CAPITAL GAIN ON SALE OF PROPERTY OTHER THAN HOUSE PROPERTY & HOW TO SAVE INCOME TAX?

 

Recently one of my friend sold a plot for Rs. 49,00,000/- in March 2022. Can you guess the purchase amount paid by his Grandfather?

It’s unreal!! only  Rs. 1200 in the year 1985. So the amount has multiplied by 4000 times over the period of 37 years and in CAGR (Compound Annual Growth Rate) terms it has given an annual return of 25.20%.

Having made some extraordinary gains, he came to me for filing income tax return and asked the most common question, how to save income tax on these massive gains.

So here is what I advised him:-

1.  Since plot is not a residential house property, the option to claim exemption under section 54 is not available.

 

2.  So in order to save taxes and claim exemption he has 2 options:

a.   Section 54EC : Invest in Capital Gain Bonds.

b.  Section 54F   : Invest in new House Property.

 

3.  There are certain conditions and restrictions in both sections and is dealt below separately:-

 

4.  Section 54EC :

a.   Amount to be invested:- Amount of Capital Gain to be invested(Profits) and not the entire sales proceeds.

 

b.   Time limit:- Within Six months from date of transfer.

 

c.   Maximum Limit:- A maximum of Rs.50 Lacs can be invested in any financial year.

 

d.  Lock in Period:- There is lock in period of 5 years, meaning you cannot sell the bonds before 5 years from the date of acquisition.( if sold before 5 years then capital gain exemption claimed in earlier year shall be taxable in the year of transfer)

 

5.  Section 54F :

a.   Amount to be invested:- Amount of entire sales proceeds to be invested and not only the Capital Gain (Profits).

 

b.   Time limit:- Purchase 1 new residential house within 2 year from the date of transfer or construct 1 new residential house within 3 year from the date of transfer.

(Since it’s difficult to find the right house property, one can deposit the net sales consideration in Capital Gains Account Scheme before due date of filing return for relevant assessment year until he finds the suitable house property. The deposit in this account shows the intention of individual that he will buy the residential property within prescribed time limit. Just because the desired property is not yet available for purchase this deposit is being made, the exemption u/s 54F is claimed by depositing the sum in Capital Gains Account Scheme.)

 

c.   Maximum Limit:- There is no maximum limit on amount that can be invested.

 

 The tabular comparison of these provisions is presented below for your reference:-

 

MOST CRITICAL ASPECT THAT YOU MIGHT MISS

 

What Happens if the Amount is not deposited in capital Gain Account Scheme within due date i.e. section 139(1)?

·        Subsection (4) of section 54F plays the most critical role here. It is specifically mentioned to deposit the amount of the net consideration which is not appropriated by the assesse towards the purchase of the new residential house property in capital gain account scheme before due date of return under section 139(1).

·        If an individual fails to deposit the amount within due date, he is left with only two option:-

1.  To purchase the new residential house property within the due date of filing return i.e. 139(4) since the due date u/s 139(1) has already elapsed. The due date of filing return U/s 139(4) is 31-12-2022.

2.  To pay the capital gain tax @ 20 % on the profits earned.

 

·        The time period which was allowed i.e. 2 year /3 year for purchase / construction shall stand withdrawn, because the assesse fails to deposit the amount in Capital Gain Account scheme before due date.

 

·        A major problem which an individual may face is when he deposits the amount after due date and consider this as due compliance under income tax act. Once the due date is over even a single day delay attracts altogether different provisions under the income tax act.

 

 

·        It is advisable to consult a good tax consultant before making any decision that impacts your taxes.

“Beware of False knowledge, it is more dangerous than ignorance”

 

A tabular comparison of different option under section 54F is presented below for your reference:-

Section 54F
Invest in new House Property
	option 1	option 2
Particulars	Purchase/ construct directly 1 residential house property	Deposit in capital gain Account scheme and further purchase residential house property.
Property sold in financial year	2021-22	2021-22
Due date of return filing(Belated and original)	31-12-2022	31-07-2022
Section	139(4)	139(1)
Time Limit to Purchase House property	Before due date of filing return of income i.e. 31-12-2022.	Amount deposited in CGAS before 31-07-2022, hence extended time of 2 years for purchase and 3 years for construction from date of transfer is available.

 

 

Disclaimer :- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

 

Study Material:

1.  ITO vs. Smt. Rosamma Korah [2014] 45 taxmann.com 153 (Cochin – Trib.)

2.    CIT vs VR Desai (2011) 197 Taxman 52 (Ker).

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