Investment in Two House Properties for Capital Gain Exemption: Confusion & Clarification

Income Tax law is very often amended so as to achieve the socio-economic objectives of the Government. To meet the changing requirements of the taxpayers, Scope of capital Gain exemption has also been widened recently from one house property to two. However, the extended benefit is very selective and not blanket across all the Long Term Capital Gain (LTCG) accruing to the taxpayers. There are lots of confusions & ambiguities among st taxpayers as to the scope of capital gain exemption for two house properties. Let us know more about it.

About Capital Gain Exemption:

Any Long Term Capital Gain (LTCG) arising from transfer of a “House Property” or “Any other capital assets (like Land, Shop, Gold, etc)” can be claimed as exempt if the taxpayer invests the amount in another house property. Exemption is available U/s 54 if the capital gain arises from transfer of House Property & for other assets, it is available u/s 54F. To avail exemption, taxpayers have to invest the amount for purchase or construction as under:
a] For purchase:
One year before or two years after the date of sale or transfer.
b] For Constructions: 
Three years from the date of sale or transfer.

Though both above sections offer capital gain exemption for investment in a house property, the conditions stipulated are drastically different. For capital gain exemption u/s 54, one needs to invest the amount of LTCG only whereas for exemption u/s 54F, the entire net sale consideration needs to be invested.

New amendment in Section 54:

Prior to 2019, the benefit was restricted for investment in “one” house property. However, considering the socio-economic need of middle class families to maintain houses at two locations on account of their job, children’s future, different location of parents etc., the benefit is stretched to two house properties from FY 2019-20 (AY 2020-21). In short, taxpayers can now claim exemption against LTCG by investing the amount in 2 house properties. However, taxpayer must note following vital conditions while planning to claim an exemption against 2 house properties:

1. Exemption can be claimed only if the amount of capital gain does not exceed Rs 2 crore. Taxpayers may note that restriction of Rs. 2 Cr is on the amount of LTCG & not on the amount of “Sale Consideration”. Even if the sale consideration exceeds Rs. 2 Cr, still exemption can be claimed if capital gain amount is not crossing Rs. 2 Cr threshold.
2. Exemption is available only to an Individual/HUF and not to other categories of taxpayers like firm, AOP, Company, etc
3. Exemption against two house property is “once in a life time” offer. If the taxpayers have already availed exemption against two house properties in earlier year then they will not be able to opt for it again.
4. Benefit of Two House Property is not available U/s 54F:
   If LTCG arises 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. It may carefully be noted that 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.  In short, if the LTCG is arising from transfer of any capital assets other than residential house property then investment has to be done in ‘one’ house property. Further, exemption u/s 54F is subject to the condition that taxpayers own not more than one house property on the date of earning LTCG.  If a 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.
5. There is one more stipulation in section 54F which is not there in section 54. Section 54F stipulates that taxpayers should not purchase any other house property within a period of 2 years or construct another house property within a period of 3 years from the date of earning LTCG. If a taxpayer violates the condition by purchasing another house property within a period of 2 year (3 years for construction) then exemption allowed earlier will be taxable in the year of such violation. There is no such rider in section 54.

6. Though the purpose of section 54 as well as Section 54F is to offer capital gain exemption for investment in house property, the conditions differ significantly. Both the sections are neither aligned nor synchronized. Let us consider the implications of the above section with illustration:
   a) Mr. Smart owns 5 House properties & 2 plots. He sold one house property and earned LTCG of Rs. 1.99 Cr. In such case, he will be eligible to claim exemption u/s 54 even by investing Rs. 1.99 Cr in two house properties. Exemption will be available even if he already owns 4 other house properties i.e., after purchasing, he will be owner of 6 house properties. However, if Mr. Smart 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).
   b) Mr. Smart owns 1 House property & 3 plots. He sells one plot and invests the net sale consideration in two house properties. In such a case, he cannot claim exemption u/s 54F. If Mr. Smart invests the sale proceeds for purchase of two house properties, he will be violating the condition enumerated in section 54F & so will not be able to get exemption against any of the house properties. He can claim exemption u/s 54F if he invests the proceeds in “one” house property only.
   c) Mr. Smart has sold a plot on 11.01.2021 and purchased new house property on 10.01.2022 to claim exemption u/s 54F. Now, if he purchases another house property before 10.01.2023 (or constructs before 10.01.2024) then the amount of LTCG claimed exempt earlier will be taxable in the year of violation of such condition.
7. One more area where taxpayers can find that section 54 & section 54F are not synchronized is with regard to the amount of investment. For 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. Let us understand with an example of Mr. Smart & Mrs. Smart. Mr. Smart has sold a house property for Rs. 2 Cr and has earned LTCG of Rs. 75 Lakh whereas Mrs. Smart has sold a plot for Rs. 2 Cr and has earned LTCG of Rs. 75 Lakh. For full exemption, Mr. Smart will be required to invest only Rs. 75 Lakh whereas Mrs. Smart would be required to invest Rs. 2 Cr.

Though the purpose of both the sections (54 & 54F) is same i.e., to grant an exemption from LTCG, the conditions & stipulations are drastically different. In view of the above, the taxpayer needs to be careful while planning to claim an exemption against investment in two house properties.

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