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Income Tax: Claim capital gains tax benefit on sale of house judiciously

Neha Malhotra

Housing for all is the one of the major objectives of the government. It wants to promote investment in residential property and various steps were taken even in the Interim Budget to give relief to owners of house property and boost real estate sales.

Ease in capital gain exempt norms

The Income Tax Act provides tax exemption on capital gains on sale of capital assets if the same is invested in a residential property. The government has made such provisions governing exemption more beneficial through its Interim Budget 2019 by increasing the threshold of investment from one house property to two house properties subject to the fulfillment of certain conditions.

Prior to Interim Budget 2019, capital gains arising on the sale of a capital asset were tax exempt to the extent of the cost of acquisition incurred in purchase or construction of one residential house property. The government restricted such exemption to only one residential house property as it intended to help its citizens to own at least one house property and not for investments by richer class of the society in numerous properties.

However, such provisions became a pain point for individuals who wanted to divide their property between their children by giving different house properties to each of them as their share. Addressing the hardships faced by the taxpayers under such circumstances, the government provided exemption of the amount of capital gains to the extent of investment made in purchasing two residential house properties.

One-time benefit

Availing such facility depends on satisfying two conditions. Taxpayers would not be entitled to claim this exemption if the amount of capital gains on the sale of house property exceeds `2 crore. Moreover, this is a one-time facility; i.e., the benefit of claiming exemption through investment in two house properties can be availed once in the lifetime of the taxpayer at his option.

Claim this tax benefit mindfully!

The provisions for capital gain exemption by investing the gains in one house property remains unaffected. The latest facility is only an addition to the existing capital gain exemption. The facility should not be availed by taxpayers haphazardly and should be utilised at the time when the need arises to distribute the property amongst the children.

While the amendment facilitates division of property, exemption cannot be claimed if the property is purchased in the name of the person other than the taxpayer. Generally, the taxpayer purchasing the properties would wish to buy them directly in the name of the children to avoid the hassle of getting it registered in his/her name first and then transferring the same further to the children. The government may consider to introduce certain measures for reducing such complexity and facilitate the amendment further.

Tax on notional rent

Living away from home for work? Now no need to worry for tax on house property. The benefit of exemption of payment of tax on notional rent has been extended to two self-occupied houses properties for the individual living away from their families on account of job and maintaining two houses.

For builders, the extension of the period of exemption from levy of tax on notional rent on unsold inventories, from one year to two years, beginning from the end of the year in which the project is completed, will give a substantial boost to the residential housing sector.

The writer is executive director, Nangia Advisors (Andersen Global).
With inputs from Radhika Arora