Capital Gain arising from sale of residential property held for more than 2 years
 

Long Term Capital Gains [ LTCG ] earned from Sale of Residential House are exempt from income tax if the LTCG are invested for Purchase or Construction of  another residential house under the Income Tax Act , 1961 [ I.T.Act ]. Salient features of this exemption are:

1.Tax Exemption:

.01 Total LTCG will be exempt from tax if the entire LTCG are invested in new Residential House. 

.02   If part of LTCG is invested in new house property, exemption will be granted to that extent. 

2.Conditions:

.01  New House Property (maximum two) is to be purchased within one year prior or two years after the sale of original House Property. 

.02    Alternatively New house property is to be constructed within three years after the sale of original House Property.

.03    Such new House Property should not be sold for a period of three years.

3.Unutilised Gains:

.01   The amount of capital gain which is not utilised for purchase or construction of new house before the due date of filing of tax return should be deposited in "Capital Gains Bank Account". 

.02   Purchase or construction should be met out of balance held in such Capital Gains Account within the time limit of two or three years respectively.

4.Withdrawal of Exemption:

.01   If the new Residential Property so purchased is sold within the period of three years, then the cost of purchase will be reduced by the amount of LTCG which are claimed as exempt earlier and net sale proceeds of new residential house sold will be taxed as STCG in the year of such sale. 

.02  Balance of Capital Gains Bank Account not utilised for purchase or construction of new residential house within the stipulated time shall be charged to tax upon completion of three years from the date of sale of original asset.

5.Capital Gains - Computation:

.01  While calculating the LTCG, Indexed cost will replace the actual cost. 

.02  Indexed cost is computed by increasing the purchase price by notified cost of living index for the year in which acquired/purchased.

.03    LTCG are arrived at by deducting such Indexed cost from the sale price.

.04   In case of Immovable Properties, sale price is to be replaced by the valuation of the property determined by the State Registrar for Stamp Duty payable by the buyer if the same is higher.

6.Tax Rates:

.01  LTCG are taxed at 20% after Cost Indexation.

.02  Short Term Capital Gains [STCG] are taxed at normal rates of tax applicable to the slab of net taxable income.

7.Capital Gains - Meaning:

.01  Profits and gains earned upon sale of Residential Property is  taxed under the head of "Capital Gains" under the Income Tax Act, 1961.

.02  Capital Gain will arise at the time of transfer i.e. sale, exchange, partition of family, relinquishment etc.

.03  Such gains are classified as "Long Term Capital Gains (LTCG)" if the assets are held for a period of more than 24 months and as "Short Term Capital Gains (STCG) if held for lesser period.

8.Disadvantage NRIs:

.01  Non Residents are at a disadvantage as against residents, as LTCG of all assets including LTCG on sale of Residential house the basic threshold exemption limit is not deductible in case Non-Residents.

.02  Thus a Non-Resident will be paying LTCG tax on gross amount of LTCG without benefit of basic exemption limit.

.03    And as such entire LTCG will be taxed at 20% subject to Indexation from the first Rupee gain.

.04 STCG will be taxed at normal tax rates as applicable to the slab of net taxable Income.