Analysis, Income Tax

Capital gains exemption for investment in residential house: Top 5 Issues & their answers

Sale and purchase of house property: Capital gains exemption

If buying and selling a house property, Section 54 allows an individual to be exempted from payment of capital gains tax on the profit, if:

  • The seller is an individual or HUF.
  • Asset needs to be classified as a long-term capital asset, being a residential house.
  • The seller should purchase a residential house within either 1 year before the date of sale/transfer; or 2 years after the date of sale/transfer.
  • If constructing a house, the seller will have to construct the residential house within 3 years from the date of sale/transfer. In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional compensation)
  • The new residential house should be in India.

Similarly exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property, if:

  • A new residential house property is purchased either 1 year before the sale or 2 years after the sale of the property/asset,
  • Alternately, the new residential house property must be constructed within 3 years of the sale of the property/asset
  • Only one house property can be purchased or constructed.

In a situation where assessee was unable to invest entire capital gains in time to file tax return, a Capital Gains Scheme Account can be opened with any scheduled bank and such amount can be invested. This amount can be withdrawn at a later time to buy or construct a house and save long-term capital gains tax.

Here are the most frequently occurring issues arising under this transaction

Construction on new building before sale of old building: Can capital gains exemption be denied?

Short answer: No

Most cited caseCIT vs J.R Subramanya Bhat

High Court Karnataka ITRC No. 4 of 1983 (cited +19 times)

Reasoning: The language of S. 54 stipulates that the assesse should within one year from date of purchase, or within a period of two years thereafter, construct a residential house to avail benefit under the said section. It is immaterial as to when construction commenced, the sole and important consideration is that it should be completed within stipulated time.

Multiple flats converted into single unit: Is exemption still available?

Short answer: Yes

Most cited case: CIT vs D. Ananda Bassapa

High Court Karnataka, IT Appeal 113 of 2004 (cited +30 times)

Reasoning: The expression “a residential house” in 54(1) of the Act has to be understood in a sene that the building should be of residential nature and “a” should not be understood to indicate a singular number. When assesse has purchased two flats which are situated side by side and builder has made modifications to make both the flats as one unit, he is entitled to exemtion u/s 54 even when the purchase was made by separate sale deeds.

Can benefit u/s 54F be availed when construction of the house is not complete?

Short answer: Yes

Most cited caseCIT vs Sadarmal Kothari

High Court Madras, TCA 354 of 2008 (cited in +20 cases)

Reasoning: It is enough that assesse establishes that he has invested entire net consideration within stipulated period for him to get benefit u/s 54F. The court also distinguished the facts of the present case with the case of D.P Mehta (2001) 251 ITR 529  (Del), where the assesse had admitted that the construction was put up only on garage and service quarters and it was not fit for occupation of the assesse.

Also Read: Curious Case of Long-term Capital Gains tax exemption

Can benefit u/s 54F be availed when the house purchased in the name of wife?

Short answer: Yes

Most cited caseCIT vs V. Natarajan

High Court Madras, TCA 155 of 2006 (cited in +20 cases)

Reasoning: If assesse has purchased the residential house within stipulated time in the name of his wife, the assesse is entitled to exemption.

Can an exemption be availed on the investment made in a Government housing scheme for the acquisition of a flat.

Short answer: Yes

Most cited caseSashi Verma vs CIT

High Court Madhya Pradesh, Misc. Civil Case 467 of 1989 (cited +15 times)

Reasoning: The assesse had invested sale consideration for purchase of flat from Delhi Development Authority (‘DDA’) and had paid part instalments. The HC observed that the capital gains was Rs 31980/-, whereas the instalments paid were Rs. 71, 256/-, i.e much more than the amount of gains. The court further observed that it is not easy to construct a house within three years and under Government schemes, the construction takes many years. When substantial investment has been made, it should be deemed that sufficient steps have been taken to satisfy S. 54.

(Written by Anuj Sharma, Product Counsel @ Riverus)

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