The Income Tax Appellate Tribunal, Delhi, recently ruled that if a house owner sells multiple properties and invests the proceeds in a new house, he is eligible to get a deduction of capital gains tax benefit.
“It’s not unusual to see people sell small dwelling units and buy a bigger one. The ruling, therefore, benefits taxpayers and can be used as a reference in other states,” says Naveen Wadhwa, general manager, Taxmann.com.
According to Wadhwa, the government had brought an amendment two years back clarifying that an individual cannot invest in multiple properties by selling one house unit to save capital gains tax. Also, the property purchased has to be in India. “If the government were of the view that proceeds from multiple houses cannot be invested in one house, the laws would have been amended accordingly,” he says.
Tax experts warn that taxpayers need to keep the time lines mentioned under the Section 54 and 54F. The Section 54 of the Income Tax Act allows a house owner to sell a property and invest it in a new one to save capital gains. The new property has to be bought either one year before the transfer of the old property or two years after that. Suppose you sell a property on June 1, 2016. You can save capital gains tax in you had bought a new house between June 1, 2015, and June 1, 2016, or if you buy another house by May 31, 2018. But if you are constructing a new house, you are allowed to finish construction within three years.
Under Section 54F, an individual can save capital gains by selling any long term capital asset (like gold) and investing in a house property. The key difference between the two section is that under Section 54, only the taxable profits need to be invested in a property. Under Section 54F, the entire sale consideration has to be utilised.
The recent ruling of ITAT also clarifies that as long as the house is under-construct and the period of three years given for completion has not elapsed, the individual can continue to invest taxable profits in it over multiple financial years.
Say you sell the first house on June 1, 2016. You can save capital gains tax if you finish constructing a house by May 31, 2019. If you sell another house in 2017 and deploy money in the same under-construction property, you can still claim deductions on capital gains.
Also, if any portion of the money remains unutilised by the time you file returns, you have to deposit the funds in capital gains account scheme. If you sold a house in 2016 for Rs 1 crore and had capital gains of Rs 30 lakh. You buy a new house that has a construction-linked payment and give the developer Rs 20 lakh as booking amount. The remaining Rs 10 lakh needs to be deposited in a capital gains account scheme.