The Income Tax Act (ITA) provides for exemption from tax on long-term capital gains under two separate sections, Section 54 and Section 54F, if the investment of the gains is made for purchase or construction of a residential house. Now a report has surfaced saying that, a person can claim exemption under Section 54 of the Income Tax Act on purchase of a house for his residence from funds other than capital gain.
Capital gains are made when you sell a capital asset – residential or commercial property, plot, or stocks/shares/bonds – at a higher price than what you bought it for. This profit, or capital gains, is taxable.
Short-term capital gains are added to the income of the individual and tax applied according to the income tax slab they fall under. Long-term capital gains (LTCG) are taxable at the rate of 20% plus cess and surcharge. However, you can claim exemption from this tax under Sections 54 and 54F if you are investing the capital gains you make on the sale of property or stocks and bonds, in another house. This house can be bought either 1 year before the sale of your property, or within 2 years after your long-term asset is sold.
According to Financial Express, also, the sale proceeds need not be used for the purchase of new asset before the end of the time limit provided by Section 54, according to a recent judgment of the Cochin Bench of Income Tax Appellate Tribunal (ITAT). The judgment dated 5th November 2019 came in the case of a person (assessee) who had sold his house for Rs 2.6 crore on April 12, 2012. He held 50 per cent share in the house. The assessee had purchased the residential property for Rs 85,30,475, six months back on September 9, 2011.
In his ITR for AY 2013-14, the person claimed exemption under Section 54 of the Income Tax Act on the house purchased in 2011. But the Assessing Officer denied exemption, saying the person had made the purchase using other funds than capital gain. But the appeal was dismissed by CIT(A), which relied on CIT v. V.R. Desai (2011) judgement of Kerala High Court. After which the assessee then moved the Income Tax Appellate Tribunal (ITAT).
The Income Tax Appellate Tribunal (ITAT) made some observations about Section 54 of the Income Tax Act, in which it said Section 54 of the I.T.Act does not prohibit the assessee to raise funds or borrow money for investment in the house property. The section 54 of the I.T.Act does not specifically state that claiming exemption, the entire investment should be from capital gains or no other funds be used for purchase of new asset. The only condition imposed u/s 54 is that investment should be made prior to one year or within two years of transfer of the property from which capital gain is earned.
