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Business News/ Money / Calculators/  Conditions apply to tax exemptions on capital gains reinvested in house
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Conditions apply to tax exemptions on capital gains reinvested in house

If you have capital gains from the sale of a residential property and are considering reinvestment to save taxes, take a look at these conditions

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Provisions in the Income Tax Act, 1961, allow an individual to bring down or avoid paying tax on capital gains from transfer of residential property. To do so, you can either reinvest the capital gains in capital gain bonds or in a residential property. But in both the options, you need to fulfil some conditions to avail the related tax benefits. If you have capital gains from the sale of a residential property and are considering reinvestment to save taxes, take a look at these conditions.

Investment of capital gains in capital gain bonds specified under section 54EC of the Act, provide exemption from tax. You need to invest in these bonds within 6 months from the date of transfer of the property or before the due date of filing the tax return for the relevant financial year. The maximum amount you can invest is Rs50 lakh. If the property was jointly held, each owner has a separate limit of up to Rs50 lakh. You have to remain invested in these bonds for at least 3 years. If you redeem or even take a loan or advance against these bonds within 3 years, the tax benefit gets revoked. Also, a bond issue has to be available.

You can save on taxes by reinvesting the capital gains in a residential property. But you can buy only one property. The new house has to be bought 1 year before the transfer of the older property or 2 years after the transfer. If you intend to construct a property, it should happen within 3 years of transfer of the older property. If you plan to buy a property later, but not after 2 years have expired, the sale proceeds can be kept in a separate bank account under the Capital Gain Account Scheme (CGAS). Even if you are constructing a house, the money should be kept in CGAS to avail the tax benefit. Withdrawals can be made according to the progress in construction, and not for any other purpose.

The new house should be situated in India and should be the only residential property you own. Moreover, you should not buy another new house or construct one (other than the new one), within a period of 2 years or 3 years, respectively, from the date of sale of the older house. You also can’t sell the new house within 3 years of buying or constructing it.

To claim the tax exemption on the entire capital gains from sale of assets other than residential property, under section 54F of the Act, you have to invest the entire sale proceeds. If you invest only a part of it (to buy or construct the new house), tax exemption is only on that proportion. For instance, if you sell gold jewellery for Rs1 crore and make capital gains of Rs50 lakh, you need to reinvest the entire Rs1 crore to save on taxes. If you invest only Rs50 lakh (i.e., 50% of Rs1 crore), you can claim tax exemption for Rs25 lakh only (50% of the capital gains). The remaining Rs25 lakh capital gains will become taxable. But in case of capital gains from sale of residential property, under section 54 of the Act, you can reinvest only the capital gains and not the entire sale proceeds to get the tax benefit.

You can also invest in residential property and bonds. Both investments will be considered for exemption.

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Published: 20 Sep 2017, 05:04 PM IST
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