The proposed regulations allow you to claim the benefit of investment in two houses but for those citizens whose capital gains is up to ₹2 crore
If the LTCG is higher than ₹2 crore from sale of property you will need to invest the entire amount in only one property to avoid tax
Now you have the option to buy two houses instead of one to save tax on long-term capital gain (LTCG) from the sale of a property. Earlier there was no limit to the capital gains amount for claiming an exemption. But there was a limit in the number of houses.
The proposed regulations allow you to claim the benefit of investment in two houses but for those citizens whose capital gains is up to ₹2 crore.
Say for example, you use the ₹2 crore LTCG to invest in two houses and add around ₹70 lakh from your pocket and then invest ₹1.2 crore in the first house and ₹1.5 crore in the second house.
According to the existing rules, your exemption amount will be the lower of these two: the LTCG or the investment made in the purchase of the new residential property.
Here, ₹1.5 crore, which is the investment made in the new property, is lower than the LTCG, which is ₹2 crore.
Hence the exemption amount taken is ₹1.5 crore. Your taxable LTCG becomes ₹50 lakh and the tax at 20% is ₹10 lakh. If the proposed regulations are implemented, you will get an exemption on your entire LTCG amount, which is ₹2 crore and you would not have to pay ₹10 lakh as taxes. Hence you will save that amount.
“Under the existing law, there is no limit to the capital gains amount for claiming the exemption, however, one can invest maximum in one house property," said Gopal Bohra, partner at NA Shah Associates LLP, a Mumbai-based tax accounting firm.
“The exemption amount will be the lower of the two: LTCG or the new investment amount. According to the proposed regulation, you can claim exemption on investment in two houses if the capital gain does not exceed ₹2 crore.
“This benefit is available once in a life time. This regulation seeks to benefit middle-class families who would want to purchase two houses to meet their family’s socio-economic need," Bohra said.
“The law allows you to invest in different places. A middle-class family based in a metro city like Mumbai may want to invest in a house in the suburbs and in another smaller city, say Pune or Nashik," said Deepali Sen, founder of Mumbai-based Srujan Financial Advisers LLP.
“This regulation is handing over more flexibility to the taxpayer and fuelling their demand in the real estate space," said Sen.
Remember that you can avail this benefit only once.
Also if your capital gains is higher than ₹2 crore, you will not be eligible for the change in rules. If the LTCG is higher than ₹2 crore from sale of property you will need to invest the entire amount in only one property to avoid tax.