Arnav Pandya
There are provisions in the Income Tax Act whereby an individual can save long term capital gains tax by reinvesting the amount into another capital asset. There are two provisions here related to the reinvestment made in a house property and this occupies a very crucial role because there are a lot of people who have capital gains when they sell their existing properties or other capital asset but are saved the tax problems as they reinvest the amount again into another property. There are a couple of main changes that have been proposed by the budget which will impact the manner in which an individual does their planning on this front.
Overall provisions
The existing provisions under Section 54 state that where a capital gains arises from a long term asset in the nature of a building or land and being a residential house and the gains here are reinvested in another property either through a purchase one year before or two years after the sale or the construction of another property within three years of the sale then the capital gains would be exempt.
A similar provision is present under Section 54F for a long term capital asset that is not a residential property and here too if a property is purchased one year before or two years after the sale or a property constructed within three years of the sale then the capital gains would be exempt. These have been used extensively by individuals but there are changes here that will determine the manner in which the benefit can be taken going ahead.
One residential house
The view of the tax department is that the benefit of reinvestment of the proceeds was meant for only one house and hence this has to be restricted to this figure. There has been a lot of litigation in the past with respect to whether the reinvested amount has to be in just one property or multiple ones and the argument has been that since there is no express prohibition from investment into more than one single property there could be multiple properties that are purchased on the sale and the proceeds redeployed and this will ensure that the benefit is available. However in the light of these conditions the change now is extremely clear and the new property has to be a single property. This means that the individual has to plan their steps carefully especially with respect to the amount that is the capital gains and the value of the new property. If the amount falls short of the capital gains that have been earned then there would have to be the payment of the differential to clear the dues.
House in India
There is another condition that has also been strengthened with respect to these two provisions regarding the reinvestment of the amount of gain into another house property. Earlier there were a lot of people who actually went and brought property abroad and then claimed the benefit of the exemption from taxation. Again the argument was that there was no specific condition that said that this was not possible. So in order to tackle this the conditions have been changed and now the property that can be purchased in order to get the benefit has to be situated in India. This means that any foreign property purchase would not get the benefit and hence any such plans of the individual needs to be put aide. This clearly lays out what is possible and what is not so there has to be a clear way in which there is adequate planning done before any final steps are taken.
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