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Priyanka Parashar/Mint
Priyanka Parashar/Mint

LTCG tax exempt if cost of new house exceeds sale gain

If it is lower, LTCG is exempt from tax in proportion of cost of construction of new house

I owned a residential plot and an apartment in Bengaluru, which were bought around 10 years ago. I want to sell the plot and construct a house. Will I get a tax exemption if I do this?

—Gayathri

The long-term capital gain (LTCG) from sale of any long-term capital asset (LTCA) other than residential house can be claimed as exempt from tax by re-investing the net sale proceeds into a new house subject to fulfilment of specified conditions laid in section 54F.

A residential plot that’s held for more than 36 months from acquisition date will be classified as LTCA. So, any gains from sale of such a plot can be claimed as exempt from tax by re-investing into a new house (including its construction). The LTCG should be computed as difference between the net sale proceeds and the indexed cost of acquisition. The cost of acquisition and improvement should be adjusted by applying the cost inflation index notified by the tax authorities in the year of purchase and sale, respectively.

Do ensure that the new house is constructed within three years of the sale of the old plot. One condition categorically requires that while claiming LTCG exemption, you should not own more than one house (other than the new house) on the date of sale of the old plot. You seem to comply with this condition.

Where the cost of the new house exceeds proportionate net sale proceeds, entire LTCG should be exempt from tax. But if it is lower, LTCG is exempt from tax in proportion of cost of construction of new house to the net sale proceeds. The balance LTCG shall be taxed at 20.6% (including education cess). If taxable income during financial year (FY) 2015 exceeds 1 crore, surcharge at 10% on basic rate (i.e. 20%) should be applied. As per Finance Bill 2015, if the total income during FY16 exceeds 1 crore, proposed surcharge at 12% on basic rate will be applicable.

If you are unable to re-invest the sale proceeds in building a new house before filing the tax return for the FY of sale of old plot, the unutilized balance should be deposited into the Capital Gains Account Scheme before the due date of filing tax return. The amount deposited should be utilized to build a new house within three years from sale of old plot. If this is not done, the unutilized amount shall be taxable as LTCG in the FY in which three years from sale of old plot lapses.

If the total income for the FY as reduced by said LTCG is below the applicable basic income exemption threshold for the said FY, the capital gains shall be reduced by the amount by which the total income so reduced falls short of the basic income exemption limit. The balance gains shall be taxed at a flat rate of 20.6%.

If the new house is sold within three years, the LTCG tax exemption claimed for the old plot shall be revoked. Also, you can invest LTCG in specified bonds.

Queries and views at mintmoney@livemint.com

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