Plot owner selling at 80 Lakhs: Can I save tax on long-term capital gains?

Ans: In India, you can utilize the long-term capital gains from the sale of a house to purchase a plot of land and potentially avail certain tax benefits. The provisions related to the reinvestment of long-term capital gains are covered under Section 54F and Section 54EC of the Income Tax Act, 1961. Here's an overview of these provisions:

Section 54F - Exemption on Investment in Residential Property: Under this section, if you have sold a residential property (other than an inherited property) and have made a long-term capital gain, you can claim an exemption from capital gains tax by investing the proceeds in a new residential property. However, there are specific conditions that need to be met:

a. Investment in Residential Property: The entire amount of the long-term capital gains must be invested in purchasing a new residential property within one year before or two years after the date of sale of the original property. Alternatively, you can construct a residential property within three years from the sale of the original property.

b. Ownership and Lock-in Period: The newly purchased or constructed residential property should be held for a minimum of three years. If you sell or transfer the new property within this lock-in period, the capital gains exemption claimed under Section 54F will be revoked.

c. Restrictions on Multiple Properties: It is important to note that if you own more than one residential property, except for the new property being purchased or constructed, you will not be eligible to claim the exemption under Section 54F.

Section 54EC - Investment in Specified Bonds: Under this section, if you have made long-term capital gains from the sale of any asset, including a house, you can claim an exemption by investing the capital gains amount in specified bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC). Here are some key points:

a. Investment in Bonds: The entire long-term capital gains amount must be invested in these specified bonds within six months from the date of sale of the original asset.

b. Lock-in Period: The specified bonds have a lock-in period of five years. You cannot transfer or sell the bonds before the completion of this period.

c. Limit on Investment: There is a maximum limit of Rs. 50 lakh for investment under Section 54EC in a financial year. If the capital gains amount exceeds this limit, you can only claim an exemption up to Rs. 50 lakh.

Ans: Hi Thomas
As the base year for Cost Inflation Index (CII) has been reset to 2001, you may need to get a valuation done through an approved valuer to identify the value as on April 1, 2001. If this value is higher than Rs. 2.98 Lakhs then you could use that as the cost.

As regards the general renovation amount spent, it may not be allowed to be added as cost of the property as generally tax officers are not dispensed to allow it.

W.R.T. your decision to reinvest in a ready possession flat within 2 years, please note that if this investment is extending beyond 6 months OR due date for filing your tax returns (whichever is earlier), you would need to open a Capital Gain Account Scheme (CGAS) account with a nationalized bank and park the capital gain amount in it for reinvestment.

Now answering your queries

Query 1 - If the capital gain amount does not exceed Rs. 2 Crores then you could reinvest in 2 residential units. This however is a one time option and cannot be used again in any other year.

Query 2 - Yes you could add their names but they would be treated as name-sake owners and for all purposes of taxation, you would be taxed singly.

Query 3 - You can add their name as proportionate owners to the value of their contribution. The taxation of income in that case would be based on their contribution

Query 4 - The answer to this would depend on the valuation report. Nevertheless, you could derive the indexed cost yourself by multiplying a factor of 3.48 to the cost. An example would be as follows:

Suppose the cost is Rs. 2.98 Lakhs
Indexed cost would be Rs. 2.98 Lakhs x 348 / 100 OR 2.98 Lakhs x 3.48 = Rs. 10.37 Lakhs