Reinvestment of capital gains from sale of property (2024)

We will explain here about capital gains, reinvestment, and the method.

Are you looking for ways to save taxes for the capital gains? Reinvestment of the capital gains from the sale of a property is one way. Alternatively, you can also invest in the capital gains bond issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation or construct a property using the profits within three years. Here, we will explain about capital gains, reinvestment, and the method involved.

What are capital gains?

The profit you earn after the sale of capital assets, such as real estate, stocks, or any other asset is known as capital gains. As with other instruments, capital gains are taxable. The rate of interest depends on the asset type on which capital gains was earned and the time duration.

Capital gains tax on property

When a person sells a property he owns and makes profit, then he should pay the capital gains tax. This is based on the profit he makes through the sale of the property.

Capital gains = Selling price of property – initial price at which the owner had bought the property.

The capital gains tax is calculated based on the capital gains came out using the above formula.

Types of capital gains on property

• Short-term capital gains tax: This is applicable if a property is sold at a profit within three years from the date of purchase of the property.
• Long-term capital gains tax: This is applicable if a property is sold at a profit after three years from the date of purchase of the property. In case of long-term capital gains tax, after indexation, a capital gains tax of 20% is applicable.

What is reinvestment?

• This is one of the most sought-after ways to save capital gains tax where you reinvest money earned from the sale of a property in another one, within a mentioned period.
• Note that reinvestment can be done only in residential properties and not in commercial properties.

How to reinvest to save capital gain taxes?

Reinvestment by individual/Hindu Undivided Family (HUF) under Section-54

• The individual/HUF can save on capital gains taxes by reinvesting in a single residential property under Section-54 of the Income Tax (I-T) Act.
• Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house, or should construct a residential house within a period of three years from the date of transfer of the old house.
• In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original, or additional).
• With effect from the Assessment Year 2021-22, the Finance Act, 2020 has amended Section-54 to extend the benefit of exemption with respect to investment made in two residential properties. The exemption for investment made, by way of purchase or construction, in two residential properties shall be available if the amount of long-term capital gains does not exceed Rs 2 Cr. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year. Further, with effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section-54. In case the cost of the new asset exceeds Rs 10 Cr, the excess amount shall be ignored for computing the exemption under Section-54.

Sale proceeds to be deposited under Capital Gain Account Scheme

Note, if the taxpayer has plans to buy a residential property within two years or construct a house within three years, he has to deposit the proceeds earned from the sale of property under the Capital Gain Account Scheme (CGAS) in a separate bank account. The money can be withdrawn only for reinvestment during the time of purchase or construction and cannot be used at any other time.

Non-utilisation of amount deposited in CGAS

If money deposited in the CGAS on which the taxpayer has claimed exemption under Section-54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount (for which exemption is claimed) will be taxed as income through long-term capital gains of the year in which the specified period of two years/three years gets over.

Reinvestment by any assessee

According to Section-54EC of the I-T Act, all taxpayers can avail of capital gains tax benefits from the sale of residential property by investing in bonds. The investment should be done within six months of the transfer date of the land, or before the due date of filing tax returns for the relevant financial year.

A taxpayer can invest a maximum of Rs 50 Lakh. In case of joint ownership, each owner is eligible to invest Rs 50 Lakh. Note that taxpayers should hold these bonds for a minimum of three years. In case they redeem or take a loan against this bond within three years, the tax benefit will be withdrawn.

FAQs

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com