Hard to get capital gains benefit for joint houses

Recently, the Income Tax Appellate Tribunal, Delhi, said that if a taxpayer sells multiple properties to invest in a house, he can get the long-term capital gains tax benefit on all the house he sells. But what happens if an individual sells one house and invest in multiple properties?

The law states that to take the benefit of the long-term capital gains tax, the proceeds of the sale of a property has to be invested in a single house. But in certain cases, the income tax department can dispute what the taxpayer considers as one residential unit. The tax department, for example, can dispute if a taxpayer sells one house and construct a building or a bungalow on a plot with two or three floors that are occupied by family members.

For the taxpayer, it is one residential unit. An assessing officer, however, can take the view that different floors can mean that each floor is an independent house. In such disputable cases, the taxpayer needs to be cautious, warns tax experts. “In such cases, the tax department will delve into details to confirm whether it should be considered as a single or separate unit,” says Kuldip Kumar, partner and leader, Personal Tax, PwC India. 



A taxpayer can face similar dispute when buying two adjacent flats in the same building and combining them as a single unit. The assessing officer can dispute that as the individual has purchased two different houses, he can only get the long term capital gains benefit for only one. A similar dispute can arise if a taxpayer acquires two floors, one above the other, in a single building or plot. “To convince the officer, the property owner need to combine the flats and ensure that it’s an integrated unit. Having a common entrance would strengthen the case. If possible, the buyer should execute a single agreement for both the flats,” says Suresh Surana, founder of RSM Astute Consulting Group.

Such cases have been a point of dispute between the assessees and tax department. In the financial year 2015-16, there was a notification that changed the words “a new residential house” to “one residential house property.” The change in language has led to change in interpretation, too. It’s has become harder to get exemption for above-mentioned cases. “In the past, before the amendment, the income tax tribunals and courts have ruled in favour of the taxpayers. But those rulings are very specific to particular cases,” says Naveen Wadhwa, general manager, Taxmann.com.

Wadhwa points out that this year Madras High Court even ruled that just because flats were purchased by two separate sale deeds and had separate electricity meter connections does not necessarily lead to the conclusion that there were two separate residential units. But after the change 2015 notification, such cases have only persuasive value and are not binding.

Under Section 54, which deals with long term capital gains tax exemption, the seller needs to purchase or start construction of a new property within one year before selling the house or two years after the sale. If the taxpayer is constructing a property, it needs to be completed within three years from the date of sale of the old property. According to the amendment in the Union Budget, from the assessment year 2018-19 the owner should hold an immovable property for 24 months to be qualified as long term capital asset. Earlier, the period of holding was 36 months.