Invested Capital Gains In Property? Now, Claim Deductions More Than Once

There are several incentives for investing in property. Among them is the tax exemption a buyer enjoys under various sections of the Income Tax Act. Those who invest in property to make profits are liable to pay taxes in the form of short-and-long-term capital gains, but they, too, enjoy deductions if the earned benefits are invested in a new property.  A recent ruling by the Income Tax Appellate Tribunal has come as good news for such investors. Before we analyse the news in this context, let us understand certain basics.

Tapping the gains

Depending on the period for which an asset is held before it is sold, one has to pay a short-term capital gain (STCG) tax or a long-term capital gain (LTCG) on the profits earned through its sale.

If an asset is held for not more than three years, its transfer would invite the STCG tax. If an asset is held for more than three years, it would invite long-term capital gains tax. However, in the case of immovable property, the limit was reduced to two years in the Union Budget 2017-18.

While long-term capital gains are taxed at 20 per cent, plus surcharge and education cess, short-term gains are taxed at 15 per cent, plus surcharge and education cess. In case the securities transaction tax is not applicable, the STCG is added to your income and you are taxed according to your tax slab. The securities transaction tax is levied on sale and purchase of listed securities.

What does the law say?

Section 54 of the Income Tax (I-T) Act says that if you acquire a new home from the sale proceeds of the previous property, you are exempted from paying capital gains tax.

It states that “if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed, the difference between the amount of the capital gain and the cost of the new asset shall be charged under Section 45 as the income of the previous year”.

“If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45,” it further adds.

In the Union Budget 2014-15, it was further clarified that only one property must be purchased using the capital gains to claim deductions under this Section.

Section 54F of the Act also says that the seller can be exempted even if the saleable property is non-residential and the profit gained so is being used to buy a residential property.

"If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under Section 45”.

Do note here that non-residential assets are referred to as the "original asset" in the Act while residential assets are called "new asset".

However, a taxpayer has to fulfill certain conditions.

The new property has to be purchased within one year before or two years after the date on which the transfer of the original asset took place. In case of property constructions, the timeline is set at three years.  In case you own more than one residential house, other than the "new asset", you will not be able to enjoy the deductions.

What changes now?

Earlier, it was understood that one can avail of the tax exemption only for once. According to a ruling by the Income Tax Appellate Tribunal (ITAT) order, tax authorities cannot deny a taxpayer tax exemptions on this ground anymore. This means a tax payer can invest capital gains for the second or third time for the same “new asset”, and enjoy deductions on the same. However, the cost of the newly acquired property should not be more than the capital gains earned to avail of the benefits.

Giving its verdict in case where the taxpayer, Mohan Kumar Jain, sold five properties and invested the long-term capital gains in the construction of one property, the ITAT also said that an under-construction “ new” property cannot be counted as a property already “owned” by an assesse.  Also, in case a taxpayer has sold more than one asset to acquire one property, as was the case with Jain, he will still be eligible to claim deductions.

"The ITAT has rightly held that the new house was not complete, so it could not be regarded as a house already “owned” by the taxpayer. Also, there is no bar on the claim on the exemption of more than one capital gain in respect of investment in one house, which the ITAT upheld. The only aspect taxpayers need to keep in mind is meeting timelines for the acquisition of the new house," Gautam Nayak, tax partner at CNK & Associates, was quoted by The Times of India as saying.

Also read: #Budget2017: 3 Cheers For Capital Gains Tax Provisions