Selling a House? Tax Changes You Need to Know

Finance Minister Arun Jaitley in his first Budget proposed changes to income tax laws related to capital gains from property sale. The finance minister put a cap on the amount of tax-saving by investing long-term capital gains from property sale in specified bonds, also called as capital gains bonds. Mr Jaitley also clarified that investment should be made in one residential house property situated in India for availing long-term capital gains benefit.

As per the current income-tax rules, long-term capital gains on sale of a property held for three years, attracts 20 per cent tax. Exemptions are granted under certain conditions. These the proposed changes to the income tax laws.

Capital gain exemption on residential house property: As per the existing tax provisions, long-term capital gain arising from sale of a capital asset is exempt under Section 54/54F if invested in purchase or construction of a house property, subject to certain conditions. To get the captain gains exemption, the assessee needs to purchase the new residential house within a period of one year before or two years after transfer of the original house. For under-construction properties, the construction needs to be completed within three years from the date of transfer of the original house.

It has now been clarified that the investment for getting capital gains benefit should be made in one residential house property situated in India, not abroad. This amendment will apply in relation to the assessment year 2015-16 and subsequent years.

Investment in bonds for availing long-term capital gains exemption: Many investors, who sell properties, save tax on long-term capital gains by investing the capital gain amount in specified bonds, also called as capital gains bonds. A tax payer who wishes to claim the exemption from long-term capital gains has to invest the amount in the capital gains bonds within six months from the date of sale or before the filing of returns, whichever is earlier. This benefit is available under Section 54- EC of the Income Tax Act 1961 up to a limit of Rs. 50 lakh in a single financial year.

It has now been clarified that the total of exemption in respect to long-term capital gains for investment in capital gains bond shall be restricted to Rs. 50 lakh. This amendment will apply in relation to the assessment year 2015-16 and subsequent years.

Advance received for sale of property and forfeited: It has been proposed to tax any advance received and later forfeited by individuals for sale of a capital asset like flats if the transaction does not happen. If negotiations don’t result in transfer of the capital asset and such money taken in advance is forfeited by the assessee, then the amount will be taxed in the same year under the head of ‘income from the other sources’. Under the existing provisions, such amount could be reduced from the cost of acquisition of the asset subsequently in the year of sale of the capital asset while determining capital gains. This amendment will apply in relation to the assessment year 2015-16 and subsequent years.