Whenever one sells a house after holding it for a period of 3 years, the gains from the sale of the house is eligible for taxation under the Long Term Capital Gains section. It is only 20% of the gains, after indexation – as against the usual tax that is 30% of all income (for individuals).
To avoid paying any LTCG whatsoever, there are two alternatives:
- Under Sec 54EC, the entire capital gain is invested within 6 months of the date of transfer, in capital gain bonds. This investment should be held for 3 years. This gives a 6% return and the interest is taxable.
- One has to invest the gains (not the entire amount) in a residential property and this property is held for three years. This investment has to be done one year prior or 2 years after the sale. But there is a catch here.
Suppose one sells a flat in October 2016. Technically, one has 2 years to invest this money to claim the LTCG exemption. Most people think that they can use this money whatever way they want and reinvest it just before the 2 year period is over. Not so!! In this case, the last date of filing the tax returns would be 31st July 2017. One has to open a ‘CGA’ or Capital Gains Account in the State Bank of India (don’t know if other banks also open this account) and all the money from this account should go to pay for the new house.
As usual, this part is ignored and generally, the IT department would not enforce it. But recently, the assessment officer denied the exemption. The matter went to court and the judge concurred with the officer that the LTCG exemption is not available if the money is not deposited in a CGA if it is not fully utilized by the date of filing the IT returns for that year.
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