Sale of old house to purchase two house properties in two different Cities & Capital Gain Exemption

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Sale of old house to purchase two house properties in two different Cities & Capital Gain Exemption

 

Query 1]

I have purchased a plot in Nagpur in the year 1978 and constructed the house property in 1983 by availing the housing loan. I have two sons, the elder one is living in Mumbai & the younger one is settled in Pune. I want to sell my old house constructed in 1983 for Rs. 4.85 Cr and use the amount for purchase of two house properties in two different cities i.e., Mumbai & Pune. Whether the capital gain will be taxable even if the amount is invested in two house properties at two different locations in India? I have been told that the amount will be tax free only if the amount is invested in one house property and not if I invest it in two house properties? Please advice. [krishnar*****@gmail.com]

Opinion:

To meet the changing requirements of the taxpayers, Scope of capital Gain exemption has also been widened. Now, any Long Term Capital Gain (LTCG) arising from sale of a house property can be claimed as exempt by investing LTCG in two house properties. However, the benefit of investment in two house properties is not blanket but subject to various terms and conditions. Let us know more about it.

Provision related to Capital Gain Exemption by investment in the House Property:

  1. 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.
  2. If the capital gain arises from transfer of House Property, exemption is available U/s 54. If the capital gain arises from transfer of other assets then exemption can be claimed u/s 54F. To avail exemption, taxpayers have to invest the amount within prescribed time period 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.
  3. Exemption U/s 54 by investment in Two house Properties:
    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).
    Now, taxpayers can claim exemption by investing LTCG in 2 house properties. However, taxpayer must note following vital conditions while planning to claim an exemption against 2 house properties:
  4. a) Exemption can be claimed only if the amount of capital gain does not exceedRs 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 (i.e., Rs. 4.85 Cr in your case), still exemption can be claimed if capital gain amount is not crossing Rs. 2 Cr threshold.
  5. b)Exemption is available only to an Individual/HUF and not to other categories of taxpayers like firm, AOP, Company, etc
  6. c) Exemption against two house property is“once in a life time” 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.
  7. 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 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.

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 taxpayers violate 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.

  1. Section 54 Vs. Section 54F:
    a) Benefit of exemption by investment in two house properties is available only u/s 54 & not U/s 54F.
    b) 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.
    Though the purpose of both the sections (54 & 54F) is same i.e., to grant an exemption from LTCG, the conditions & stipulations are quite 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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