I had sold a 3-BHK flat in September 2015 and invested the proceeds in a new flat. In March this year, I sold my ancestral property—an apartment— and bought some land with intention to construct a house thereon. How will I be able to take advantage of the long-term capital gains (LTCG)?
—Name withheld on request
It is assumed that you are the owner of the ancestral flat, being a residential house property held for more than 24 months (including the period of holding by the previous owner) before its sale. The sale of such ancestral flat (original asset) would be considered as a sale of long-term capital asset and liable to be taxed as LTCG in your hands.
As per provisions of the Income-tax Act, deduction against LTCG on sale of residential house property is available, where the reinvestment of LTCG is done for construction of a residential house property or purchase of a residential house property in India, subject to other specified timelines and conditions. Such purchase or construction of residential house property can be done either one year before the date of sale of original asset or within two years (in case of purchase) / three years (in case of construction) after sale of the original asset, respectively.
Based on available judicial precedents and circulars issued by the tax department, investment in purchase of plot of land for construction of a house property may entitle a taxpayer to claim deduction under section 54 of the Act, subject to prescribed conditions. Since you plan to construct a residential house, the deduction may be considered if the construction of the residential house thereon is completed within three years from the date of sale / transfer of the original asset, i.e. ancestral flat. Any LTCG amount that remains uninvested up to the due date of filing the tax return would need to be deposited by you under the prescribed Capital Gains Account Scheme and utilized as per the conditions prescribed.
Please note that you would not be eligible for an exemption if you choose to only purchase a plot of land (without construction of residential house property thereon within the prescribed timelines) and in such case you would be liable for tax on the LTCG, as applicable, in the financial year in which the timeline of three years expires.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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Updated: 02 Jul 2023, 10:20 PM IST