Sale of property home attracts capital achieve tax. If a property home is sold inside 24 months from the date of acquire, the achieve quantity, if any, is deemed as Short-Term Capital Gain (STCG) and added to total revenue of the seller.
On the other hand, Long Term Capital Gain (LTCG) arises if a property home is sold just after 24 months from the date of acquire. Indexation advantage is accessible whilst calculating tax liability on LTCG. The seller wants to spend 20 per cent tax on the achieve quantity just after indexation, unless the achieve quantity is invested to acquire and/or building of up to two property properties, invested in Capital Gain Bonds or deposited in a Capital Gain Account inside the stipulated time limit.
However, to save tax on LTCG, only the achieve aspect wants to be invested in Capital Gain Bonds or the whole sale proceeds? For instance, if a property home purchased for Rs 20 lakh 10 years back is sold for Rs 50 lakh and the indexed price is Rs 30 lakh, to save the tax on LTCG of Rs 20 lakh, only Rs 20 lakh really should be invested in Capital Gain Bonds or the whole Rs 50 lakh?
“Yes, under section 54EC the capital gains are required to be invested and not the sale proceeds. In this particular case, Rs 20 lakh would be the investment amount in the eligible (NHAI / REC / PCI, etc) capital gains bonds u/s 54EC to avail of the deduction,” mentioned Dr. Suresh Surana, founder, RSM India.
“Section 54EC allows investors to save tax on Long Term Capital Gains realised from the sale of a long term asset by investing the entire capital gains realised or a part of it in Capital Gain Bonds issued by National Highways Authority of India and Rural Electrification Corporation Limited,” mentioned Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
“To qualify for the tax exemption, the capital gains have to be invested within 6 months of the transfer of the asset. The quantum of capital gains invested in these bonds would be exempt from LTCG tax, subject to an upper cap of Rs 50 lakh on the investment amount irrespective of the financial year,” he added.
Similarly, how a great deal to be reinvested in a different House Property or to be kept in Capital Gain Accounts for saving LTCG taxes?
“As per the provisions of section 54, the amount of capital gains is required to be invested in the purchase or construction of “one residential property” for availing the capital gains exemption advantage. However, exactly where the quantity of capital achieve does not exceed Rs 2 crore, the taxpayer may well, at his solution, acquire or construct two residential homes in India,” mentioned Dr. Surana.
“The amount of capital gains can be kept in the Capital Gain Accounts in accordance with the Capital Gain Accounts Scheme, 1988 (CGAS), if the re-investment in the house property (under section 54) or in capital bonds (section 54EC) is not made till the date of filing the tax return. Also, if the taxpayer has already invested some of the portion of the proceeds/gains in the specified asset, he would be only required to transfer the balance portion in the CGAS in order to claim tax exemption on the entire amount,” he added.
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“When investors take the route of Capital Gains Account Scheme to save LTCG tax under Section 54, the quantum of capital gains reinvested in this scheme would qualify for the deduction as long as the amount invested is utilised for purchase or construction of a house property within the specified time limits,” mentioned Chaudhary.
“This scheme is beneficial for those who cannot utilise the entire capital gains for purchasing another housing property within the final date of filing the tax return for the financial year in which the transfer of property took place,” he added.
Accordingly, which of the above would be most advantageous?
“It depends on various factors such as whether the taxpayer wants to invest in new residential property or wants liquidity in the medium term (the term of bonds issued under section 54EC on or after 1 April 2018, is 5 years) and also other aspects such as appreciation in the value of the new residential property or the interest rates on bonds, need to be factored,” mentioned Dr. Surana.
“Capital Gains Account scheme would suit those who wish to purchase or construct another housing property with the capital gains realised from the transfer, within the specified period,” mentioned Chaudhary.
“Capital Gains Bonds would suit those who do not wish to use the capital gains realised from the transfer for purchasing housing property or other long term capital assets,” he added.