I receive a lot of queries on Long Term Capital Gain. Each case is different from another. In my post, capital gain tax, i discussed long term capital gain in detail. It is a vast subject and not possible to cover in the single post. The rules related to long term capital gain from house property are different. There are a lot of myths and misconceptions about long term capital gain from house property. The objective of this post is to clarify the doubts of the readers. Secondly, a lot of readers share references of the decision of courts and income tax tribunals. These decisions are exceptions to section 54 under income tax act. You will always find such judgements but these rulings are situational in nature. In my opinion, these judgements do not supersede the spirit of income tax act. Therefore, you can act based on these judgements but at your own risk.
One of my readers posted a query whether he can claim home loan interest as an expense while calculating long term capital gain. He already availed deduction on home loan interest u/s 24(b). As per the rule, you cannot claim interest component as an expense because then you will be availing double taxation benefit on the same amount i.e. home loan interest. I was anticipating that he will quote the ruling of Chennai income tax tribunal in this regard. I was proved right :). In its judgement, Chennai Income Tax tribunal allowed double taxation benefit. First deduction u/s 24(b) that deals with income from house property. The taxpayer again claimed a deduction for computation of long term capital gain. The reasoning given by tribunal was that both the sections are altogether different. I agree but they are part of same income tax act :). Secondly, it violates the basic principle of taxation i.e. you cannot claim double taxation benefit. A taxpayer is free to claim double tax benefit on home loan interest citing the ruling of Chennai Income Tax tribunal. Personally, i will not do that. One of the logical reason can be provided if the taxpayer has not claimed a tax deduction on home loan interest u/s 24(b). In this case, he can claim home loan interest as an expense. The point is, a taxpayer should be able to justify in the case of clarification from Income Tax department.
I don’t want to confuse the readers and my stand is very clear that individual rulings can act as reference or citation but is not law/rule/regulation. At the same time, these rulings are not amendments to income tax act, can be challenged and overruled anytime. As a taxpayer, the income tax act is a bible and that should be followed from heart and soul. Let’s check some of the unknown facts about long term capital gain from house property.
Long Term Capital Gain from Property – 11 Least Known Facts
1. To save Capital Gain, You have to invest only Long Term Capital Gain not the entire Sale Proceeds:
The father of all confusions. In the majority of the cases, i observed that to save long term capital gain, the taxpayer invested entire sale proceeds. For example, one of the readers sold the property for 1.5 Cr and his long term capital gain was 47 lac. In order to save Long Term Capital Gain tax, only an investment of 47 lac would have sufficed but he invested entire 1.5 Cr.
2. The Exemption from Long Term Capital Gain is available only for Residential Property of Individual or HUF:
Recently, i received a query wherein one of the reader sold the residential property and bought commercial property. He claimed an exemption for long term capital gain from the sale of residential property against commercial property. Subsequently, he received notice from income tax department and has to deposit capital gain tax with a penalty. As a thumb rule, both the properties i.e. property sold and the property bought to save capital gain tax should be residential. Any other combination is not allowed. Residential property includes residential farm house. A common query from uber rich in Delhi :).
3. Clubbing of Capital Gain from Multiple Properties:
You can club capital gain from multiple properties to buy one property. For example, one of my clients sold two properties and his LTCG was Rs 37 Lac and Rs 22 Lac respectively. He invested capital gain from these two properties and bought a new property for exactly 59 lac to save LTCG tax :). It is allowed but the reverse is not true as discussed in next point.
4. Investment of Capital Gain from Single Property to Multiple Properties:
The inverse of point no 3 is not allowed. In short, Long term capital gain from the single property can be invested only in one property. For example, if i incurred a capital gain of 70 lacs and buy two properties of 40 lac & 30 lac. In this case, i can claim the exemption only for investment in single property i.e. either of two new properties. Assuming, i claimed exemption on 40 lac property therefore, i have to pay LTCG tax on 30 lac.
5. Residential Property purchased outside India:
This point is especially for NRI’s. Long term capital gain is exempted if you purchase property in India. You cannot claim an exemption on property bought outside India. You can buy a property outside India through the sale proceeds of Indian property after paying LTCG tax.
6. Closure/Prepayment of existing Home Loan to save LTCG tax:
There is a lot of confusion in this regard. The answer is YES provided you bought and availed home loan on residential property within a period of one year before the date of sale of the old house. For example, i have two properties i.e. Property A and Property B. I bought property A on 1st April 2008 and Property B on 1st April 2015. I bought property B on Home Loan of 50 lac. Now, i sold Property A on 20th Jan 2016 and my long term capital gain is 20 lac. In this case, Property B is purchased within one year before the date of sale of Property A. Therefore, i can pay 20 lac capital gain from sale proceeds of Property A to prepay the Home Loan of Property B to save Long Term Capital Gain Tax.
7. It is not necessary/mandatory to invest 100% Capital Gain:
Let me share an example. From the sale of residential property, my capital gain is 50 lac. There is a common misconception that to save the LTCG tax, an individual has to invest entire capital gain i.e. 50 lac. It is not true. You can invest 30 lac to purchase new property and pay long term capital gain tax on balance 20 lac.
8. Capital Gain Exemption can be Withdrawn:
If you sell new property purchased to save capital gain within 3 years from the date of purchase or completion of construction then any exemption claimed earlier will be withdrawn. The amount of exemption claimed for the old property will be deducted from the cost of acquisition of the new house. In other words, the individual has to pay additional short term capital gain tax on the exempted long term capital gain from old property.
9. Date of Transfer of Property:
Normally, the property transfer is a long process. It is two step process i.e. sale agreement is signed and then sale deed is signed. In the case of a home loan, payment is in installments. An individual is confused which date should be considered for transfer of property. The answer is Date of receipt of compensation is the date of transfer of the property (Whether original or additional). In short, the last installment date is the date of transfer of property.
10. Date of Acquisition of Under Construction Property:
There is a confusion on the date of acquisition of under construction property. A general perception is that date of possession is the date of acquisition or purchase of the property. It is not true. Though there is no direct reference in income tax act but the date of allotment letter from builder to the buyer is the date of purchase of the property. After receiving allotment letter, you can transfer the title of the property, therefore, it is the date of acquisition. In short, from the date of allotment, the title is transferred in your name or you obtained right to conveyance.
11. Long term capital gain from residential property cannot be offset against other losses:
The long term capital gain from equity, gold, mutual funds etc can be offset against long/short term capital loss and loss from business/profession. It is not true for long term capital gain from the sale of residential property. To save LTCG from the property, you can invest only in residential property or Capital Gains Bond.
I have covered all the important points related to Long Term Capital Gain. Hope the readers will find this post useful. Please feel free to post your general queries in following comments section.
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