Sourabh Sharma bought a property in 2000 for Rs 10 lakh. After occupying the apartment for almost 16 years, he is contemplating selling it to a buyer this year for Rs 50 lakh. Given the attractive deal, he cannot resist going forward with the sale but is worried about the long term capital gain (LTCG) taxes applicable on the sale of property. His main cause of worry is that he may have to pay one-fifth of his profits from the sale of the property to the government as taxes.
Under the provisions of the Income Tax Act, 1961, in case the capital gains on sale of a residential property are short term capital gains (ie property has been held for a period of 36 months or less), there are no specific exemptions/benefits provided to an individual. However, in case of long term capital gains, there are several provisions which can be availed to reduce the tax liability.
In this article, we discuss the ways in which one can judicially invest long term capital gains to avoid paying hefty taxes during the year the property is sold.
Acquisition of another property: Section 54 of the Income Tax Act, 1961 provides relief to an individual or an HUF (Hindu undivided family) from payment of long term capital gains tax if capital gains are utilised for purchasing/constructing another property. But the exemption is subject to conditions:
The asset transferred should be a residential property;
Capital gains are utilised to purchase another residential property within a period of one year before or two years after the date on which the sale took place. Or these should be utilised to construct a property within three years of transfer.
The said exemption is subject to a condition that the property cannot be sold for three years after acquisition
What happens if proceeds from the sale are not invested before the due date of filing returns?
As per section 54, the assessee is given two years to purchase the property or three years to construct the property but capital gains on sale of residential property is taxable in the year in which it is sold
Given that income tax return for the said year is required to be furnished by a specified time period, the assessee will have to take a decision till the date of furnishing such return of income in order to avoid levy of tax on capital gains. In order to avoid this, the provisions of the Act provide for a relief from tax if such an amount is deposited by the assesse into a capital gains account scheme
The amount of capital gains not utilised by the assessee for purchase or construction of property before the date of furnishing the income tax returns can be deposited under the capital gains account scheme
If the amount deposited under the scheme is not utilised wholly or partly for the purchase or construction of the new asset within the period of two or three years, then, the amount not utilised shall be chargeable as long term capital gains
Investment in specified bonds
Long term capital gains arising from sale of a residential property can also be claimed as exempt under section 54EC of the Act if within a period of six months after the date of sale of property, such gains are invested in long term capital bonds as notified by the government within a period of three years. The maximum amount one can invest under this scheme is restricted to Rs 50 lakh per financial year.
The author is partner and national eader – Real Estate practice, EY. Abhishek Arora, senior tax professional, EY also contributed to this article. Views expressed by the authors are personal