Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a capital gain or a capital loss. Capital gains and losses are classified as long-term or short-term.
If Land or house property is held for 24 months or less (w.e.f. FY 2017-18) then that Asset is treated as Short Term Capital Asset. You as an investor will make either Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL) on that investment.
If Land or house property is held for more than 24 months (w.e.f FY 2017-18 / AY 2018-19) then that Asset is treated as Long Term Capital Asset. You will make either Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) on that investment.
You may have to pay Capital Gains Tax on STCG / LTCG.
Applicable Capital Gains Tax Rates on Sale of Property
- Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
- Long Term Capital Gains are taxed at 20%.
Capital gains tax on Short term gains is unavoidable and no exemptions are available to minimize your tax liability. However, you can claim deductions to lower the tax liability on long-term gains.
Long Term Capital Gains Exemptions list under Different Sections of the IT Act
The various sections listed in the above table are the rules based on which the Tax exemptions on LTCG can be availed.
(Suggest you to kindly go through this detailed article on ‘How to calculate Capital Gains on Sale of property & List of LTCG tax exemptions‘)
Long Term Capital Gain Exemptions on Sale of Property & Recent Court Judgments
Let’s us discuss some of the recent judgments given by various courts related to the above rules/sections and were in favour of Tax Assessees and advised the respective Assessment Officers (AOs) to accept the claims filed by the Tax Assessees.
Exemption U/s 54 cannot be denied for investments made in joint names
- As per the existing law, the tax payer can purchase the new property and claim exemption on LTCG of sale of old property. What if the new property is acquired in joint-names? The law does not clearly say that the new property must be bought only in the name of the seller and not on anybody else’s name. Hence, there are interpretations that Joint ownership can be acceptable but exemption can be limited to the share of ownership.
- For example : If you sell ‘XYZ’ property and make LTCG of say Rs 10 Lakh, you can use the entire Long Term Capital Gain proceeds on sale of a residential house to buy another house property (residential property) to save Capital Gains tax. In case, you buy the new property in joint-name (self + Spouse names), the LTCG exemption can be limited to the share of ownership say Rs 5 Lakh in this example (if the newly acquired property is jointly owned in the ratio of 50:50).
- The Delhi High Court however observed that section 54F does not require that the new residential property should be purchased in the name of the tax payer only, it (Section 54) merely says that the tax payer should have purchased / constructed a ‘residential house’.
(Click on the images to download the court judgement/orders. Courtesy & Source – www.taxguru.in)
- As per the above court order – The Assessee was entitled to full exemption u/s 54 when the full amount was invested by the assessee even though the property was purchased in the joint names of the assessee and his brother. The AO had earlier restricted the exemption u/s 54 to the extent of 50% of the value of the new house, which the court did not find any merit in it. (Date of Judgement – Apr 2017)
CG exemption allowed even when Assessee has invested in Term deposit a/c instead of CGAS
- If you are unable to invest in a new residential property, notified Bonds (Sec 54EC) etc., before the due dates to claim LTCG exemptions, you can deposit the LTCG amount in a public sector bank or other banks as per the Capital Gains Account Scheme (CGAS -1988). You can withdraw the funds from this account and can utilize for buying or constructing a residential house.
- What if you deposit the LTCG in regular Term Deposit Account instead of Capital Gain Scheme Account? This is what had happened in the below case. The Tax payer has disclosed that LTCG has been deposited in CG Scheme and filed his ITR. The AO during the ITR assessment, had sought clarification from the concerned bank and has been informed that the tax assessee has deposited the amount in normal Term Deposit instead of CG Account. Hence, the AO has denied the exemption.
- As per the court judgment – The assessee has deposited the capital gains in the term deposit a/c and not the capital gains scheme a/c as required u/s 54(2) of the Act. It is the case only a technical defect and exemption cannot be denied on this ground. The learned judges opined that the assesee has fulfilled all other conditions applicable to CG Scheme, and also the assessee has not utilized the term deposit for any other purpose till investment in the new residential flats. It has been held that the deposit in Term Deposit A/c can be considered as compliance u/s 54(2) of the Act, provided the assessee has deposited the entire capital gains and has not availed any loan against the said A/c and has utilized the same for purchase of the new property. (Date of Court Judgement – 31/Aug/2017)
Assessee allowed Deduction U/s. 54 despite non completion of construction within 3 years
- You can use the CG / Sale Proceeds to build a new residential house (Sec 54 / Sec54F). However, the construction has to be completed within 3 years.
- The Tax Assessee has used the Capital Gains to build new residential property, but the construction was not completed within 3 years. Hence, the AO has denied the claim on LTCG exemption.
- As per the court judgement – The assessee had already appropriated the capital gains for the purpose of construction of residential unit. However, construction was not completed within the stipulated period. The commencement of the construction of the residential unit which is evidenced by construction agreement and also sale deed, in Judges opinion, assessee over and above satisfied the conditions laid down by section 54 of the Act and demonstrated his intention to invest the capital gains in residential house. Hence, he can claim the LTCG exemption. (Judgement date – May/2017)
Section 54/ 54F benefit cannot be denied for mere non-registration of Sale Deed
- As per Sec 54 & 54F, the new property has to be acquired within a period of one year before (under-construction property) the transfer of the first house (or) within two years after the sale.
- The Tax payer has entered into a Sale Agreement to buy a new residential property, paid substantial amount to the seller (using the LTCG) but the Sale Deed has not been done. Hence, the AO has rejected the claim.
- As per the court order – It does not matter if the registration of the sale deed has not been made in favour of the assessee because transfer of the property is to be taken from the date of agreement. It has been held that for the purpose of attracting the provisions of section 54 of the Income-tax Act, it is not necessary that the assessee should become the owner of the property as registration of the document was not imperative. So, once the assessee has paid substantial amount to purchase the property within a period of one year, he has become entitled for exemption u/s 54 of the Act. (Date of Court Order – 22/Sep/2017)
Final occupation date to calculate ‘Purchase date’ for section 54F exemption allowed
- As per Sec 54 & 54F, the new house can be bought one year before (under-construction property) the transfer of the first house. For example : If you had bought XYZ property in 2008, sold ABC property in 2009, then you can claim LTCG exemption on sale of Property ABC by disclosing that you have acquired property XYZ one year before the sale of property ABC.
- Let’s say you have entered into sale agreement to buy XYZ property in 2008, got final possession of property from the builder in 2010, you have also sold your another property ABC in 2011, can you claim LTCG exemption? As per the rule the property should have been acquired one year before, in this case its more than 1 year. Hence, the AO can deny your claim.
- As per the court order – The date of final occupation of the property can be considered for calculation the period of eligibility for deduction u/s 54 of the Act. In the above example, the date of possession falls under the ‘one year’ period, hence the tax assessee can be allowed to claim the exemption. (Date of Court Order – 13/Sep/2017)
Related Articles :
- Meaning & Importance of Occupation Certificate & Completion Certificate
- Delay in possession of Flat? How to file Complaint against Builders under new RERA online?
Deduction u/s 54F on more than one residential flats received by virtue of a development agreement is allowable
- You are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
- Let’s say you sell a large piece of land, enter into a joint-development agreement with a builder, in such a scenario, you may receive more than one residential unit under your share of ownership. Is it possible to claim exemption on LTCG on sale/transfer of Land?
- As per the court order – The AO has been directed to take the cost of construction of the flats by the builder as the sale consideration received by the assessee for transfer of land to the development for computing the long term capital gain. (Date of Court Order – 29/Sep/2017)
Exemption U/s 54F cannot be denied for delay in filing Income tax returns
- As per the below court order, it is not a statutory obligation on the part of an assessee to file his return of income within the stipulated time period contemplated u/s 139 or 148 of the ‘Act’, as a precondition for entitling him to claim exemption of LTCG.
- The belated return (the ‘return of income’ filed by the assessee after the expiry of the time period) can still be considered as a valid ‘return of income’ u/s 139 and claim of exemption u/s 54F can be allowed.
Kindly note that the Judgments can not become rules unless the relevant Act/Sections are amended by the Govt. If your case is genuine and your AO rejects your claim (or) deny you from claiming LTCG, you can always approach the court and can justify your stand. Based on the facts & figures, the learned judges can declare the verdict. (But, do keep it mind that the court trails may continue for many years….)
In most of the ‘sale of property’ cases, the amount of LTCG involved can be huge, hence many of us do try to look at the possible legal ways to minimize (or) reduce the tax impact. So, when you claim these LTCG exemptions in your ITRs and in case AOs rejects your claims, suggest you to consult a CA/lawyer and approach the court of law (if your case/claim is a genuine one).
Continue reading :
- Sale of Inherited (or) Gifted Property : Tax Implications on Capital Gains
- What is Ancestral Property? | Definition & Important Legal Rules
- How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?
(This article is for information and knowledge purposes only. We suggest you to kindly consult a legal expert / Chartered Accountant for more information.)
(Image courtesy of digitalart at FreeDigitalPhotos.net) (Judgement Order Documents – Courtesy & Source : Taxguru.in) (Post published on : 27-October-2017)