Ask Mint Money | When cost of new house exceeds sale amount, LTCG is exempt

I sold a residential plot in May 2011 which was purchased in 1979 in Hyderabad. I want to avail tax benefit under section 54F. I thought of an alternative: I have a flat which is under construction for which I have already paid five instalments starting in 2006. The flat may to be completed by December. I have to file tax returns in 2012 and submit the above details. To avail capital gains tax benefit for the second house, how much money should I deposit in Capital Gain Account Scheme (CGAS) in type A and B accounts in a nationalized bank?

—Appa Rao

Under section 54F of the Income- tax Act, long-term capital gains (LTCG) resulting from sale of residential plot could be claimed as tax-exempt, subject to prescribed conditions. The exemption from LTCG could be availed by investing the net sale proceeds into a new residential house within one year before or two years after the sale date of plot. Alternatively, you may invest the sale proceeds in constructing a new house, the construction of which needs to be completed within three years from the sale date. The legislation has provided that in case of construction of a new property, the construction should be completed within three years from the date of sale of the old property.

In a situation such as yours, the courts have held that though the construction of the new property has commenced before the sale of the old property, the benefit under section 54F may be claimed if such construction is completed within three years from the date of sale. The amount of deduction (especially in respect of expenditure incurred prior to the date of sale) may be subject to litigation, especially at lower levels.

Where the cost of the new house exceeds the net sale consideration of land, the entire LTCG should be tax-exempt. But where the amount of the new house investment is lower than the net sale value, the exemption shall be prorated in proportion of the new investment to the net sale value.

If you are unable to make the new investment either partly/ entirely by the due date (31 July) of filing your returns for FY12, then you could deposit an amount equivalent to LTCG into CGAS and avail exemption from LTCG in FY12 for the old plot. You should utilize the amount deposited into GCAS for purchase or construction of new property within the prescribed time frame. If you are unable to do so, then the unutilized amounts shall be taxable as LTCG from the end of three years from the date of sale of plot—for you, in FY15.

Exemption can’t be availed under section 54F under the following situations:

•If you own more than one house (other than the new house), on the date of sale; or

•Purchase/construct any residential house (other than the new house) within a period of one/three years, respectively, after the sale date; or

•The new house acquired is sold within three years from purchase/construction.

Parizad Sirwalla, Partner (tax), KPMG

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