Earned Long Term Capital Gain in FY 2018-19, Whether tax can be saved by investing it in two house properties in FY 2019-20?

Earned Long Term Capital Gain in FY 2018-19, Whether tax can be saved by investing it in two house properties in FY 2019-20?

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Before knowing it, one needs to read section 54 which reads as under:

Profit on sale of property used for residence.

54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

 (i)  if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii)  if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

 (i)  the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii)  the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

Amendment to section 54 is proposed by the Finance Bill 2019. The relevant part of the amendment proposed as per finance bill reads as under:

 

 

In section 54 of the Income-tax Act,

 in sub-section (1), after clause (ii), the following provisos shall be inserted with effect from the 1st day of April, 2020, namely:––

 

‘Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee, may at his option, purchase or construct two residential houses in India, and where such an option has been exercised,––

(a)  the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;

 

(b)  any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India: Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.’.

 

It may be noted that the above clause in section 54 is proposed to be introduced with effect from the financial year commencing from 01.04.2019. It means that the clause with amended part in section is applicable from the financial year commencing from 01.04.2019.

The above proviso proposed to be inserted in section 54 is going to operate in continuation to sub section 1 to section 54. Above proposed proviso don’t have any applicability without the sub section prior to it. Proviso will be the part of the basic provision 54(1) to which it is succeeding and so it will be effectively applicable only in respect of LTCG earned on or after 01.04.2019. Any long term earned in FY 2018-19 will be governed by the exemption provision in existence in the FY 2018-19.  No such exemption clause in respect of two house property is available for FY 2018-19 and so LTCG earned cannot have the benefit of amendment proposed by Finance Bill 2019.

Any LTCG earned in FY 2018-19 will not be exempt towards investment in two house properties. In such case, the exemption will be restricted to one house property only.

Conclusions:

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.

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