Capital Gains Exemption via investment in Residential House

 
Exemptions under Sections 54 and 54F can be availed in respect of Long Term Capital Gains, if the capital gains/net consideration is invest in the purchase or construction of resident house within the stipulated period of two years/three year.

Gains from one Residential House invest in another Residential House

Under Section 54 of the Income-tax Act, an exemption is available to a taxpayer who is an individual or a Hindu Undivided Family, in respect of the transfer of a residential house (whether self-occupied or let out) held for more than 36 months, where the capital gains arising from the transfer are invested either for the purchase of another residential house (whether old/new) within a period of one year before or two years after the date of transfer or the construction of another residential house within a period of three year after the date of transfer.

If the whole of capital gains are invest in the cost of the house so purchase or constructed, the entire capital gain will be exempt from tax. If, however, the amount of capital gains is greater than the cost of the house so purchase or constructed, the difference between the two will be chargeable to tax. Exemption under Section 54 can be availed even if the taxpayer owns more than one house on the date of transfer.

 
It important to note that as per the provisions of Section 54, if the new house property is transfer within a period of three years of its purchase or construction, the amount of capital gains arising there from, together with the amount of capital gains exempted earlier will be chargeable to tax in the year of transfer as Short Term Capital Gains.

Gains from Other Assets invested in a Residential House 

Under Section 54F of the Income-tax Act, an exemption is available to a taxpayer who is an individual or a Hindu Undivided Family in respects of the transfer of any long term capital assets (Other than a residential house), where the net consideration arising from (whether old or new) within a period of one year before or two years after the date of transfer, or construction of a residential house within a period of the three year after the date of transfer. 

This exemption will, however, not be available in a case where the taxpayer owns more than one residential house, on the date of transfer of such long capital asset.

If the cost of the house that has been purchased or constructed is not less than the net consideration in respect of the capital asset transferred, the entire capital gains arising from the transfer will be exempt from tax. If, however, the cost of the newly acquired house is less than the net consideration the exemption from long term capital gains will be granted proportionately, on the basis of the investment of net consideration either for purchase or consideration and multiplied by Long Term Capital Gains.

 It is thus important to note that whereas the exemption under Section 54 is worked out with reference to the amount of Taxable Capital Gains invest in the new house, for purpose of Taxable of section 54F the Exemption is worked out with reference to the amount of Net Consideration invested in the new house.

            Net consideration in respect of the transfer of a capital asset means the full value of the consideration received or accruing as a result of the transfer of the capital asset, as reduced by any expenditure incurred, wholly and exclusively, in connection with the transfer.

        It is also important to note the exemption granted under Section 54F is liable to be withdrawn in the     following two events:

(a)   If the taxpayer sells or transfer the new house within 3 year of its purchase or construction, or

(b)   If the taxpayer purchase within a period of two year after or constructs within a period of three years after the date of transfer of the original assets, another residential house other than the new house with reference to which exemption is claimed.

        In the above two cases, the amount capital gains arising from the transfer of the original assets, which was not charged to tax, will be deemed to be income by way of the long term capital gains in the year in which the new house is transfer or another residential house is purchase or constructed, as the case may be.

Relevant judgment and CBDT Instructions under Sections 54 & 54F

      In the context of the above referred provisions of Sections 54 & 54F, some liberal interpretations as laid down by various High Courts and relevant instructions of the Central Board Taxes (CBDT) need to be borne in mind and can be usefully relied upon in appropriate cases:

• As held by the Calcutta High Court in the case of ‘B.B. Sarkar  v. CIT’ 132 ITR 150, where a taxpayer spends capital gains partly for purchase of another house and partly for further construction on it, he is still entitled to exemption under Section 54 construction, but, where both the conditions are fulfilled within the time stipulated, the taxpayer would also be entitled to the relief.

• As held by the Karnataka High Court in the case of ‘CIT v. J. R. Subramanya Bhatt’ 165 ITR 571 , construction of the new house property may and be commenced even before the transfer of the old house property and it is not necessary that it should commence only after such transfer. The High Court held that that the material condition is that the construction must be completed within three years from the date of transfer. The High Court held that the material condition is that the construction must be completed within three years from the date of transfer.

•  The Bombay High Court in the case of ‘CIT v. Dr. Laxmichand Nagpal Nagda’ 211 ITR 804 has held that talking into consideration the letter as well spirit of Section 54, the word ‘purchase’ is not used in the sense of ledge transfer and, therefore, the holding of legal title within the period of one year (as then provided under Section 54) is not a condition precedent for attracting Section 54 of Income-tax Act. The High Court held that in this case the taxpayer had paid the full consideration, obtained the possession of the flat and it was actually put to use and hence exemption under Section 54 was clearly available, though no registered purchase deed was executed.