Exemption under Section 54F can be claimed if the seller satisfies the conditions
I have a detailed query on capital gains tax pertaining to real estate.
1. My spouse owns a residential plot in Chennai. If she sells the property and invests the entire proceeds in a new flat, will she be exempted from LTCG? She already owns a residential flat in Chennai.
2. If she transfers the first residential property to our daughter by way of settlement deed without consideration and then sells the plot and buys a new flat, can she avoid capital gain tax since on the date of purchase of the new flat there will be no residential property in her name. Our daughter already owns a flat.
3. According to Section 54F, the assessee should not own more than one residential property at the time of investing the proceeds of the long-term asset in order to claim LTCG tax exemption. Does this mean that she can already own a residential property and still claim LTCG tax exemption while purchasing the second property by investing the proceeds of the sale of the plot?
4. All of us i.e. me, my spouse and daughter individually own shares of listed companies. If we sell the shares (gains would be long-term) and invest the proceeds jointly to buy a plot, will there be LTCG tax exemption? If not, if we invest the proceeds to buy a flat jointly, will there be LTCG tax exemption? Each of us already own residential flats individually.
As per the provisions of Section 54F of the Act, long-term capital gains arising from sale of capital assets (original asset) other than residential house-property by individual or Hindu undivided family (HUF), can be claimed as exempt in case the below conditions are satisfied:
• The sale proceeds from above asset has to be invested for purchase of residential house property (new asset) in India;
• The taxpayer should not own more than one residential house on the date of transfer of the asset (other than the new asset)
• Time-limit for re-investment
• If purchased – such purchase should be made within 1 year before or 2 years after the date of transfer of Original asset;
• If constructed – Construction should be complete within 3 years from date of transfer of Original asset.
Denial of exemption:
• If any other residential house property (other than new asset) is purchased within a period of 2 years from the date of transfer of the asset; or
• constructed within period of 3 years respectively from the date of transfer of the asset.
• If the new asset is transferred within a period of 3 years from the date of purchase/ construction
The capital gain so claimed as exempt would be subject to taxes in the year of investment/ transfer
Eligible amount of exemption:
The amount of deduction under Section 54F of the Act depends on the amount invested towards the residential property.
• If entire Net Sales consideration (Sales consideration less any expenses directly attributable to sale like brokerage) are invested towards a house property, the whole of the amount can be claimed as an exemption under Section 54F.
• If part amount is invested, the exemption would be available proportionately i.e. Capital gains X Amount invested / Net Sales Consideration
If such investment is not made before the date of filing of return of income, then the net sale consideration has to be deposited under Capital Gain Account Scheme (CGAS) with any nationalised bank.
Answers to specific queries:
1. Yes, your spouse would be eligible to claim exemption under Section 54F, as she owns only one residential property at the time of transfer of the plot. I have assumed that all other conditions as specified above are satisfied.
2. She would be eligible to claim the exemption even if she does not transfer the property to your daughter as the conditions allows holding one residential property at the time of sale of the original asset.
3. Yes, she would be eligible to claim LTCG tax exemption while purchasing the second property / new asset by investing the proceeds of the sale of the plot if she owns only one residential property at the time of transfer of the plot and other conditions being met.
4. Purchase of plot: In case the sale proceeds from sale of shares are invested in purchasing plot, then you may not be able to claim exemption under section 54F. However, if a residential house property is constructed on the said land within a period of 3 years from the date of transfer of shares then the same would be eligible for claiming exemption under section 54F.
Investment in residential property: You and your daughter may claim exemption u/s 54F from re-investment of sale proceeds of shares in a new residential house property if you both own only one residential property each at the time of transfer of the shares subject to satisfaction of other specified conditions as per Section 54F of the Act.
Your spouse may also explore claiming exemption u/s 54F, provided she has not already invested in new residential house property from sale of plot (as mentioned in point 1 above) before the date of sale of shares.
The exemption would be available in proportion of the investment made by you, your daughter and your spouse in the new asset.
The writer is a practising chartered accountant
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Published on June 18, 2022