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New house not ready in 3 years? In some cases, you may get to retain the LTCG tax exemption

The new asset is required to be constructed within a period of 3 years from the date of sale of the original asset

I had sold some land in my home town and invested the proceeds in an apartment 5 years ago. For this, I had claimed exemption from capital gains tax. The house is still not ready. Will I be penalised for availing the exemption?

—Name withheld on request

The Long Term Capital Gain (LTCG) arising from the sale of an asset can be claimed exempt where the net sale consideration (that is, the sale proceeds minus the selling expenses) is re-invested in a residential property situated in India (‘new asset’) within the specified time and subject to fulfilment of other conditions under section 54F of the Income-tax Act, 1961.

The new asset is required to be constructed within a period of 3 years from the date of sale of the original asset. If this condition is not met, the capital gains not taxed earlier would be subject to tax in the year in which the timeline to invest expired.

There have been certain judicial precedents where appellate authorities have permitted the claim for exemption even where there has been a delay in the construction of the new asset, for reasons beyond the control of the taxpayer. It would therefore be advisable for you to ascertain whether the delay in construction is solely attributable to the builder/ developer, to consider whether a reversal of capital gains exemption is required. If the delay was on your account and if the reversal of exemption of capital gains is required, the same would need to be done for the financial year in which the 3-year period expires.

Hence, depending on the exact year, you may need to pay the taxes (along with relevant interest) and revise the return for the said financial year if a return was already filed for that year.

I had purchased a house for Rs28 lakh in June 2013 and sold it for Rs31 lakh in February 2018. After purchasing the house, I paid the Noida Authority Rs1 lakh as penalty for farmers’ dues, Rs3 lakh in re-modification, Rs1.5 lakh as registration fee (stamp duty), Rs25,000 as brokerage (during selling), and Rs25,000 as brokerage (during purchasing). Total amount spent from the date of purchasing to selling is Rs34 lakh. This way, the total expenditure of the house I sold for Rs31 lakh is Rs34 lakh. I had taken a housing loan for this. I have also returned the loan to the bank after selling the house. I am a salaried person and I am also taking tax rebate on the principle amount and interest. Am I liable to tax on capital gains? Will the tax benefits on principal amount and interest of loan continue during the period? Or will both the benefits be reversed?

—Harish Kumar

The sale of your house property would trigger taxes on any capital gains arising from its sale. As the house property you sold was held for more than 24 months, the gains, if any, resulting from the sale would be taxable as LTCG. It is computed as the difference between net sale proceeds and the indexed cost of acquisition (the brokerage and registration costs paid at the time of purchase will be added to your cost of acquisition) of the house property and the indexed cost of improvement (that is, re-modification in this case if such re-modification expenses were capital in nature and not in the form of routine repairs). Indexation refers to adjusting the cost of the asset based on the Cost Inflation Index (CII) published by the income-tax department for the financial years (FY) of purchase and sale.

The brokerage paid at the time of sale will be deducted from the sale consideration to arrive at net sale proceeds. More facts on the exact nature of penalty costs would be required to determine whether the same can classify as cost of acquisition or cost of improvement.

In your case, the aggregate indexed cost of acquisition and improvement will be higher than the net sale consideration, resulting in a long term capital loss (LTCL). The LTCL arising to you can be carried forward and set off against any LTCG arising to you in the next 8 tax years.

Deductions claimed by you towards principal repayment of housing loan in respect of the property sold until the date of sale would ordinarily be reversed and treated as taxable income in the year of sale, since the property has been sold before being held for the stipulated period under section 80C(5)(iii) of the income-tax Act. If you had invested in other qualifying investments or expenses during each of the years in which the tax deduction was claimed, it may be possible for you to argue before the tax officer that the deductions claimed in earlier years towards principal repayment ought not to be treated as income.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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