If a father sells a big house to buy two smaller ones for his children, until now, he could claim long-term capital gains tax benefit on only one of the two properties. Under Section 54 of the Income-Tax Act, long-term capital gains (LTCG) benefit could be availed only on one residential property located in India.
The Budget has now allowed residential property sellers to get the capital gains benefit when they invest the proceed from the sale of one house into two residences. The only caveat is that the total capital gains have to be up to Rs 2 crore. Also, the benefit can be claimed only once. The changes in the tax laws benefit families who want to sell one big property and buy two separate houses to settle children or during the partition of the family assets. It also helps individuals who live in metros such as Mumbai and Delhi where properties prices are much higher compared to the rest of the country.
The other conditions to get the tax benefit remains the same. The house needs to be held for over two years (long-term). The seller needs to purchase a residential house either one year before the date of sale/transfer or two years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, that is, he will have to construct the residential house within three years from the date of sale/transfer.
There is, however, no clarity on whether an individual can sell multiple houses and invest the gains in one property to get the tax benefit under Section 54F. While a few tax officers object to this, many Income Tax Appellate Tribunals (ITAT) have allowed the taxpayer to avail the benefit in such cases as Section 54 is a beneficial provision. ITATs usually allow taxpayers to take the benefit in case of the grey areas if he has fulfilled all other conditions mandated by the law. “The view of ITATs is that the assessing officer cannot put additional conditions,” says Naveen Wadhwa, a chartered accountant with Taxmann.com.
Wadhwa also points out that the benefit will not be available under Section 54F. Under this section, a taxpayer can sell any long-term asset and invest in a house to save long-term capital gains tax. Long-term capital assets include a plot of land, mutual funds, stocks, gold, and so on.