I have a house and a flat, and the same are declared in my IT returns every year. Last financial year, I have sold a plot (purchased during 2004-05) at a profit. I have opened a capital gains account and invested the entire proceeds in the capital gains account. Out of the sale proceeds, I have used about 85 per cent for booking a flat in Bangalore. The new flat is not yet registered. The balance amount in capital gains account is equal to my plot’s original cost. I need guidance on the following:
(A) Can I claim exemption from tax on capital gains, since I have used the proceeds from sale for purchase of property (booking advance)? Is capital gains tax applicable for my sale transaction since I have used the proceeds from sale for purchase of property (booking advance)? (B) I understand that I have to pay capital gains tax since I have two properties in my name, as per prevailing IT rules. But it is to be noted that the third property (new flat) is not yet registered. If capital gains tax is applicable, can I gift the property to my wife by making settlement deed before filing IT return for FY 2020-21, so that I remain a owner of only two properties (including new one)? (C) Also, please suggest whether I can remit back the amount withdrawn from the capital gain accounts and avoid capital gains tax?
A) Capital gain (CG) tax provisions shall apply on sale of plot under Income tax Act, 1961 (the Act). You are eligible to claim the tax deduction under section 54F of the Act from the capital gains earned, by investing the net sale consideration in buying the residential house property, provided you don’t own more than one residential house property (excluding the new property) on the date of transfer of the plot. As you own more than one residential house property (house and flat) on the date of sale of plot of land, you may not be eligible to claim this exemption. We would also like to add that you may still claim the deduction under section 54EC of the Act upon investing making investment in specified bonds (including National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited bonds) up to ₹50 lakh. Such investment should be made within six months from the date of transfer of such capital asset and the lock-in period is five years. The option of depositing the capital gains in CGAS is not available for exemption in this category.
B) There are two transactions here. One is sale of plot and the other is gifting of property. Gifting of immovable property to your spouse is exempt under section 56 (1) (x) of the Act. Your spouse is not required to pay tax on such gifts. In order to claim exemption under Sec. 54F, as mentioned earlier, the crucial point is the date of sale. If on the date of transfer of the plot you own more than one house property then, you will not be eligible to claim exemption.
C) LTCG could be deposited in Capital Gain Account Scheme (CGAS) for the purpose of utilising the money in making the requisite investments. However, such deposits should be made on or before the due date of filing the tax return. There are specific conditions for transferring / withdrawing the amount from CGAS account or closure of such account whereby you are required to complete certain formalities with your banker. Further, if the amount remains unutilised after expiry of prescribed period of time, then the amount not so utilised shall be charged as capital gains of the year in which the prescribed period expires.
The writer is Partner, Deloitte India
Send your queries to email@example.com