How is tax calculated on sale of apartment?

I am selling my flat in Dharuhera, Haryana, and my mother is selling a flat in Laxmi Nagar, Delhi. We plan to invest the money from this sale in a single apartment in Gurgaon within a year. Do we need to deposit the money in any specific account? I am also taking a loan from my mother to pay off the home loan on my flat in Dharuhera and  will her pay back from the proceeds of the sale.  What is the tax liability with these transactions? 

                             —Aman Kishore

Section 54 of the Income-tax Act, 1961, provides for deduction against the long-term capital gain (LTCG) arising from the sale of a residential house being held for more than two years.

This deduction is available where the amount of LTCG arising from such sale is either invested to purchase another residential house in India, within a year before or two years after the transfer of original asset or the same is invested to construct a new house within three years of the transfer of original asset.

The deduction will be available to the extent of LTCG invested. In case the LTCG can’t be invested for purchase/construction of the new house till the date of furnishing the return under Section 139 of the Act, then such amount can be deposited before the due date of filing tax returns in a specified Capital Gain Account Scheme (CGAS) bank account with authorized banks and utilized in the manner prescribed, to avail of the deduction.

We understand that you and your mother are selling your properties and plan to invest the sale proceeds to purchase one new house in India, which would be owned jointly by you and your mother. As also held in judicial precedents. you and your mother may both claim deduction u/s 54, if the respective LTCG amount earned from sale of the respective properties, are either invested in (i) the new house in India and / or (ii) the same is deposited under the CGAS, before the due date of filing the original tax return.

However, please note that in case you are not able to purchase/construct the new house within the specified period under this section, the amount of deduction claimed by you earlier shall be considered as taxable income in the year in which the time limit of three years from the date of transfer of the original asset expires. Further, in case the new house is transferred within a period of three years from the date of purchase or construction, then for the purpose of computing the capital gain, the LTCG for which deduction is claimed earlier will be reduced from the cost of acquisition of the new house.

Further, availing of loan from mother to pay off the housing loan on your original asset and repayment of the same from the sale proceeds of the property would not attract any tax implications as long as the amount of LTCG earned from the sale of the property is invested as mentioned above. In case the complete amount of LTCG earned by you is not fully invested, then the deduction would be limited to extent of the amount invested by you and the balance LTCG will be taxable in your hands.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Write to us at mintmoney@livemint.com to get your personal finance queries answered from experts.