Question: How can taxpayers save tax under the Income Tax Act after selling a residential house property?
Answer given by CA (Dr.) Suresh Surana: 1. According to Section 54 of the Income-Tax Act, 1961, individuals or Hindu Undivided Families (HUFs) can receive an exemption from capital gains tax when selling a long-term capital asset, specifically a residential house property. To qualify for this exemption, the capital gains must be reinvested in purchasing a new residential house property within 1 year before the date of transfer, or within 2 years after the date of transfer or for constructing new residential house property within 3 years from the date of transfer.
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The exemption under Section 54 is normally available for investment in one residential house. However, where the capital gains do not exceed Rs 2 crore, the assessee may, at his option, purchase or construct two residential house properties and claim exemption under Section 54. This option is available only once in the lifetime of the assessee.
Additionally, under Section 54EC of the Income-Tax Act, individuals or HUFs can also gain tax exemption on long-term capital gains from a house property by investing those gains in certain long term specified bonds within six months of the property’s sale. The following bonds, which can be redeemed after five years, are eligible for exemption under Section 54EC:
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* Rural Electrification Corporation Limited (REC) bonds
* Power Finance Corporation Limited (PFC) bonds
* Indian Railway Finance Corporation Limited (IRFC) bonds
2. The exemption is limited to the lower of the following:
i. The capital gains arising from the transfer of the original residential property, or
ii. The investment made in the purchase or construction of the new residential house.
In simpler terms, if the entire capital gains are reinvested, the entire capital gain is exempt from tax. If only part of the capital gains is reinvested, the exemption is limited to the amount reinvested, and the remaining capital gains will be taxed.
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However, in cases where the amount of capital gains arising from the transfer of a residential property exceeds Rs 10 crore, the investment made in the purchase or construction of a new residential house property exceeding Rs 10 crore shall not be considered for the purpose of claiming exemption under Section 54 of the Income-Tax Act, 1961.
Illustration: –
Mr. Sam acquired a residential house property in Mumbai on 1 June 2010 for Rs 10 lakh and is now selling it for Rs 70 lakh on 7 September 2024. How do you calculate the capital gain in this case, and what is the amount he can reinvest to claim tax exemptions?
Note: – Here the capital gains tax has been computed without taking into account the applicability of surcharge and health & education cess. If surcharge and cess will be levied, then the tax will increase accordingly.
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Working Note: – (1) Calculation of Indexed Cost of Acquisition
Indexed Cost of Acquisition = Purchase price x Cost Inflation Index of 2024-25
Cost Inflation Index of 2010-11
= 10,00,000 x 363/167
= 21,73,653/-
In the case presented, it is advantageous for Mr. Sam to pay capital gains tax at a rate of 12.5% without indexation. Therefore, Mr. Sam may elect to pay the capital gains tax at the rate of 12.5%, disregarding any excess amount over Rs 7,50,000. Please note that the aforesaid tax rate of 12.50% needs to be increased by the applicable surcharge (if any) and cess.
3. Deposit in Capital Gains Account Scheme:
If the capital gains are not utilized for the purchase or construction of the new house before the due date of filing the income tax return, the unutilized amount must be deposited in a Capital Gains Account Scheme (CGAS).
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The deposited amount must be used to purchase or construct the new property within the prescribed time limits. If not utilized, it will be taxed as capital gains in the year in which the time limit for utilization for such amount expires.
