The Income Tax Act offers multiple tax benefits to encourage and facilitate property ownership. One of the most significant incentives is the exemption on capital gains tax when you use the proceeds from the sale of certain assets, such as shares, mutual funds, gold or any capital asset other than a residential house, to purchase a residential property. This valuable tax exemption falls under section 54F of the Income Tax Act.
To qualify for the section 54F exemption, there are three key conditions:
- Long-term Capital Gains (LTCG): The gains from the sale of assets must be categorised as long-term capital gains. Different types of assets have varying holding period criteria to be considered as LTCG.
- Full Utilisation of Sale Amount: The entire sale amount, not just the capital gains portion, must be utilised to purchase the new house property. Failing to do so will result in a proportional deduction of capital gains.
- Timeframe for Property Purchase: The new residential property should be bought either one year before or two years after the sale of the capital asset you intend to reinvest in the property. If you plan to construct a house, you have up to three years for such reinvestment.
- Deposit of Unutilized Investment: If the entire investment is not utilised for the new house's purchase or construction before the due date of filing the tax return for the year in which the original asset was sold, the unutilised amount must be deposited in a Capital Gains Account Scheme (CGAS) to claim the exemption.
Furthermore, it's essential to note that the exemption applies only if the new house is located in India. Purchasing a residential property abroad does not qualify for this tax benefit.
Starting from April 1, 2023, there is a threshold for the capital gains tax exemption under Sections 54 & 54F, limited to Rs.10 crore. Previously, there was no such limit. Irrespective of the amount of investments done, the total exemption under each section will not exceed Rs.10 crore.
The calculation of the exemption under Section 54 is based on the lower of two amounts:
- Long Term Capital Gains: The gains arising from the transfer of the residential house.
- Investment in New Property: The amount invested in the purchase or construction of the new residential property.
For example, if you sell a property for Rs.45,00,000 and invest Rs.20,00,000 in a new property, your exemption will be Rs.20,00,000 as it is the lower of the two amounts.
However, it's crucial to be aware of the consequences of selling the new house within three years of purchase or construction. If this occurs, the exemption claimed under Section 54 can be indirectly taxable in the year of the sale of the new house property. The cost of acquisition may be considered nil in such cases, leading to an increase in taxable capital gains.
In summary, purchasing a new home can be a smart move not only for fulfilling a personal goal but also for gaining significant tax benefits, especially when dealing with capital gains from other assets. Section 54F of the Income Tax Act offers substantial tax exemptions, provided you meet the necessary criteria and timeframes. It's important to understand these provisions thoroughly and consult with a tax advisor for proper guidance to make the most of these tax-saving opportunities.