In order to encourage more investments in the real estate sector, the Government of India has introduced several laws and provisions for individual real estate owners, who wish to reinvest their money in the purchase or construction of a new residential property.

Before deep diving into the tax benefits, it is important to understand the concept of Capital Gain.

WHAT IS CAPITAL GAIN?

• Capital Gain is the rise in value of an asset, when it is being sold. Hence, if an asset such as real estate is bought for Rs. 10 lakhs, and then sold for Rs. 15 lakhs, then simply put Rs. 5 lakhs is the Capital Gain.
• Now, typically one will need to pay income tax on the Capital Gain generated from the sale of a real asset property. But, if they fulfil some requirements as prescribed by the Government, then they can not only save money by not paying income tax, but also generate new investments and new sources of income.
• However, there are important conditions for this to be legally possible.

SECTION 54 OF THE INDIAN INCOME TAX ACT

As on 1st August 2021, Section 54 of the Income Tax Act helps genuine, individual real estate sellers to save money on the taxes which need to be paid on the Capital Gain arising from a sale of a real estate. However, only in the case, if the money acquired via sale of one real estate property is used to buy another real estate property by the individual. Only residential properties are included in this exemption.

WHAT IF CIRCLE RATE REVISES POST BOOKING AND BEFORE REGISTRATION?

• Note here, that Income Tax is always levied on the ‘profit’ generated from the sale of a house, and not the entire Capital Gain. And this makes all the difference. Example: Let’s say, you bought a property for Rs. 40 lakhs, and sold it for Rs. 1 crore. In this case, the Capital Gain generated is Rs. 60 lakhs. If you invest this full Capital Gain of Rs. 60 lakhs or above in the new residential property, then you can avail full benefits of Section 54, and avoid paying any tax on the Capital Gain.
• In case the Capital Gain by selling one house is less than Rs. 2 crores, then the individual investor can even invest in two homes at one time, and save on 100% taxes generated via Capital Gain. However, this is only once-in-a-lifetime offer.

CONDITIONS TO AVAIL TAX BENEFITS UNDER SECTION 54

Long Term Investment

As per the laws under Section 54, the real estate investment should be long-term, which means the owner should be selling the real estate asset only after holding it for at least two years.

Defined Time Period

The new investment in a residential property should be done either one year before the sale or within 2 years after the sale. In case of an under-construction property, then it is for the next three years. This new residential property can be self-occupied or can be offered on rent.

Example: You sold a residential property in April 29, 2020. In this case, the new residential property needs to be bought either before April 30, 2019 or till April 29, 2022.

Lock-in Period

The new residential property bought should be locked-in for three years, in case tax on Capital Gain is being saved via Section 54. The new residential property can be self-occupied or rented out.

Investment in India

It is imperative that the new residential house should be in India. No exemptions can be claimed if an individual wants to reinvest the money in purchasing a residential house outside the country.

The Section 54 of the Indian Income Tax Act is an excellent way to reinvest the Capital Gain generated and to save money on the taxes on Capital Gain, if appropriate rules are adhered to. You should always consult Tax Experts for more information and maximum benefits.