RBI Issues Circular On Levying Unfair Interest Charges On Customers

If you too are buying a new house by selling your old house, then you must understand tax implications. The capital gain is taxed in two ways on the profits made from selling the house. If the house is sold after keeping it for two years or more, then it will be considered as long term capital gain. The amount of capital gain will be taxed at 20% after indexation benefit. Whereas, the profit made by selling the house before 24 months will be treated as short term capital gain. This profit will be added to the regular income of the person and will have to be taxed according to the tax slab.

Now let’s get to know when and how tax can be saved. Section 54 of the Income Tax Act gives tax relief on buying a second house from the income (capital gain) generated by selling the old hous. This benefit is only in the case of long term capital gain. Income Tax law recognizes that in such cases the objective of the seller is not to earn by selling the house but to find a suitable abode for himself.

Which property will get tax exemption

It is clear in section 54 of the Income Tax Act that the capital gain should be used only for the purchase or construction of a residential property ie, tax exemption will not be available on the purchase of a commercial property. In the case of land, on the purchase of a plot and construction of a house, exemption can be claimed on an amount equal to capital gains tax. Tax exemption will not be available only on purchase of land.

Time limit to buy property

Under section 54, the new house has to be purchased within two years from the date of transfer of the old property to avail the tax exemption. Whereas, in case of construction, the house should be completed within three years. If you buy a new house even one year before selling the old property, then you can avail of the exemption.

Tax and investment expert Balwant Jain explains that on the sale of a residential property, reinvesting the long-term capital gain in another residential property is tax exempt under section 54. Even two residential properties can be bought or built from the profit of one property. However, there could be a catch here. This provision may be used only once in an lifetime,  provided the capital gain is not more than Rs 2 crore.

Capital gain in CGAS account

Jain says that if you want to buy a house and you are not able to use the capital gain money till the date of filing ITR, then that money will have to be deposited in the bank under the Capital Gain Account Scheme (CGAS).  If you do not do this you will have to pay tax. One thing to keep in mind here is that despite keeping the money in the capital gain account, you have to buy a residential property within two years or construct it within three years, otherwise long term capital tax will be deducted at the end of the prescribed period.