Many a time, due to family requirements or due to re-location, a person intends to acquire a new residential house by investing the sale proceeds of his existing house property. Is the capital gain arising from the sale of the earlier house taxable or can one claim tax exemption?

WHO CAN CLAIM THE EXEMPTION

In case of an individual or a Hindu Undivided Family (HUF), the capital gains arising from transfer of a long-term capital asset - buildings or lands appurtenant thereto and a residential house - could be claimed as exempt under the provisions of the Act if such capital gains are invested in acquiring another residential house (new residential house).

TIME PERIOD

The new residential house should be purchased within one year before or two years after the date on which the earlier house is transferred. Similarly, the new residential house could also be constructed within a period of three years from the date of transfer of the original house.

EXEMPTION LIMIT

The amount of the capital gains that is invested to purchase or construct a new residential house is exempt from tax. In case the amount of the capital gain is more than the amount of the cost of the new residential house then the balance amount of capital gain would be liable to tax.

CAPITAL GAINS ACCOUNT SCHEME

In case the capital gains arising from the sale of the house is not utilised for the purchase or construction of a new residential house, then the tax payer may still claim exemption by depositing such capital gains in a specified account with any bank or institution as per the provisions of the Act. It is pertinent to note that such amount must be deposited under the capital gains account scheme before the due date of furnishing the return of income by the tax payer to claim the necessary exemption.

Further, the amount so deposited in the bank must be utilised for purchase or construction of new residential house within the time period specified above else the balance amount that is not so utilized shall be chargeable to tax in the financial year in which the period of three years from the date of transfer of original house expires.

CAUTION, IF NEW HOUSE IS TRANSFERRED

If the new residential house for which an exemption as has been claimed as above is transferred within a period of three years from the date of its purchase or construction then for the purpose of computation of the capital gains arising from the transfer of the new residential house, the cost of such house shall be reduced by the amount of the capital gains to the extent an exemption has been claimed earlier.

Thus, say if the capital gains arising from the sale of the earlier house were equal to the cost of the new house, and an exemption was claimed for the entire amount of the capital gains. Now, when the new house is transferred within three years, then its cost will be taken as Nil. Therefore, the entire amount of capital gains arising from the sale of the new asset would be liable to tax.

BENEFICIAL PROVISION

If due caution is taken in respect of the time lines for purchase / construction of the new house, deposit of money into capital gains scheme and also in respect of the transfer of the new residential house, the capital gains amount from transfer / sale of the residential house could be claimed as exempt.

Source :http://epaper.timesofindia.com/