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Investment in two house property for capital gain exemption- Few cautions for the taxpayers
The Finance Bill – 2019 has got the president’s assent on 21st Feb 2019 and all the provisions therein have become a law now.
One of the beneficial amendments in the Income Tax Act-1961 relates to exemption to an Individual/HUF under section 54 from Long Term Capital Gain (LTCG) arising from sale of any residential house property. Earlier, it was exempt only if the investment is done in ‘one’ house property. Now, the benefit is available even if the investment is done in two house property. There are few important precautions which one needs to take while planning for an exemption against such LTCG.
- Exemption against investment in two house property is available only if such LTCG is arising from transfer of a residential house property. It is available under section 54.
If LTCG is arising from sale of any capital assets other than house property (like against sale of Plot, Gold, Jewellery, etc) then exemption towards investment in house property can be claimed u/s 54F and not u/s 54. The freedom of investment in ‘two’ house property is only for the purpose of exemption u/s 54 & not for the purpose of section 54F.
It means that if the LTCG is arising from sale of sale of any capital assets other than residential house property then investment has to be done in ‘one’ house property and not in two house property.
- Exemption u/s 54F is subject to the condition that taxpayers do not own more than one house property on the date of earning LTCG. If taxpayer already owns more than one house property then exemption u/s 54F is not available to such taxpayers. There is no such stipulation for claiming an exemption u/s 54.
For example, if Mr. Ram owns 5 House property & 3 plots. He sold one house property and wants to invest the amount of LTCG in two house properties. In such case, he will be eligible to claim exemption against investment in two house property even though he already own 4 other house property while opting for exemption and after purchasing he will be owner of 6 house properties. However, if Mr. Ram sale one plot then he will not be able to claim any capital gain exemption, neither u/s 54 (as he is not selling the house property but selling the plot) nor u/s 54F as he already owns more than one house property on the date of sale of the plot.
- There is one more stipulation in section 54F which is not there in section 54. Section 54F stipulates that taxpayer should not purchase any other house property within a period of 2 years or constructs another house property within a period of 3 years from the date of earning LTCG. If taxpayers violates the condition by purchasing another house property within a period of 2 year (3 years for construction)than exemption allowed earlier will be taxable in the year of such violation. There is no such rule for exemption u/s 54.
For example, if Mr. Ram has sold a plot on 25.02.2019 and purchases new house property on 31.07.2019 to claim exemption u/s 54F. Now, if he purchases another house property before 25.02.2021 (25.02.2022 for construction) then amount of LTCG claimed exempt earlier will be taxable in the year of violation of such condition.
- For the purpose of exemption u/s 54, investment of LTCG is important and not sale consideration whereas for exemption u/s 54F, investment of net sale consideration is relevant and not LTCG. For example Mr. Ram has sold a house property for Rs. 2 Cr and has earned LTCG of Rs. 75 Lakh whereas Mr. Shyam has sold a plot for Rs. 2 Cr and has earned LTCG of Rs. 75 Lakh. For full exemption, Mr. Ram will be required to invest only Rs. 75 Lakh whereas Mr. Shyam would be required to invest Rs. 2 Cr.
Though the purpose of both the section (54 & 54F) is same i.e., to grant an exemption from LTCG, the conditions & stipulations are drastically different. Taxpayers need to be cautious while planning the above transactions.
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CA. Naresh Jakhotia
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distinguishing feature &
There is one more distinguishing feature of section 54F vis a vis section 54.