11 Things To Keep In Mind If You Are Going To Transfer Sale Proceeds Of One Property Into Another

Are you planning to sell your property? Well, the profit you earn through the transaction is taxable. Under Indian tax laws, gains arising out of the transfer of a capital asset, which among other things includes property, are taxable under the head “capital gains”. Depending on the period for which the asset is held, the gains could either be taxed under the short-term capital gains (STCG) head or the long-term capital gains (LTCG) head.

Do note here that under the current norms, long-term capital gains are taxed at 20 per cent, plus surcharge and education cess, and short-term gains are taxed at 15 per cent, plus surcharge and education cess.

However, if you plan to use the proceeds of the sale of your old residential property in acquiring another residential property, Section 54 of the Income Tax (I-T) Act saves you from paying the capital gains tax. Also, under Section 54F of the Act, a seller can be exempted from paying LTCG tax even if the saleable property is non-residential, and the profit gained so is being used to buy a residential property.

Also Read: How to claim deductions on capital gains invested in real estate

Now, let us look at what are the terms and conditions to avail of the benefits under Section 54:

The eligibility

To avail of the benefit under this Section, the seller has to be an individual or HUF (Hindu Undivided Family). An HUF includes all members of a family, including the extended family members. Apart from Hindus, HUF laws also cover Jains, Sikhs and Buddhists.

The holding period

The property you sold should be a residential asset and should have been held by you for a long term. In case if you hold the property only for a short-term, you will not be eligible to avail of the benefits. From the assessment year 2018-19, the period of holding, in case of immovable property is reduced from 36 months (three years) to 24 months (two years), to qualify as a long-term capital asset.

The Mumbai Bench of the Income Tax Appellate Tribunal has also ruled that the date of the allotment would be considered to calculate LTCG, and not the date of property registration. Typically, possession if offered before property registration if one is buying it from a real estate developer. 

Also read: Can Property Be Transferred To An Unborn Child?

Purchase of the new asset

Another condition that you have to fulfill to avail of the benefits under this Section is to buy the new property one year before the sale of the old one or within two years the sale of the old property. In case you are planning to construct a house on your own, the undertaking must be carried out within three years from the date of transfer of your old property.

Compulsory acquisition

In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

Also read: Listing 8 Real Estate-Related Transaction That Are Tax Free

The number cap

Effective from assessment year 2015-16, exemption under Section 56 can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, exemption under Section 54 will be available for one property only.

Those selling multiple properties to buy one single residential unit are eligible to get tax benefits, if the transaction is carried out within the stipulated timeframe. 

Within boundaries

What if you bought a property outside India using the sale proceeds of a property that you held in India? No exemption can be claimed for the house purchased outside India.

The amount

Now, what is the amount of exemption provided under the Section? The lower of following amounts will be exempted:

• The amount of capital gains arising on transfer of residential house; or
• The amount invested in purchase/construction of new residential house property.

Suppose you sold your old property for Rs 10 lakh, earning capital gains of Rs 1 lakh. Now, if you invest Rs 80,000 of this amount in the purchase of a new property, the exemption under Section 54 will be Rs 80,000 while the remaining Rs 20,000 of the gains would be taxable.

Holding again

What if you are unhappy with the new property and want to sell it soon enough? In such a scenario, you will have to let go of the exemption you claimed. According to the law, the benefit granted under Section 54 will be withdrawn if you transfer the new house within a period of three years from the date of acquisition.

The scheme

The Act further says that if the capital gains arising on transfer of the house are not utilised, in whole or in part to purchase another house till the date of filing the income tax returns, the benefit of exemption can be availed of by depositing the unutilised amount in Capital Gains Deposit Account Scheme. This provision has come into force with the enactment of the Gains Deposit Accounts Scheme, 1988. You can approach any branch of a public sector bank to deposit this amount. The new house can be purchased or constructed by withdrawing the amount from the account within the specified time-limit of two or three, as the case may be.

The unused amount

In case the amount lying in Capital Gains Account Scheme account is not utilised within a specified period, the unutilised amount, for which exemption is claimed, will be taxed as income by way of long-term capital gains of the year in which the specified period ends.

The very same money

It is not mandatory for the taxpayer to use the capital gains amount lying in his account to make the new house purchase. He could use money from other sources to do that and can still claim the tax exemption, several Benches of the Income Tax Appellate Tribunal have ruled. 

Also read: Taxpayer Eligible For Capital Gains Deduction Even If Home Loan Is Availed