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With the passage of time, the requirements of the taxpayers also changes and as such there is always a need to review the exemption clauses. Under the existing provision of Income Tax Act-1961, any Long-Term Capital Gain (LTCG) arising to an individual or HUF from sale of any residential house property is exempt from tax under section 54 if such LTCG is used for Purchase or construction of another house property within the prescribed time frame.
As of now, exemption is restricted to only investment done in ‘one residential house’ in India. Taxpayers may recall that the word ‘one’ was introduced by the Finance Act-2014. Prior to FA-2014, there was a word ‘a’ residential house. Few courts have interpreted that the word ‘a’ used in section 54 means “any” which is further stretched to mean “many” and resultantly have granted exemption benefit u/s 54 towards investment in more than one house property. In short, courts have not restricted the meaning of the word “a” to “one” but have extended it to more than one house property. By replacing the word ‘a’ by ‘one’, the benefit was specifically restricted to investment in one house property.
|In the present scenario, there are numerous instances where the person earning LTCG from sale of house property is required to invest the proceeds in 2 house properties because of job, children’s education, care of parents, family members & other family issues, etc. Interim Budget-2019 has now proposed to further amend Section 54 for LTCG exemption arising from the sale of a residential house. It provides that exemption can be claimed by investing the amount in two separate residential house property. The present amendment will not only incentivize much needed investment in the real estate sector & but will also address the genuine concern of the taxpayers by owning two self-occupied house properties without losing the tax benefit.
Let us know some minute points from the fine prints of the budget documents with regard to above provision:-
1. The benefit of two house properties is available only if the LTCG is arising from sale of house property. If LTCG arises from sale of any other capital assets like plot, gold, shares etc then the exemption is admissible u/s 54F & not u/s 54. There is no amendment proposed in section 54F and it is restricted to one house property only.
2. Exemption is available only if the amount of LTCG doesn’t exceed Rs. 2 Cr. Exemption provision is not worded in such a way that exemption can be availed up to Rs. 2 Cr in case LTCG amount exceeds Rs. 2 Cr. The proposed amendment in section 54 is drafted in such a way that the exemption would not available even if LTCG exceeds Rs. 2 Cr marginally.
3. What is relevant for the purpose of exemption u/s 54 is ‘LTCG’ and not sale consideration. For example, Mr. Ram has sold his old house for Rs. 5 Cr and has earned a LTCG of Rs. 1.99 Cr. He can claim an exemption u/s 54 by investing minimum amount of Rs. 1.99 Cr towards purchase/construction of the two house properties.
4. If LTCG amount exceeds Rs. 2 Cr, taxpayer would continue to be governed by the existing provision wherein exemption is available towards investment in ‘one’ house property.
5. Present exemption towards investment in two house property is available as “once in a lifetime” offer. This should be exercised carefully as the offer towards investment in ‘two’ house property will not be available on second occasion. However, exemption will continue for investment in ‘one’ house property at any subsequent occasions.
6. One more amendment which is proposed to be synchronized with above present amendment to section 54 is respect to notional taxation of second house property. Presently, if taxpayer owns more than one house properties for self occupation then only one house property is considered as self occupied house property & the other house properties are deemed to have been let out.Finance Bill-2019 has proposed to offer immunity to the second house property from notional taxation.
|7. Exemption u/s 54 is available only on LTCG earned from FY 2019-20. Any person who have earned LTCG in FY 2018-19 & invested in FY 2019-20 in two house properties will not be eligible for the benefit proposed in the present interim budget-2019.