A piece of land was acquired by my grandpa in the year 1957, which then came to my father in the year 2004 after my grandpa's death. In 2015 my father gifted half of this property to me and my brother and retained the other half in his name. Me and my brother sold the half property which was gifted to us in January 2016 for a sale consideration of Rs.24 lakhs. Now we want to use this 24 lakhs to construct a house in the other half property that is in my father's name. We are planning to finish construction within 1 year and later on sell it. What is the best way reduce capital gains in the above case?
As the property sold is land, you can claim exemption u/s 54F, if you invest in purchase of a residential house, subject to fulfillment of conditions specified therein. Alternatively, you may also invest in capital gains bonds and claim exemption u/s 54EC. After a lock in period of 3 years, the proceeds can be spent in the manner you like.
If you are planning to invest in the house and then sell it later within 3 years, the exemption u/s 54F will be withdrawn.
If you want to avail exemption under section 54F of Income Tax Act, from paying capital gain by investing sale proceeds of Rs. 24 lacs in construction of a house, you can not sale the new house before completion of 3 years from the date of construction, neither can you purchase any other house within one year from the date of transfer of original assets/construct any other house within three years from the date of transfer of original asset.
If you comply these conditions, you can avail exemption, by making another gift deed from your father transferring 50% of plot in your name and constructing a new house thereon within a period of 3 years.
There are certain things which needs to be kept in mind if you want to avail exemption under section 54F of Income Tax Act:
1. you have to invest sale proceeds of old asset in purchase (within 2 years from date of sale) or construction of property (within 3 years from date of sale).
2. You cannot sale newly purchased house or newly constructed house within 3 years from the date of purchase/construction.
3.You cannot purchase any other house (other than new house eligible under this section) within one year from the date of transfer of original assets/construct any other house within three years from the date of transfer of original asset.Further,you should not own more than one house on the date of transfer of old asset. In essence you should not have more than one house in your name after the sale of old asset including this new house.
Further, looking at your case it is advisable to first ask your father to gift 50% of plot in your name (as you are not the owner of the land) and then constructing a new house thereon within a period of 3 years.
Sir i think this is being answered by my other professional collegue. If you again want the answer kindly post the same.
Dear Sir,
Firstly to claim exemption you need to first transfer the Land in your as well as your brothers name.
Then you can construct a House Property within a period of 3 years from the date of sale of Land (assuming you have not more than 1 house property in your name).
This house property cannot be sold for a further period of 3 years, if sold then Capital Gain on sale of House as well as Sale of Land shall be payable.
After 3 years the proceeds from the sale of house can be invested in Capital Gain Saving Bonds.
Trust this clarifies your query.
Feel Free to get back for further clarifications.
Thanking You.
Regards,
CA Rohit R Sharma
BCOM, CA, LLB - GEN, CERT. FAFP.
