Capital Gains Tax Exemptions on the Sale of House Property in India

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Aug. 16 – Capital gains are profits that arise out of the transfer of a capital asset. In India, house property sales are considered taxable capital assets and are taxed appropriately as part of someone’s income taxes. Therefore, any gains derived from the sale of a house are taxable at India’s capital gains tax rate – which ranges from 0 to 30 percent and depends on the nature of the asset itself.

Under Indian law there are certain capital gains tax exemptions on the sale of a residential house which someone may be eligible for. Specifically, one can save on the taxes on capital gains that arise out of the sale of a house property as stated in sections 54, 54EC and 54GB of India’s Income Tax Act, 1961.

Section 54

The exemption under this section is only available to persons that satisfy the following conditions:

  1. An individual or Hindu Undivided Family (HUF) that legally maintains ownership of the house property;
  2. The house property is used only for residential purposes;
  3. The house property is a long term capital asset, and was not transferred or sold within the first three years after the initial date of purchase or construction.

To claim the exemption, one must invest the proceeds derived from the sale of the house property into another residential house either within two years from the date of the sale or one year prior to sale, or one must invest in the construction of a new house within three years of the sale.

The exemption amount will be:

  • Equal to the amount of the capital gains if the cost of the new house property is greater than the capital gains; or
  • Equal to the cost of the new house property if the cost is less than the capital gains.

Section 54EC

The exemption under this section is available to:

  1. An individual, HUF, company or any other legal person;
  2. An individual, HUF, company or any other legal person who invests the long term capital gains from the sale of a house property within six months in either of the following:
      • Specified bonds of the National Highway Authority of India; or
      • Specified bonds of the Rural Electrification Corporation Ltd.

The investment made must be on a long-term specified asset – meaning any bond that was issued by either of the above two organizations on or after April 1, 2006, that is redeemable after three years. The maximum investment that can be made on the long-term specified asset during a financial year cannot exceed fifty lakh rupees.

If the cost of the long-term specified asset is more than the capital gains arising from the transfer of the house property, then the entire capital gains amount shall be exempt. If the cost of the long-term specified asset is less than the capital gains arising from the transfer of the house property, then the exemption gets reduced to the extent of the cost of the investment.

Section 54GB

The exemption under this section is only available to persons that satisfy the following conditions:

  1. An individual or HUF that legally maintains ownership of the house property;
  2. The house property is used only for residential purposes;
  3. The house property is a long term capital asset, and was not transferred or sold within the first three years after the initial date of purchase or construction.
  4. An individual or HUF invests the long term capital gains from the sale of the house property in the equity shares of an eligible company before the due date of return filing under Section 139 of the Income Tax Act.
  5. An individual or HUF holds 50 percent or more of total issued capital of the eligible company that they invest in, or holds fifty percent or more of the voting rights. The shares are required to be held for a period of five years from the date of its purchase.

An eligible company is one which is incorporated in India during the financial year in which the individual or HUF sold the house property, and is involved in the business of manufacturing. The company shall invest the capital into the purchase of new assets, such as plants, machinery, office equipment, etc., before the due date of return filing of the individual or HUF. However, if the investment in assets falls short of the capital raised, then the same is to be deposited in a separate bank account.

The arising capital gains are exempt if the investment in the equity shares of an eligible company is more than the net consideration (sale or transfer value of the house property less any costs to make the sale). If the investment in the equity shares of an eligible company is less than the sale or transfer of the house property, then the exempted amount equals the ratio between the investment and the sale or transfer of the house property.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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