Capital gains Tax on long term Investments in Real Estate


Date: 5-March,2019Last Updated: 10-February,2021
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A profit or gain arising from the sale of a Capital Asset is called Capital Gain. Capital gain is accounted for as income and is taxable from the year of transfer of the capital asset. The tax imposed in this scenario is called a capital gain tax.

With respect to Long Term Capital Assets and having considered provisions for tax exemptions for the same, the Income Tax Act has provided exemptions from tax on capital gains for Long Term Capital Gains under Sections 54 & 54F:

  • Section 54 states that the Long-Term Capital Gains obtained from the sale of a Residential property or home is exempt from capital gains tax.

  • Section 54F doles out an exemption of tax for Long term Capital Gains from the sale of any asset except a residential property or a home.

Also, the Income Tax Act has clearly exempted any assets received by the means of an Inheritance or Will. In the case of an inheritance of a capital asset, the capital gain tax is not applicable due to the absence of an actual sale or transfer of an asset. However, when an asset inherited by a certain tax paying individual is sold by them then the capital gains tax is imposed.

Invest in a Property

Section 54 (Sale of Home, Purchase of Home):

Long Term Capital Gains arising from the sale of residential property are exempt from Capital Gains Benefit Tax under the following provisions:

  • The seller must be an individual or a HUF. These benefits are not applicable for Firms, Companies and LLP’s.

  • Must be a Long-Term Capital Asset and the income obtained from this sale is taxable as Income from House/Property under the tax laws.

  • To gain the benefits the purchase of the new property must be within the period of either 1 year before the sale or 2 years after the date of sale or transfer.

  • In the case of construction of a new property, the deadline is within 3 years after the date of sale or transfer.

  • For full exemption, the entire capital gains have to be invested.

In the case of entire capital gains not being invested, the amount not being invested is taxable.

Section 54F (Sale of Asset except for a Home, Purchase of a Home)

Long Term Capital Gains arising from the sale of any asset other than a residential property but culminating in the purchase of a Residential property are exempt from Capital Gain Benefit Tax under the following provisions:

  • The seller must be an individual or a HUF. These benefits are not applicable for Firms, Companies and LLP’s.

  • Must be a Long-Term Capital Asset and the income obtained from this sale is taxable as Capital Gain.

  • To gain the benefits the purchase of the new property must be within the period of either 1 year before the sale or 2 years after the date of sale or transfer.

  • In the case of construction of a new property, the deadline is within 3 years after the date of sale or transfer.

  • For full exemption, the entire sale receipts have to be invested.

  • For partial exemption, an exemption is effectively calculated as:

Exemption = Cost of the new House*Capital Gains/Sale Receipts

Common requirements between the two Sections:

  • If you are not able to invest the capital gains from a previous sale before the date of tax filing or 1 year from the date of sale, depositing the specified amount in a public sector bank shall be eligible for tax exemption.

  • It is mandatory that this new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India.

  • As per the current tax laws, it is also important that the taxpayer has just one property to their name at the time of sale.

  • In the case of section 54, if a new property is acquired within 3 years of the purchase of the original asset then the tax exemption is reversed and the capital gains from the sale of the asset will be taxed as a short-term capital gain.

  • In the case of section 54F, the exemption is reversed in the case of sale of the original property within 3 years of its purchase or purchase of another property within 2 years of the purchase of the original asset or construction of new property within 3 years after the purchase of the original property. Capital gains in this scenario will be taxed as Long-Term Capital Gains.

  • If the cost of the new property is lower than the total sale amount, then an exemption is allowed proportionately. The remaining amount can be reinvested under Section 54EC within 6 months of sale.

  • In case a developer of a new property fails to hand over property within the stipulated time of 3 years then the taxpayer is still eligible for tax exemption.

Homes247.in Experts View

In today’s world, real estate is considered the best capital asset to invest on in terms of returns.

The income tax authorities by taking these initiatives to provide tax benefits on real estate investments are part of the culture promoting real estate investments.

To utilise these tax provisions to the best, a correct decision of the timeline of investments is essential to ensure higher profits.

As per the latest Indian Real Estate trends, in the era of rising income taxes, such rules must be taken advantage of by homebuyers for increased savings.

Our highly experienced team at Homes247.in is adept with all the latest trends, rules and laws and our acumen for maximizing profits for customers drives us to advise you with the best.

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