My wife and I bought pieces of land in September 2007 for Rs.5 lakh each and plan to sell in February for Rs.15 lakh each. Both the plots are vacant land. My wife and I also jointly own the house that we stay in now. Considering that we already have one residential flat in our names, if we use the sales proceeds of the plots (Rs.30 lakh) for buying a residential flat jointly, will we get exemption from long-term capital gains (LTCG) tax if the proceeds are invested in a new residential property or if the proceeds are invested in an old residential flat.
Under the Income-tax Act, gains resulting from the sale of plot of land shall be termed as LTCG since the plot of land has been held by you and your wife for at least 36 months from the date of acquisition. The LTCG could be claimed as exempt from tax either by reinvesting the net sale proceeds in another residential flat as per section 54F or in specified bonds as per section 54EC.
We understand that you and your wife propose to jointly re-invest the net sale proceeds resulting from the sale of respective plot of land in another residential land for claiming exemption from capital gains tax. We also understand that you and your wife jointly own the existing house (assumed that the house is jointly funded).
One of the condition prior to claiming an exemption under section 54F categorically requires that at the time of claiming an exemption, you should not own more than one house (other than the new house) on the date of sale of your original asset. Since you and your wife own only one house as on the date of sale of the respective plots, both of you shall satisfy that condition.
Accordingly, each one of you shall be entitled to claim an exemption under section 54F in the proportion of net sale proceeds resulting from sale of individual plot of land reinvested into another house. Where the cost of new house exceeds the net sale proceeds resulting from the sale of individual plots, the entire LTCG should be exempt from tax. However, where the cost of the new house is lower than the net sale proceeds, LTCG is exempt from tax in proportion of the cost of new house to the net sale proceeds.
Further, investment in another house should be made either within one year prior to the sale date or two years from the sale date or within three years for an under-construction property. It is irrelevant whether you reinvest the net sale proceeds in a newly constructed flat or used flat, only the time frame for the newly constructed property or purchase of flat should be met.
If each of you propose to invest the entire LTCG in another flat, but are unable to invest the same before the due date (31 July) of filing tax returns, the unutilized LTCG could be deposited into Capital Gains Account Scheme (CGAS).
Both of you can claim an exemption in the year of the plot’s sale by investing in CGAS. However, you should invest the amount deposited into the CGAS towards purchase or construction of a new residential apartment within the aforesaid investment time frames (within two years if the new property is acquired or within three years if the property is constructed).
If you are unable to re-invest the entire sale proceeds in another residential apartment and claim entire LTCG as exempt from tax, exemption from tax could be availed by investing the LTCG in specified bonds issued by National Highways Authority of India or Rural Electrification Corp. Ltd within six months from the sale date of the plot of land, subject to the cap of Rs.50 lakh during any financial year, according to the provisions of section 54EC of the Act.
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