Investing long-term gains in land only won’t give tax benefit

However, if you have acquired a land to construct a house, then the exemption could be availed.
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First Published: Wed, Feb 13 2013. 06 18 PM IST
I own three residential houses and none of it is self occupied. I recently incurred capital gains from the sale of an ancestral property (other than the three houses). Am I eligible for tax benefit by reinvesting the proceeds in an infrastructure bond or another house property. If I am eligible, will the exemption be available if I reinvest the gains in land only or land with a plan to construct a house within the next three years.
In case of ancestral property, the period of holding is reckoned from the date of purchase of property by the owner who actually acquired the property otherwise than by inheritance or gift. Since you have sold an ancestral property, it is likely that the property must have been held (including the period of holding of the actual owner) for more than 36 months from the acquisition date. Accordingly, the resulting gains shall be classified as long-term capital gains (LTCG).
Further, in case of inheritance, the cost of acquisition shall be the cost for which the previous owner who has actually acquired the land otherwise than by inheritance or gift, as increased by cost of improvement made subsequently. Further, where the property has been acquired by the original owner prior to 1 April 1981, you have the option of taking the actual cost of acquisition or fair market value of the land as on 1 April 1981.
Further, the cost of purchase and cost of improvement, if any, made subsequent to the purchase of property shall be increased using the applicable cost inflation index notified by the income-tax department with respect to the base year when the land was first purchased, the financial year (FY) in which cost of improvement, if any, was made and the FY of sale of land, respectively.
You can avail an exemption from LTCG tax by reinvesting the LTCG in a new residential property within the specified time frames (within one year prior to sale date or two years from the sale date or within three years from the sale date for an under-construction property), subject to fulfilment of other specified conditions under section 54 of the Act. The quantum of exemption under section 54 is restricted to the lower of investment in new house or LTCG resulting from sale of old property.
Note that investment of LTCG in land only shall not qualify for tax exemption under the Act. However, if you have acquired a land with an intention to construct the house thereon, then the exemption could be availed subject to construction of the property within three years of the sale of old property. The documents such as quotation from builder may be obtained to prove the bonafide intention of construction of the new house on the acquired land.
If you are unable to invest LTCG towards purchase or construction of new house either partly/entirely by the due date for filing your tax returns for FY13, you could deposit the unutilized LTCG into the Capital Gain Account Scheme (CGAS) and avail exemption from LTCG in FY13 for the old property. Further, to ensure that the said exemption is not revoked in future, you should utilize the amount deposited into CGAS for the purchase or construction of a new property within the aforesaid time frame. If you are unable to utilize the amount deposited into CGAS for purchase or construction of new property within the aforesaid timeframes, then the unutilized amounts shall be taxable as LTCG from the end of three years from the date of sale of property.
You can also avail an exemption from LTCG by investing the same in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC of the Act. The investment should be made within six months from the sale of old property subject to a cap of Rs.50 lakh per FY.
The exemption is restricted to LTCG where investment in bonds is higher. Where the investment in bonds is less than LTCG, the exemption is calculated as a proportion of the cost of the new asset to the LTCG. The amount invested in specified bonds shall be claimed as exempt from tax and the balance amount, if any, shall be taxable at a flat rate of 20.6% (including education cess).
The investment in a new house or specified bonds has a lock-in period of three years. Accordingly, if the new property is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of the ancestral property shall be revoked. If you take any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash.
On the other hand, if the property has been held for less than 36 months, then the resulting gains shall be termed as short-term capital gains (STCG). This entire STCG shall accordingly be taxable as per the applicable income-tax rate.
Please note that since you own more than one residential property, the wealth tax implications will need to be separately examined.
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First Published: Wed, Feb 13 2013. 06 18 PM IST
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