Capital gains tax exemption is now available against investment in two house properties

There has been a change in the tax policies regarding capital gains arising from house properties. It has been broadened to offer exemption against two house properties instead of one.
The lifestyle of people has changed and to keep in line with the same, the law also needs to be amended. We find many families maintaining houses at two locations because of their jobs or location of their parents and children’s future etc. It has been made effective from the FY 2019-20 onwards.
The Long-Term Capital Gains is exempt but that is subject to terms and conditions. It is not blanket across all the LTCGs accruing to the taxpayers.

The exemption is subject to the following:

1. Exemption is available only to an individual and HUF. Any other taxpayer such as a firm or a company cannot claim this benefit. 
2. The amount of capital gains should not exceed Rs. 2 crores. This cap is applicable to the amount of LTCG and not to the amount of sale consideration.  Irrespective of the amount of the amount of sale consideration, if the capital gain does not exceed Rs. 2 Crore, an exemption can be claimed. 
3. This benefit is available only once in a lifetime. Once you claim for this benefit, there shall be no further claims made under this exemption rule.
4. The capital gains must arise from transfer of a house property. (Section 54 of the Income Tax Act-1961). Any other kind of LTCG arising from transfer of any capital assets other than a house property can be claimed u/s 54F, like from the sale of plot of land or any other asset. 

The exemption u/s 54 is available when the capital gains from the sale of house property are invested into buying or constructing two house properties. Prior to Budget 2019, it was limited to only one house property. 

The amount of exemption available under section 54 will be the lower of 

• Long Term Capital Gains arising on transfer of residential house or,
• The investment made in purchase or construction of a new residential house property. The balance capital gains if any, will be taxable. (It can be invested in the prescribed ways)

The new property can be purchased either one year before the sale or two years after the sale of the property. The gains thus invested in the construction of the property must be completed within three years from the date of sale. 

Effects of section 54F:

Section 54 and 54F both offer capital gains tax exemption from investment in house property, yet they are not the same. U/s 54F, LTCG arising from transfer of any capital assets other than residential house property can be invested in only ‘one’ house property. And the taxpayer should not own more than one house property at the time of getting the LTCG. If he/she owns more than one house, then this exemption is not available. Investment in two house properties is available only u/s 54 and not under section 54F. 

Both the sections have been explained here with illustrations:

An individual owns three house properties and three plots. He sold one of the 3 house properties. He earned a LTCG of Rs. 1.80 cr and reinvested the amount in two house properties. Exemption shall be available despite him owning two other house properties u/s 54. Now if he sells a plot of land, then he shall not be allowed any capital gain exemption u/s 54 or u/s 54F. By selling a plot a house cannot be purchased under sec 54 and he already owns more than one house property so he cannot buy another one (sec 54F).

Now if a taxpayer own one house property and 2 plots and sells one plot to invest the net sale proceeds in two house properties, he cannot claim the exemption under section 54F as it allows such an investment only in ‘one’ house property.  Further the taxpayer should not purchase any residential house other than the new asset, within a period of one year after the date of transfer of the original asset or construct any residential house within a period of three years from the date of transfer of the original asset. Otherwise, the capital gains exemption shall be withdrawn, and it shall be taxable in the year of violation. 

Section 54F allows taxpayers to invest the sale proceeds and is not limited to the amount of capital gains. 

It should be noted that the amount which has not been utilized within the stipulated time under both the above sections can be invested or kept in the prescribed ways to avoid capital gains tax. And the withdrawal shall be made in accordance with the schemes. The unutilized amount otherwise is charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires. 

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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