The principal provision for claiming exemption on the capital gain from the sale of a residential house property is contained in Section 54 of the Income Tax Act, 1961 To claim exemption on long-term capital gains on the transfer of residential house property, a taxpayer must meet the following condRead more
The principal provision for claiming exemption on the capital gain from the sale of a residential house property is contained in Section 54 of the Income Tax Act, 1961
To claim exemption on long-term capital gains on the transfer of residential house property, a taxpayer must meet the following conditions:
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Nature of the Asset and Holding Period:
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The house property being sold must qualify as a long-term capital asset. For residential house property, the asset is considered long-term if it has been held for at least 24 months (this period is applicable for properties acquired after a prescribed date, as per current law).
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Reinvestment Requirement:
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Purchase Option:
The taxpayer must invest the net sale consideration (i.e., the sale proceeds after deducting expenses directly related to the sale, such as brokerage and transfer expenses) in the purchase of a new residential house property either:-
One year before the date of transfer or,
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Two years after the date of transfer.
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Construction Option:
If the taxpayer opts for constructing a new residential house property, the construction must be completed within three years from the date of transfer of the original property.
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Quantum of Exemption:
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The exemption is available only to the extent of the capital gain that is invested in the new residential property.
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If only a part of the net sale consideration is reinvested, the exemption will be restricted proportionally; that is, only a part of the capital gain corresponding to the amount invested qualifies for exemption.
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Utilization and Subsequent Sale:
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The new residential property, in which the capital gain is reinvested, must be held for the minimum period as prescribed.
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If the new property is sold within the prescribed period (3 years for purchased property or 4 years for constructed property), the previously claimed exemption may become taxable in the year of such subsequent transfer.
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Documentation and Compliance:
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Proper documentation (such as sale deed of the original property, purchase agreement or construction contract of the new property, bank statements, and relevant receipts) must be maintained as evidence to support the reinvestment claim when filing the Income Tax Return (ITR).
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The Capital Gains Account Scheme (CGAS) is a facility provided by the Income Tax Department, through its circulars and guidelines, to enable taxpayers to park the net sale proceeds (or capital gains) from the sale of a long-term capital asset when they intend to claim reinvestment exemptions under pRead more
The Capital Gains Account Scheme (CGAS) is a facility provided by the Income Tax Department, through its circulars and guidelines, to enable taxpayers to park the net sale proceeds (or capital gains) from the sale of a long-term capital asset when they intend to claim reinvestment exemptions under provisions such as Section 54, Section 54EC, or Section 54F of the Income Tax Act, 1961.
Purpose and Need for CGAS
When a taxpayer sells a capital asset and is eligible for exemption by reinvesting the proceeds (or gains) in another specified asset or bonds within a defined time frame, any delay or partial reinvestment can lead to a situation where the taxpayer has not fully discharged their reinvestment obligation. To preserve the benefit of the exemption and avoid immediate taxation on the capital gains:
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- Relevant Statutory and Guideline Context
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See lessDepositing in a CGAS:
The taxpayer can deposit the funds in a designated CGAS account with authorized banks. This deposit acts as a temporary repository for the capital gains until the taxpayer completes the reinvestment as stipulated by the applicable exemption rule.
Safeguard for Reinvestment:
This mechanism allows the taxpayer to claim the benefit of exemption even if the reinvestment is completed at a later date within the prescribed time limit. It ensures that the capital gains are “earmarked” for the intended reinvestment, thereby deferring the tax liability on those gains.
While the term “Capital Gains Account Scheme” does not appear verbatim in the bare act, it is an integral part of the reinvestment framework described in sections such as:
Section 54:
Provides for exemption on long-term capital gains from the sale of residential house property when the net sale proceeds are reinvested in another residential property.
Section 54EC:
Offers exemption on long-term capital gains if the proceeds (or gains) are invested in specified bonds (such as those issued by NHAI or REC) within six months of the sale.
Section 54F:
Pertains to the sale of capital assets (other than a residential house) where full reinvestment of the net sale proceeds in a residential property is required to claim an exemption.