Those who have sold their property generally earn handsome capital gains and in all probability would be keen to know how this tax can be saved. And those who have bought property would most likely to sell the same sometimes or the other — so they may as well learn the nuances of saving the potential tax. In short, today’s article is about saving capital gains tax on property sale.
First and foremost, it must be pointed out that we are just dealing with long-term capital gains tax here i.e., the capital gains earned on the sale of only such property that has been held for over three years. Any profit from sale of property owned for less than three years would be categorised as short-term capital gains. Such short-term gains get added to your other income (salary, interest etc.) and consequently investments eligible for Sec. 80C deduction (PPF, ELSS, NSC etc.) are the only way to save tax on the same.
However, on long-term capital gains, you can save tax in two ways. The first one is by way of investing the amount of capital gains in NHAI or REC bonds within six months of sale. This is indeed the simplest way, however, lately the problem is that you have to be fortunate enough for the bonds to be available within the time limit applicable to you. Secondly, there is a cap of Rs 50 lakh per financial year. So if yours is a big ticket sale, this avenue may not really be that useful.
In any case, another way of saving the tax is by investing the capital gain amount in another property. There are several conditions under which this deduction is available and let us examine these. First and foremost, it has to be a residential house property that is sold, not a commercial one. (For commercial properties, you will have to take recourse to Sec. 54F where the net sale proceeds need to be invested, not just the capital gain amount).
However, note that residential property doesn’t mean that it has to be self-occupied — the property could have been rented out — only it needs to be a residential property, self-occupied or let out. Secondly, this deduction is only available to individuals and HUFs. So if a company or a partnership firm were to sell property, this deduction isn’t available.
To claim the exemption the taxpayer has to purchase another ready residential house property or buy a residential property under construction. While a ready to possess house should be bought either within one year before or two years after the date of sale, an under construction property has to be purchased within three years of date of sale. Note that the construction could have commenced anytime, there is no stipulation thereon. In other words, date of commencement of construction is irrelevant, it could have commenced even before the sale of the original property.
Also, there is no necessity of there being a live link or a direct nexus between the amount of capital gain and the cost of the new house. For instance, a taxpayer can invest the sale proceeds and use housing finance to buy the new house. As long as an amount equivalent to the capital gain is utilised for the new house, exemption is available. Of course, if only a part of the capital gain amount is used, exemption is available only to that extent and the rest will be taxed.
There is a three year lock-in on the new house. So, if the new property is transferred within three years from the date of purchase, the exemption given earlier would be reversed. As we have learnt so far, taxpayers have two or three years, as the case may be, to buy the new house. However, there is a small hitch, in that, for a particular financial year, the last date of filing the tax return is July 31. What happens if you haven’t finalised the deal before the tax filing date? In terms of an example, for a property sold on say January 25, 2018, the taxpayer has till January 24, 2020 to buy a new house or till January 24, 2021 to buy a house under construction.
However, the last date for filing tax return for FY18-19 will fall on July 31, 2019. Therefore, if the new house isn’t purchased till then, a taxpayer will have to deposit the amount intended for purchase of the new house in a special deposit known as “Capital gains deposit account scheme” (C-Deposit) offered generally by public sector banks. The proof of the C-deposit should be submitted along with the return of income. Payments towards the new house should be made only by withdrawing from such C-Deposit within the time limits explained above.
If the amount deposited is not fully utilised for purchase or construction of new property within the stipulated period, then the amount not utilised shall be taxed as long-term capital gain of the year in which the period of three years from the date of sale expires. The following example summarises the above discussion. Say, on April 15, 2015, Mr. Iyer has sold his house for Rs 30 lakh thereby earning a long-term capital gain of Rs 20 lakh. Before July 31, 2016.
Mr. Iyer deposits Rs 15 lakh in the C-deposit. Consequently, for FY15-16 (the year in which Mr. Iyer has earned the capital gain), Rs 5 lakh (Rs 20 lakh – Rs 15 lakh) would be taxed as long-term capital gain. Now say, by April 14, 2018, Mr. Iyer ends up utilising only Rs 12 lakh from the C-deposit for purchase of a new house. Therefore, for current FY18-19, Rs 3 lakh (Rs 12 lakh – Rs 9 lakh) will be taxed as long-term capital gain for that year. You may note that Mr. Iyer has had the privilege of using the entire amount of sale any which way he likes, for over 15 months from April 15, 2015 till July 30, 2016.
The authors may be contacted at wonderlandconsultants@yahoo.com
