Photo: iStock
Photo: iStock

No tax exemption if LTCG from sale of residential property is used to buy farm land

If the LTCG has not been reinvested before the due date for filing your tax return for the tax year in which the property was sold, the unutilized amount can be deposited in a Capital Gain Account Scheme

Is LTCG exempt if I buy agricultural land by selling a residential property? A portion of this amount was withdrawn from an LTCG deposit account towards partial payment of a housing board property. But the authority is yet to announce allotment. The LTCG deposit scheme is valid only for 2 years. Can it be extended since the allotment procedure has been delayed by the state authority?

—Prashanth Bhat

An exemption is not available if long-term capital gains (LTCG) from sale of residential property are re-invested in agricultural land.

Capital gains tax will be payable on gains arising from the sale of the residential property. Assuming the gains are classified as long term, you can avail an exemption from capital gains tax by reinvesting the capital gains in a new residential property situated in India, within 1 year prior or 2 years after the sale date of the old property (if the property is acquired) or within 3 years (if constructed), subject to other conditions in section 54 of the Income-tax Act, 1961.

If the LTCG has not been reinvested before the due date for filing your tax return for the tax year in which the property was sold, the unutilized amount can be deposited in a Capital Gain Account Scheme, and can be used to buy or construct a property within the above timelines. Where the new property has not been acquired by you within 2 years from the date of sale, the amount deposited in the scheme to the extent not utilized will be taxed as income in the tax year in which the 2-year period from the date the original asset was sold, expires. There are judicial precedents permitting exemption where the amount was fully re-invested but the acquisition was incomplete on account of delays (beyond the control of the taxpayer). However, even in such cases any un-utilized amounts would be taxable.

I had bought a flat in 2013 but the developer did not complete the project on time. We mutually cancelled the agreement and developer compensated for this in 2018. I received the amount I had paid, plus stamp duty and registration, and compensation at 9% per annum. The developer has deducted 10% TDS on the compensation amount.

We have a registered agreement which says this is not interest but a compensation settlement. How should I declare this in my tax return?

—Name withheld on request

There is no express clarity in the law on taxation of such compensation received for failure of the builder to handover possession or complete construction. But based on general principles, a view can be taken that what you have given up is your “right to purchase" the flat. Such “right to purchase" the flat is a capital asset and hence the compensation you received to cancel your right would be taxable as capital gains.

If you held this right for at least 36 months before the cancellation, the gain is taxable as a long-term capital gain (LTCG). The LTCG will be taxable at 20% (plus applicable surcharge and cess). The indexed cost of the right to purchase is reduced from the compensation received along with interest (upon cancellation) to determine taxable capital gains.

You will have to file your tax return disclosing the LTCG and claiming a credit for the TDS withheld by the developer against any taxes due by you. The LTCG can be claimed exempt from tax by investing the gains in specified bonds notified by the central government within 6 months from the date on which the agreement was cancelled subject to satisfaction of other conditions. This exemption is available only till 31 March 2018.

The LTCG can also be claimed exempt by reinvesting the sales proceeds (gross compensation) into another residential property in India subject to satisfaction of other conditions.

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

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