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Ashwini Kumar, 42, bought an apartment in Bengaluru in August 2011 for Rs 1 crore. The property was still under construction when purchased. Four years after the purchase, when the property was finally ready for registry and possession, Kumar was unable to pay the registration amount due to some financial distress. He decided to sell the property, but wondered whether he will still receive any tax benefits under the long-term capital gains (LTCG) provision?

“People often don’t complete the registration for their houses to save on cost and the hassles involved. But without registration, you will have no right on the property in case of a dispute. Therefore, one should ideally get the registration completed as soon as possible,” Gauri Chadha, tax expert, said.

Long term capital gains (LTCG)

Any profit gained from the sale of a capital asset like land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, or jewellery is considered a capital gain. This profit amount comes under the category ‘income’ and therefore taxed for the year in which the transfer of the capital asset takes place. Any capital asset that is held for more than 36 months comes under LTCG. However, in the case of immovable property like a house or land, this period is only for 24 months.

So what is the exemption that Kumar is wondering about? Well, LTCG is taxed at 20% of the total income made by selling a property. Consider this – Kumar has held the property for over 10 years now. The purchase price is adjusted for inflation and indexed cost of acquisition is taken into account. If, for example, Kumar’s total capital gain is Rs 2 crore, then 20% tax will be deducted on this. The total tax out-go will be Rs 40 lakhs. This is a huge portion of money paid out in taxes.

However, this taxable amount can be reduced with the help of exemptions provided by the Income Tax Act on capital gains when profit from the sale is reinvested into buying another asset.

Exemption under Section 54

This exemption is allowed only once in the lifetime of a taxpayer when the capital gains from the sale of house property are reinvested into buying or constructing 2 other house properties. The capital gains should not go beyond Rs 2 crore to available the exemption. Meanwhile, the taxpayer must invest the amount of capital gains and not the entire sale proceeds to buy a new property.

“In general, the tax exemption shall be allowed if an investment is made in one house property situated in India. The exemption shall not be allowed for the investment made in overseas or foreign property. The taxpayer also has an option to claim the benefit of exemption by investing in two residential house properties if the amount of long-term capital gains does not exceed Rs. 2 crores,” Tarun Kumar, chartered accountant and tax expert, told Money9.

However, if a person exercises the option to invest in two residential house properties, he shall not be entitled to exercise this option again for the same or any other year. In other words, a person can exercise this option only once in his lifetime, he added.

In case, the cost price of the new property is higher than the capital gains earned, the exemption will be given only on the total capital gain on the sale.

Conditions to avail of this benefit

1. The new property should be bought either 1 year prior to the sale or 2 years after the sale of the existing property.

2. Apart from buying a new property, the capital gains can also be invested in the construction of a property, but it must be completed within 3 years from the date of sale.

3. This exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.

For unregistered properties

Now, like Ashwini Kumar, many people want to sell their property before possession and registry. Will they get any tax benefit under LTCG in this scenario?

If the property is sold before possession and registry, it shall not be the case of transfer of immovable property. Instead, it will be considered as sale of booking rights/extinguishment of rights in the apartment.

“In this case, the period of holding to compute the LTCG shall be 36 months which is otherwise 24 months in the case of sale property. Further, the benefit of exemption by making investment in another residential house property shall not be available under Section 54 but he can claim an exemption under Section 54F. For claiming such exemption, the taxpayer shall be required to invest net sale consideration in a new house property rather than the capital gains. Thus, selling the rights of under-construction property can be a costlier affair for the taxpayers as compared to the sale of residential house property,” Tarun explained.

Other options for reinvestment

If I don’t want to use my capital gains from the property sold in buying or constructing a new property, is there any other way to invest the gains and also avail the exemption?

If taxpayers don’t invest capital gains arising on sale of house property to purchase another house property, they can still claim the exemption up to Rs 50 lakhs by investing in bonds of National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within a period of 6 months from the date of transfer.

“Taxpayers can also claim the exemption from LTCG arising from the transfer of residential house property by investing the capital gains in the shares of an eligible start-up before the due date for furnishing of income-tax return. Such start-up should utilize the amount for the purchase of new assets within 1 year from the date of subscription in equity shares,” Tarun asserted.