. However, there is a catch that you can withdraw from this account only for purchase or construction of a new residential house  to avail exemption u/s 54. 

3. For claiming exemption u/s 54EC or 54ED,  you have to invest the Long Term Capital Gain amount directly in specified Bonds/ units within six months of transfer of original asset. There is no provision to park funds in Capital Gains account for this purpose.

Dear Vineet and Vishal

Thanks for the valuable advice.  However a few more clarifications:

1. If I decide not to buy any property during the mandatory period of 2 years and deposit the LTCG in Capital Gains Account for 3 years ( after retaining with me indexed cost of acquisition and amount of investment in bonds - say Rs.50 lakhs) , WILL I GET THE EXEMPTION FROM PAYMENT OF LTCG ?

2. Alternatively, If I buy one large apartment and retain the balance amount LTCG (after  retaining with me indexed cost of acquisition and amount of investment in bonds - say Rs.50 lakhs) in CGA for 3 years, will I get exemption from payment of LTCG ?

Kindly enlighten me.

Ashok Monga

Dear Mr Monga

If you dont buy the house, the amount deposited in Capital Gains account will be taxable at the time of withdrawal. So practically you are just postponing the LTCG tax liability.

I am unable to understand the second query. the fundamental issue is, you have to either invest the LTCG amount in new house or infrastructure bonds as per rules or pay tax on the same. Capital Gains account is only a mode to retain the capital gain amount for the period during which new house is to be purchased or constructed. Any withdrawl from the same for any purpose other than purchasing the house leads to taxation.

Dear Vineet

Thanks for the clarifications.  The confustion still prevails. In all probabilties the following appears to be most likely scenario:

1. Indexed cost of Acquisition:                Rs.56.00 lakhs

2 Sale Price                                                 Rs.300.00 lakhs

3. Investment in Apartment                      Rs.115.00 lakhs

4. Bonds                                                        Rs.50 lakhs    

5. Investment in 2nd Apartment  for letting out: Rs, 70.00 lakhs

6. Repayment of Bank & Family Loans  Rs.26.00 lakhs

7. Brokerage  both sale & Purchase       Rs.8.00 lakhs

Based on the above likely scenerio, please suggest the best course of action. 

Ashok Monga

Tax Effect of your proposed transactions will be as follows:

Sale price :  Rs.     300.00

Less:Brokerge

for sale (say)              4.00

                                  ----------

                                  296.00

Less:

Indxed cost               56.00

                                 -----------

                                 240.00

u/s 54F:

invest in

apartment              115.00

                                ------------

                                 125.00

u/s 54EC

Invest in bonds       50.00

                               ------------

          LTCG             75.00

                             =========

Capital gains tax payable @ 20% x 75.00 lacs =  Rs 1.50 lacs

Dear Shri Ashok

From the details given by you, after investing in flats and bonds, only an amount of Rs 1 Lakh remains as taxable LTCG. This amount may also well be spent in interior or other incidental expenses of new house. Therefore you need not be concerned about any further action. Only the investments in new houses and bonds should be made within specified time.

Dear Ramana

Thanks.  However, the LTCG will be 15 lakhs and not Rs.1.50 lakhs.  I note from the other response that probably investment in both the apartments is exempt from LTCG.

Ashok Monga

Dear Vineet

Thanks.  In fact more that 10 lakhs will be required for renovation of both flats.  However, your response is based on the assumption that the investment in both the apartments is going to be exempt from LTCG.  May I request the relevant case law because everyone seems to be of the view that only investment in one house or apartment is exempt. 

Ashok Monga

Dear ashok monga,

yes ,the earlier reply needs correction : LTCG will be Rs. 15.00 lacs.

S.54F clearly stipulates that the taxpayer should not own more than "one residential house property" ,so, in my opinion, there is no question of claiming deduction by investment in the second apartment.

Dear Mr Ramana : The exemption claimed is u/s 54 wherein their is no such stipulation.

Mr Monga : Let me examine this issue from the case laws point of view. Though there is no restriction for number of new houses u/s 54 as it is in section 54F, the phrase "A RESIDENTIAL HOUSE" may be interpreted to restrict the exemption for investment is only one residential house. So far I have found one case law  K.C. Kaushik v. P.B. Rane, ITO [1990] 84 CTR (Bom.) 62 which held that if investment is made in more than one house, the assessee can claim exemption in respect of any one of them u/s 54F. Will surely revert back with more research on the matter as the decision is quite old.

Dear Mr. Vineet,

Thank u very much for correcting me, yes, there is no such stipulation u/s 54 under which the exemption from Capital gains on sale of residential property is covered.

To claim deduction u/s 54, there is no bar on acquiring more than one residential house out of proceeds of one residential house  -as was decided in the following cases :

1. D.Anand Basappa v. ITO (2004) 91 ITD 53 (Bang.)

2. ITO. Vs P.C. Ramakrishna [2007] 108 ITD 251 (Chennai)

3.Prem Prakash Bhutani v. CIT [2007] 110 TTJ (Delhi) 440

4.CIT V. D.Ananda Basappa [2009] 180 Taxman 4 (Kar.)

Thanks Mr Ramana.

The decisions in Basappa 309 ITR 329 (Karnataka), Leena P Nanda 286 ITR 113 (Bombay), though allow investment in more than one residential houses as eligible for exemption u/s 54, the common fact in all these cases is that the multiple properties were in the same building and contiguous. Primarily the observation is that the exemption is allowable in respect of investment in one residential property house only.

Dear mr Monga : The sum and substance of the discussion is that you can claim exemption in respect of two flats only if they are contiguous. So if you are planning to buy two properties in separate buildings, then certainly, there is no other way to save capital gains tax on the remaining amount approx 75 lakhs as you have exhausted the exemptions available u/s 54 and 54EC.

The only option for you to save tax is to invest in contiguous flats. the second flat can be let out later.

Dear Vineet and Mr. Ramana

Many thanks to both of you for valuable inputs.  I am enlightened and confident to deal with the sale of house.

Should there be need for further clarifications, I will surely get back. 

Warm regards

Ashok Monga