How to keep away from tax capital good points below part 54?

Did you realize you can keep away from paying taxes on sale of residential property? The Income Tax Act supplies sure particular tax exemptions in case a residential property is bought and the assessee reinvests the quantity of capital good points within the buy of one other residential property.

Such an exemption is on the market below Section 54 of the Income Tax Act for the next:

The asset bought is a residential home property

The asset bought is a long-term capital asset

The asset bought must be a residential home property

The buy must be made inside a interval of 1 12 months earlier than or two years after the date of switch of the outdated home property, the taxpayer ought to purchase or construct a property inside a interval of three years from the date of switch of the outdated home

The property bought/constructed must be in India

The exemption below Section 54 may be claimed just for one residential home property bought/constructed. However, Section 54 has been amended, w.e.f 1 April 2020 and the advantage of exemption is on the market in respect of funding made in two residential home properties if the quantity of long-term capital good points doesn’t exceed ₹2 crore. This possibility may be exercised solely as soon as by an assessee throughout his/her lifetime.

For instance, Nitin owned residential home A for 10 years. He purchased a brand new residential home B on 1 February 2020 price ₹1 crore. Nitin bought home A on 2 January 2021 for ₹10 crore. The capital good points (CG) arising on this sale was ₹2 crore. On 1 March, 2022 Nitin bought home C price ₹1 crore. He believes that exemption may be claimed in respect of capital good points arising on the switch of home A since homes B and C have been bought inside the time-frame of 1 12 months earlier than or two years after. Also, the capital achieve is lower than ₹2 crore and therefore he’ll be capable to train the once-in-a-lifetime possibility of claiming deduction by investing the capital good points in two homes. In this case, his understanding is appropriate. It is pertinent to notice that CG shall be exempt to the extent of CG or quantity invested within the buy/development of one other home, whichever is much less.

It is attention-grabbing to know what occurs if the brand new residential home property bought or constructed for claiming deduction below Section 54 is transferred inside a interval of three years from the date of acquisition. The exemption claimed shall be withdrawn. The quantity claimed as exempt earlier shall be deducted from the price of acquisition of the brand new home property.

Suppose, Siddharth held two home properties L, M for the previous 8 years. He bought home L for ₹1.75 crore in September 2020 and made a CG of ₹70 lakh. He bought one other home property N in December 2020 for ₹1 crore. He information the ITR in July 2021 and claimed exemption for your entire capital, i.e. ₹70 lakh.

Now, in August 2021, he bought home N for ₹1.05 crore. Thus, the CG shall be ₹5 lakh. He doesn’t have another revenue throughout the 12 months. He believes that he won’t be liable to pay any tax attributable to rebate below Section 87A. This perception of Siddharth is just not appropriate; he bought the home property earlier than the completion of three years and had claimed Section 54 exemption to the tune of ₹70 lakh. Hence, for the aim of computation of short-term capital good points, the sooner exemption of ₹70 lakh shall be deducted from the price of acquisition of ₹1 crore. The value of acquisition for revenue tax function shall be ₹30 lakh ( ₹1 crore much less ₹70 lakh). The short-term capital good points shall be ₹75 lakh ( sale worth of ₹1.05 crore much less new computed value of acquisition ₹30 lakh).

Suppose, Rahul bought home property A in July for ₹10 crore and earned long-term capital good points of ₹4 crore. House B is bought for ₹5 crore in August in his partner’s identify. Can he declare exemption below Section 54? In a latest ruling, Bhagwan Swroop Pathak vs ITO, the Delhi bench of the Income Tax Appellate Tribunal and CIT(A) vs Kamal Vahal 351 ITR 4, the Delhi excessive courtroom has held that a person shall be eligible for CG exemption if he invests your entire LTCG in direction of the funding in one other property within the identify of the partner or different relative.

Nitesh Buddahdev is founding father of Nimit Consultancy.

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