Photo: iStock
Photo: iStock

Exemption under Section 54EC can’t be claimed in 2 FYs for single property

Investment under Section 54EC in FY in which house is transferred and in the subsequent FY can't exceed 50 lakh

I sold an inherited property shared with my brother after three years of inheritance. The buyer plans to provide the cost in two years to us. While we will receive half of the money in the first financial year, the property registration will happen next year after the entire amount is received. Can my brother and I in this scenario apply for tax exemption by putting 50 lakh each under Section 54EC? As the amount will be provided to us in two financial years, can we take the benefit of Section 54EC exemption for two financial years for this single property?

—Rajesh

The incidence of capital gains arises upon the “transfer" of a capital asset. While transfer has not been specifically defined under the Income-tax Act, based on various judicial precedents, property may be construed to be transferred on the date on which all rights and ownership of the property are transferred. The date of entering into an agreement or the date of receiving the payment may not necessarily be the only conclusive aspects.

The detailed fact pattern and documentation would need to be reviewed in your case, to determine the exact date (and, therefore, the financial year) of transfer.

As the immovable property has been held for more than two years prior to transfer/sale, the capital gains on sale would qualify as long-term capital gains (LTCG).

You and your brother would need to offer your respective share of LTCG to tax, in the financial year in which the property is considered to have been transferred.

With respect to deduction under Section 54EC of the Act, the same is available in the financial year in which the property is transferred, if the assessee has invested the capital gains in the notified securities, at any time within a period of six months from the date of transfer of property. Accordingly, exemption under Section 54EC of the Act, in respect of a single property transferred, cannot be claimed by the assessee in two financial years. Also, such investment made by the assessee, during the financial year in which the property is transferred and in the subsequent financial year cannot exceed 50 lakh.

Further, in case both your brother and you are separately investing your respective share of LTCG in the notified securities within the stipulated timelines, both of you can claim deduction under Section 54EC of the Act, up to 50 lakh each, subject to fulfilment of the other conditions prescribed.

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Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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