Taxing Gains

Our columnist details some of the tax exemptions on long-term capital gains

Last time we examined in detail the provisions of Sections 54 and 54F, which grant exemption from tax on capital gains. The exemption is granted provided the assessee purchases within one year before or two years after the date of sale or constructs within three years after that date, a residential house. If only a part of the amount required is used, the exemption would be pro-rata and the excess will be chargeable to tax.

Let us now take up two additional complications that assessees might face while applying the said exemptions to their particular situations:

* A plain reading of these sections makes it apparent that if the construction gets delayed even by one day, the assessee gets penalised and the penalty is very heavy. In the case Shashi Verma v CIT, 152 CTR 227(NB) 1999, the judge observed that the construction of a house should be completed as far as possible within two years (subsequently enhanced to three years).

Obviously, it is sometimes difficult to construct a house within two years and under some government schemes construction can take many years. Therefore, this two year window is often unworkable. If substantial investment has been made in the construction of the house, then it should be deemed that sufficient steps have been taken and this would satisfy the requirements of Section 54.

* Exemptions under Sections 54 as well as 54F are available if the assessee purchases or constructs a residential house within stipulated periods. The villain causing confusion in the section is the article