If you plan to sell your house and buy, say, two houses for your two children using the capital gains, and also want to save tax levied on long-term capital gains (LTCG), the budget 2019 has something for you. It proposes that taxpayers can reinvest their gains in two residential properties to save LTCG tax from fiscal year (FY) 2020.
Gain from sale of a residential property (land, house or apartment) within two years of its purchase is considered short-term capital gain (STCG); after two years, the gain is considered LTCG. While STCG is taxed at the slab rate, LTCG is taxed at the rate of 20.6% (including cess) with indexation (Read how to calculate the indexed cost of a property here)
Currently, if you want to save LTCG tax on the gains made from selling a house, you are allowed to reinvest the profit in a single property or other specified instruments. LTCG arising from the sale of an immovable property is exempt from tax under Section 54 of the Income-tax Act, 1961, if the sum is used to acquire a single residential property, within the stipulated timeline.
The assessee needs to buy the new property within one year before the date of transfer of the property or two years after the transfer. In case of under-construction properties, the construction needs to be completed within three years from the date of transfer.
However, in budget 2019, finance minister Piyush Goyal proposed that, “the benefit of rollover of capital gains under Section 54 of the Income Tax Act will be increased from investment in one residential house to two residential houses for a taxpayer having capital gains up to ₹2 crore".
You, however, need to keep in mind that this benefit can be only availed once in a lifetime. This means that if you spread out your capital gains in two different properties, the next time you have LTCG from sale of a house, you can’t spread it again over two properties to save LTCG tax and restrict yourself to one property.
whom does it benefit?
This will benefit a lot of sellers, especially those who want to sell an existing house and buy two smaller houses for their children or for any other purpose.
However, “in case someone makes LTCG gains of more than ₹2 crore, she will not get benefited from the amendment proposed in the budget," said Amit Maheshwari, partner, Ashok Maheshwary and Associates, Llp, a chartered accountancy firm.
In such cases, sellers will need to invest the entire LTCG in only one property to avoid LTCG tax. They can, however, look for other avenues to save this tax.
Also, “it may not apply to existing unutilised capital gain lying in capital gain account which are to be utilised for buying or constructing house property in 2 or 3 years respectively," said Kuldip Kumar, partner and leader personal tax, PwC.
Apart from reinvesting in a residential property, you can also avoid paying LTCG tax by investing the capital gains in specified bonds under Section 54EC of the Income Tax Act. However, the total investment limit in these bond is restricted to ₹50 lakh to avail the benefit.
Also, LTCG from sale of a residential property becomes tax-free if the sale proceeds are invested in a small or medium enterprise in the manufacturing sector. Such investment can be made anytime within six months from the date of transfer of assets.
However, the funds have to be used by the company to acquire new plant and machinery before the due date to furnish tax returns for the relevant financial year. Besides, the equity holding or voting power of the assessee after the investment should be more than 50% in the firm.
If you are unable to use the sale proceeds immediately, you can deposit the amount in a Capital Gains Account Scheme (CGAS). The amount has to be parked in CGAS with the intention to use the funds to buy a new house within two years or to construct one within three years of the deposit.
Remember that if the new property is sold or the bonds are redeemed within a period of two years, the exemption claimed with respect to the old property shall be revoked. Even if you take any loan or advance against the security of these bonds, they will be deemed to be converted into cash, and you would need to pay LTCG tax.