A phone call between two friends, getting ready to file their income tax returns, leads to a conversation about capital gains relief on sale of residential property.

Akhila : Hey Karthik, how was your Diwali?

Karthik : Great. I, along with my family members celebrated Diwali in our new house that we purchased a few days ago.

Akhila : Super.

Karthik : We bought this new house with the proceeds from the sale of our old house in RK Nagar early this year. I was, in fact, about to call you to check on the tax implications of this as this has to be reported in the ITR for FY20-21 (AY 21-22).

Akhila : Since you owned the old house for more than three years, gains on selling it will be categorised as long term . But since you bought a new house with those proceeds, your capital gains would be tax exempt.

Karthik : Yes, I heard something like this. Give me more details.

Akhila : An individual is eligible for relief on capital gains tax on sale of a residential property if s/he has purchased another residential property in India, one year before or two years after the date of sale of old property. The relief is also extended if a new residential property is constructed within next three years.

Karthik : Ok. Since I bought my new house within two years, I tick the box of eligibility.

Akhila : Right. If the capital gains amount is equal to or less than the cost of the new house, the entire capital gain will not be taxed.

On the other hand, if the capital gains amount is greater than the cost of the new house, the difference between the two will be charged to tax (LTCG at 20 per cent with indexation benefit).

Karthik : Ok. I have to work out my capital gains amount considering the indexation.

Akhila : Remember, if your capital gain amount is less than two crore rupees, you can utilise the amount to purchase or construct two (not just one) residential houses in India and still be eligible for capital gains tax exemption.

Karthik : I understand. Exemption is one thing I really like in Income Tax and this capital gains relief tops the chart.

Akhila : You bet!

Karthik : Are capital gains on any other assets eligible for an exemption like this?

Akhila : Yes! Section 54 to section 54G provide relief on capital gains earned on more than ten transactions such as sale and purchase of an agricultural land, investment of capital gains on any long-term capital asset in specified securities, and investment of capital gains from sale of land or building in 54EC bonds.

Related Topics