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I am selling two of my residential properties — a flat in Chennai and an individual house in my native place — to buy a new flat in Chennai. While selling my Chennai flat does not incur a profit, as it was bought just a year ago, the one at my native place incurs a profit as I am selling after 15 years. Can I use income tax act section 54 to offset my profit as I am reinvesting on a residential property again?
Kameshwaran
Under Section 54 of the Income Tax Act, 1961 (the Act), you may claim an exemption from capital gains tax arising from the sale of a residential house property if you reinvest the proceeds into another residential house property. However, specific conditions must be satisfied:
Eligible property: Section 54 of the Act is applicable only to long-term capital gains derived from the sale of a residential property. Given that you have owned your house in your native place for 15 years, it qualifies as a long-term capital asset.
Reinvestment: To qualify for the exemption, you must reinvest the capital gains from the sale of the house property into another residential property within a specified timeframe — typically, you can purchase a residential house one year before or two years after, or construct a residential house within a period of three years. However, the reinvestment exceeding ₹10 crore is not permitted under this provision.
Profit/ Gain calculation: The exemption applies solely to the long-term capital gains from the sale of your native property. If you generate a profit from this sale, you can offset that against the reinvestment in your new flat in Chennai.
No exemption for other property: The sale of your Chennai flat, which does not yield a profit and is classified as a short-term capital asset, will not impact your eligibility for the exemption under Section 54 for your native house.
If you meet these conditions, you can effectively minimise your capital gains tax liability by reinvesting the gains into another residential property. You may also have to comply with certain other requirements of keeping the funds in a capital gains account within a certain time frame as per the scheme notified by the Central government.
The author is a practising Chartered Accountant
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