Selling a property can result in a significant tax liability if the transaction generates capital gains. However, the income tax law provides certain options through which taxpayers can defer this tax burden or avoid it altogether, provided they meet specified conditions.
One such income tax provision allows taxpayers to claim an exemption from long-term arising from the sale of a residential house property, but it’s only applicable if such gains are reinvested in another residential property. Understanding these provisions can help property sellers plan their finances efficiently and make informed decisions after a sale.
How tax exemption on capital gains from sale of residential property works?
Under Section 54 of the Income Tax Act, a taxpayer can avoid paying taxes on proceeds from a sale if they reinvest the gains in another residential house. To qualify, the taxpayer must purchase a new property within 1 year before or 2 years after the sale, or construct a new house within 3 years from the date of sale. In cases involving compulsory acquisition, the time limit is calculated from the date of receipt of compensation.
However, the maximum allowed exemption limit is capped at ₹10 crore, as per the income tax rules. This exemption can be claimed by individuals and hindu undivided families (HUFs) only. Taxpayers from both old and new tax regime can claim this benefit. Firms, LLPs, companies, or other such entities cannot claim this exemption.
| Aspect | Details |
|---|---|
| Who can claim this exemption | Individuals and HUFs only |
| Exemption limit | ₹10 crore |
| Applicable tax regime | Both old and new tax regime |
| Capital gains type | Only long-term capital gains from the sale of a residential property |
Individuals must also note that this provision is applicable only to long-term capital gains, meaning the property must have been held by the homeowner for more than 2 years before being sold.
Once you sell the property, you can move the proceeds from the transaction to a capital gains account scheme. Doing so allows taxpayers to claim exemptions on LTCG for an extended period of time while following tax compliance.
What is capital gains account scheme?
The capital gains account scheme (CGAS) was introduced by the central government in 1988 to help taxpayers preserve their eligibility for capital gains when they are unable to immediately reinvest the proceeds from a property sale. Since the timelines prescribed for claiming exemptions often extend beyond the due date for filing income tax returns, taxpayers can deposit the unutilised capital gains in a designated CGAS.
Such deposits are treated as a valid substitute for reinvestment until the funds are used for the specified purpose, allowing taxpayers to continue claiming the available tax benefits. Taxpayers of any legal status can benefit from this scheme, including individuals, HUFs, companies, trusts, and any other person eligible for capital gains exemption.
Investing the gains in this account is treated the same as direct reinvestment for exemption purposes. However, short-term capital gains are not eligible for the capital gains account scheme (CGAS), as exemptions under Sections 54 to 54GB apply only to long-term capital gains.
CCAS is helpful especially for construction of property as it takes longer duration and hence the investment cannot be made in one go. This scheme provides you with some additional time, while ensuring compliance with the income tax law as well as convenience