Do you need to invest only the gain amount or entire sale value of house property to save tax?

Sale of house property attracts capital gain tax. If a house property is sold within 24 months from the date of purchase, the gain amount, if any, is considered as Short-Term Capital Gain (STCG) and added to total income of the seller.

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On the other hand, Long Term Capital Gain (LTCG) arises if a house property is sold after 24 months from the date of purchase. Indexation benefit is available while calculating tax liability on LTCG. The seller needs to pay 20 per cent tax on the gain amount after indexation, unless the gain amount is invested to purchase and/or construction of up to two house properties, invested in Capital Gain Bonds or deposited in a Capital Gain Account within the stipulated time limit.

However, to save tax on LTCG, only the gain part needs to be invested in Capital Gain Bonds or the entire sale proceeds? For example, if a house property bought for Rs 20 lakh 10 years back is sold for Rs 50 lakh and the indexed cost is Rs 30 lakh, to save the tax on LTCG of Rs 20 lakh, only Rs 20 lakh should be invested in Capital Gain Bonds or the entire Rs 50 lakh?

“Yes, under section 54EC the capital gains are required to be invested and not the sale proceeds. In this particular case, Rs 20 lakh would be the investment amount in the eligible (NHAI / REC / PCI, etc) capital gains bonds u/s 54EC to avail of the deduction,” said Dr. Suresh Surana, founder, RSM India.

“Section 54EC allows investors to save tax on Long Term Capital Gains realised from the sale of a long term asset by investing the entire capital gains realised or a part of it in Capital Gain Bonds issued by National Highways Authority of India and Rural Electrification Corporation Limited,” said Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.

“To qualify for the tax exemption, the capital gains have to be invested within 6 months of the transfer of the asset. The quantum of capital gains invested in these bonds would be exempt from LTCG tax, subject to an upper cap of Rs 50 lakh on the investment amount irrespective of the financial year,” he added.

Similarly, how much to be reinvested in another House Property or to be kept in Capital Gain Accounts for saving LTCG taxes?

“As per the provisions of section 54, the amount of capital gains is required to be invested in the purchase or construction of “one residential property” for availing the capital gains exemption benefit. However, where the amount of capital gain does not exceed Rs 2 crore, the taxpayer may, at his option, purchase or construct two residential houses in India,” said Dr. Surana.

“The amount of capital gains can be kept in the Capital Gain Accounts in accordance with the Capital Gain Accounts Scheme, 1988 (CGAS), if the re-investment in the house property (under section 54) or in capital bonds (section 54EC) is not made till the date of filing the tax return. Also, if the taxpayer has already invested some of the portion of the proceeds/gains in the specified asset, he would be only required to transfer the balance portion in the CGAS in order to claim tax exemption on the entire amount,” he added.

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“When investors take the route of Capital Gains Account Scheme to save LTCG tax under Section 54, the quantum of capital gains reinvested in this scheme would qualify for the deduction as long as the amount invested is utilised for purchase or construction of a house property within the specified time limits,” said Chaudhary.

“This scheme is beneficial for those who cannot utilise the entire capital gains for purchasing another housing property within the final date of filing the tax return for the financial year in which the transfer of property took place,” he added.

Accordingly, which of the above would be most beneficial?

“It depends on various factors such as whether the taxpayer wants to invest in new residential property or wants liquidity in the medium term (the term of bonds issued under section 54EC on or after 1 April 2018, is 5 years) and also other aspects such as appreciation in the value of the new residential property or the interest rates on bonds, need to be factored,” said Dr. Surana.

“Capital Gains Account scheme would suit those who wish to purchase or construct another housing property with the capital gains realised from the transfer, within the specified period,” said Chaudhary.

“Capital Gains Bonds would suit those who do not wish to use the capital gains realised from the transfer for purchasing housing property or other long term capital assets,” he added.