At times a person due to family requirements or due to re-location, intends to acquire a new residential house by investing the sale proceeds of his existing house property. Now the question arises is whether the capital gain arising from the sale of the earlier house taxable or can one claim tax exemption?
Who can claim the exemption
In case of an individual or a Hindu Undivided Family (HUF), the capital gains arising from transfer of a long-term capital asset — buildings or lands appurtenant thereto and a residential house — could be claimed as exempt under the provisions of the Act if such capital gains are invested in acquiring another residential house (new residential house).
Time period
Now the time period within which the new residential house should be bought is one year before or two years after the date on which the earlier house is transferred. Similarly, the new residential house could also be constructed within a period of three years from the date of transfer of the original house.
Exemption limit
The amount of the capital gains that is invested in order to purchase or construct a new residential house is exempted from levy. In case the amount of the capital gain is more than the amount of the cost of the new residential house then the balance amount of capital gain would be liable to tax.
Capital gains in the process
In cases, where the capital gains that arises from the sale of the house is not utilised for purchasing or for that matter constructing a new residential house, then the tax payer comes in a situation where he may claim exemption by depositing such capital gains in a specified account with any bank or institution as per the provisions of the Act. It is relevant to note that such amount must be deposited under the capital gains account scheme before the due date of furnishing the return of income by the tax payer to claim the necessary exemption. Later, the amount deposited in the bank has to be utilised for buying or onstructing a new residential house within the specific time period, otherwise the balance amount that is not utilized will become chargeable to tax in the financial year in which the period of three years from the date of transfer of original house expires.
Be cautious, if new house is transferred
If the new residential house for which an exemption as has been claimed as above is transferred within a period of three years from the date of its purchase or construction then for the purpose of computation of the capital gains arising from the transfer of the new residential house, the cost of such house shall be reduced by the amount of the capital gains to the extent an exemption has been claimed earlier.
Beneficial provision
If due caution is taken in respect of the time lines for purchase/construction of the new house, deposit of money into capital gains scheme and also in respect of the transfer of the new residential house, the Capital gains amount from transfer / sale of the residential house could be claimed as exempt.
