Your Taxes

I bought a plot in Chennai in 1989 for ₹60,000 and sold it in 2012 for ₹85 lakh. With the proceeds, I bought a plot in Coimbatore for ₹88 lakh in the same year. The I-T Act mandates that I should construct a house within a period of three years to minimise tax obligations. Construction commenced within three years, but it may not be completes in three years. What are the consequences of this delay?

V Selvaraj

Section 54F of the Income Tax Act provides for exemption from tax on sale of a long-term capital asset if the consideration is used to purchase/construct a house property. While such purchase has to be made within one year before or two years from the date of transfer, in case of construction of a residential house, the time limit is three years from the date of transfer. If the consideration is not utilised within the stipulated timelines, then the exemption would not be available. However, the Madras Tribunal and the Hyderabad Tribunal have held that if an assessee has substantially completed all the work of construction by investing the net consideration from the sale, it would still be inferred that the assessee has complied with the conditions provided under Section 54F and exemption would be available.

Based on the above judicial precedents, you could avail the exemption if it can be demonstrated that you have invested the sale proceeds in the construction of your residential house, even though construction is not complete within the stipulated three-year timeframe.

This position could be questioned by tax authorities, in which case you may have to substantiate the claims.

My son, an NRI, has a demat account, which he opened when he was a resident Indian. He earned some short-term capital gains. As a resident, he signed up for many insurance policies. Toward these policies, he pays ₹1 lakh a year from his rental income in India. As an NRI, can he set off of the short-term capital gains against 80C benefits? Even if the short-term capital gain is less than ₹1 lakh, i.e. below the taxable limit, should he pay tax?

S Sankaran

We understand that your son, a non-resident according to India’s tax regulations, has earned short-term capital gains from the sale of shares. Assuming that the capital gains are from the sale of equity shares or units of an equity-oriented fund on which STT is paid, your son will not be able to claim a deduction u/s 80C against the capital gains. This is due to the fact that according to Section 111A, short-term capital gains are to be taxed at 15 per cent and any deduction under Chapter VIA (including 80C) can be claimed only on income excluding the gains.

Furthermore, only resident individuals can avail the basic exemption limit and hence, your son (being an NRI) will not be able to use this benefit. As a result, he will have to pay taxes on the entire short-term capital gains at the rate of 15 per cent, even if such income is less than the taxable limit.