Can I claim an exemption under Sections 54 and 54F simultaneously for investment in the same house?

I purchased a residential in 2009 and three plots of land in Pune. One plot is 10 years old and the other two have completed 18 months. Now I wish to shift to Bangalore by selling all the plots and the residential house and wish to purchase a ready-to-move-in residential house there. Could you please guide me about the tax implications for these transactions?

Answer: As per the income tax laws any house or land becomes a long-term capital asset if the same is held for 24 months or more. One can claim exemption against long-term capital gains arising from the sale of residential houses and land respectively under sections 54 and 54F by investing in a residential house. If you sell land and building before it becomes a long-term capital asset, the profits are taxed as short-term capital gain and taxed like your regular income.

For claiming long-term capital gains exemption under Section 54 arising from the sale of a residential house, you are required to invest only the capital gains computed by reducing the indexed cost of the house from the net sale consideration. In order to claim a long-term capital gain exemption under Section 54F on the sale of plots of land, you are required to invest in the net sale consideration. If full consideration is not invested, you will only get an exemption in respect of proportionate indexed long-term capital gains.

Under both these sections the investment in residential house has to be made within a period of two years from the date of sale of the respective assets. A longer period of three years is available if you go for self-construction or booking an under-construction residential house.

You can even claim these exemptions in respect of a residential house purchased within one year before the sale of the assets. If the required investment is not made by the due date of filing the ITR, you are required to deposit the unutilised money in a bank account under the Capital Gains Account Scheme which can be utilised for the purpose of investing in the house within the prescribed time limit.

For the plots that have not been completed in 24 months, you will have to pay tax at your slab rate. I would advise you to wait till both the remaining plots become long-term and sell them within one year from the date of purchase of a new house in Bengaluru.

Please note that sections 54 and 54F are independent provisions and are not mutually exclusive. So you can claim an exemption under both Sections for making an investment in the same house. There is no specific bar in simultaneously claiming the exemption under both sections. The same has been decided by the Income Tax Appellate Tribunal in the decision of Venkata Ramana Umareddy Vs Dy. CIT (ITAT Hyderabad).

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on Twitter.