If a residential property is held for 3 years and then sold and the gain from such a sale is invested in a residential property within 2 years of the sale (3 years in case of a house under construction), then the entire gain is tax free.
Being in the business of real estate sales, we come across some misconceptions and doubts. Here are a few important points:
• The profit from a sale of a house is exempted as far as it is invested in another residential home – Not true. The holding has to be for 3 years at least.
• In case the holding period is not 36 months, then the gain is classified as short term capital gain and is directly added to your income for that year.
• Previously, one could invest this capital gain in more than one residential house and the exemption was available even if the property was bought outside India. The rule said “purchase of a residential house”. This led to various interpretations of the meaning of ‘a’ in the sentence and there was a large amount of litigation. In the first budget of current BJP government, the act was amended to read ‘1 residential house in India’, so if the capital gain is say 50 lacs, one has to invest in a house of 50 lacs or more within India– cannot buy two houses of 25 lacs each.
• The house that was bought and against which the Long Term Capital Gains exemption was claimed cannot be sold for a period of 3 years.
• In case a home loan was taken, then both, the interest component and the principal repayment component of the home loan are tax exempt under different sections of the Income Tax act. However, if one claims tax exemption for the ‘principal repayment’ component of the home loan, the home cannot be sold for 5 years.
• Lastly, but the most important – for proving that it is a long term capital gains, the date of registration is taken into account. In case the property is not registered, then the possession date is taken into account.
Hope this helps
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