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Thinking of buying your dream home? There are two great tax exemptions available for people doing so. Read on ...
Tax exemption number 1: Exemption of long-term capital gains from a residential property on re-investment in house property
There is a complete income tax exemption in respect of capital gains in Section 54. Thus, if you sell a residential house you acquired more than three years ago or earlier, or sell even a part thereof, you make a long-term capital gain.
Now, if the entire long-term capital gain is invested in the purchase of a residential house property within one year before, in anticipation of the sale, or within two years of the actual sale, or if the house property is constructed within three years of the sale, your entire long-term capital gain in respect of the sale of the first residential house property would be fully exempt from income tax.
Where, however, the entire long-term capital gain is not so utilized, or only a part thereof is so invested, then only the proportional amount of long-term capital gain would be so tax-exempt.
A procedural requirement about the claim of exemption of long-term capital gains should also be understood clearly. If by the last date of the voluntary filing of Income tax Return under Section 139(1), the entire long-term capital gain is not so utilised, then it should be deposited with a bank under a Capital Gains A/c Scheme and the receipt thereof should be enclosed with the IT return.
Such amount of unutilized capital gain, which is deposited with the bank under the scheme can be withdrawn as and when required. However, the amount must be fully utilised within the afore-stated period of 2 or 3 years from the date of transfer of the first residential house property.
Tax exemption number 2: Exemption of long-term capital gains regarding any capital asset on investment in a residential house
Another income tax exemption which can be enjoyed by an investor on investment in residential house property can be secured under Section 54F. Thus, where an investor has a long-term capital gain on the transfer of any capital asset (other than a residential house) like shares, a plot of land, commercial assets, commercial house property, jewellery, etc., then he can secure complete income tax exemption on the long-term capital gain in respect of the sale of the capital asset if the entire net sale proceeds thereof are invested in the acquisition of a residential house, or a part of a residential house, either by purchase or construction.
Thus, the entire net sale proceeds should be invested within one year of the transfer in advance, or within two years from the date of transfer in the purchase of a residential house property, or the sale proceeds may be invested within three years in the construction of a residential house property.
However, there is one more condition which is very important and which must be complied with by every taxpayer. This benefit of this exemption under Section 54F is available only where the taxpayer does not own more than one residential house as on the date of the transfer of the capital asset.
Further, such a person should not buy within one year any other residential house or a flat or should not construct within three years any residential house from the date of transfer of the original capital asset. Further, the lock-in period for the new residential house so acquired is three years.
Thus, the newly acquired house should not be so sold or transferred within a period of three years otherwise the entire capital gain becomes taxable. Where the entire sale proceeds of any capital asset are not so invested in the residential house property on or before the last date of voluntary filing of the income tax return, then the same procedural requirement about the investment of the money in a bank account in a Capital Gain A/c Scheme, as explained earlier, for the purposes of Section 54 is equally applicable for Section 54F.
[Excerpted from the book, How to Save Income Tax through Tax Planning by R N Lakhotia and Subhash Lakhotia. Published by Vision Books.]
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