Investments for saving LTCG tax cannot be in multiple houses
Capital gains—short-term and long-term—attract tax; except in equity where the long-term capital gains (LTCG) tax is nil. But if you sell assets like real estate or gold and make gains, you have to pay tax. You can avoid this if you reinvest the gains in a residential property. But there is a catch: you can’t buy multiple houses to save tax. Irrespective of the amount of capital gain, it has to be reinvested in a single housing unit. Here is all you need to know.
LTCG from sale of real estate attracts tax of 20.6%, with indexation. However, section 54 of the Income-tax Act, 1961, provides that LTCG tax can be saved by reinvesting in a residential property, and as amended by the Finance Act, 2014—reinvested in one residential unit. The new house has to be bought either 1 year before the transfer of the older property or 2 years after the transfer. If you wish to build a house, it should happen within 3 years of transfer of the older property. Remember, it is mandatory to keep the sale proceeds in a separate account under the Capital Gain Account Scheme (CGAS; read about it here) if you plan to buy a property later—though not after 2 years have expired. Even if you are building a house, the money should be kept in CGAS to avail the tax benefit. Withdrawals can be for construction, and no other purpose.
The new house has to be in India and should be the only residential property you own. Moreover, if you buy another new house or construct one (other than the new one), within a period of 2 years or 3 years, respectively, from selling the older house, you lose the tax benefit. The new house can be sold only 3 years after it is bought or built.
When you sell a house, you have to reinvest only the LTCG portion of the sale proceeds to save on tax. In other cases—such as sale of gold—according to section 54F of the Act, the entire sale proceed has to be reinvested. But if you invest only a part of the gains from sale of, say, gold (to buy or construct the new house), tax exemption is only on that proportion of the gain. For instance, if you sell a house for Rs50 lakh and make a capital gain of Rs30 lakh, you need to reinvest only Rs30 lakh to save on taxes. But, if you make similar LTCG from gold or assets other than real estate, in order to not pay tax, you will have to reinvest the entire Rs50 lakh. If you invest only part of it, say Rs30 lakh (60% of Rs 50lakh), you can claim tax exemption for Rs18 lakh only (60% of the capital gains). The remaining Rs12 lakh capital gains will become taxable.