I want to buy two flats by selling one. What are the income tax implications?

Can I buy two house properties from the sale proceeds of a one residential house held by me for more than 24 months, without paying any income tax? For smooth succession, I want to buy one property in the joint names of me and my son and second property in the name of me and my daughter though entire investment will be made by me. If not, please guide me as to how I should go ahead to ensure that the property is passed on to my son and daughter without any income tax implication.

Under Section 54 of the Income Tax Act, an individual tax payer is entitled to claim exemption from payment of tax on long term capital gains arising from sale of a residential house if he invests the capital gains for buying another residential house within specified time period. It may be noted that for availing the tax benefits under Section 54, you are required to invest only the indexed capital gains on sale and not the full sale consideration of the existing house property. Thus the extent of money which you need to invest will be lower than what you are anticipating now. Exemption on long term capital gains from one residential house can only be claimed for investment in only one residential house property.

However, as per various judicial pronouncements of various income tax tribunals exemption can be claimed for buying more than two flats if these flats are used as a single residential unit like adjoining flat or a duplex in the same building. Even the benefits can be claimed for buying a full residential building if it is proposed to be used by a single family having one common kitchen.

There are no restrictions on you buying the proposed property jointly with your children as long as you are able to establish that you have made the requisite investment in the property.

Your son or daughter can be made joint owner in the agreement even if they do not invest any money in the property. In order to ensure that the property passes on smoothly to your children after your death, please prepare a Will specifying the share of your son and daughter in all your assets whether movable or immovable. Your son or daughter will not have to pay any tax at the time when they inherit your assets on your demise and you also will not have to pay any tax now if you invest the full indexed long term capital gain as discussed above.

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