How is the tax on the sale of an apartment calculated?

I am selling my flat in Dharuhera, Haryana and my mother is selling a flat in Laxmi Nagar, Delhi. We plan to invest the money from this sale in a single apartment in Gurgaon within a year. Do we have to deposit the money in a specific account? I also take out a loan from my mother to pay off the mortgage on my apartment in Dharuhera and will she pay her back with the proceeds of the sale. What is the tax burden related to these transactions?

—Aman Kishore

Section 54 of the Income Tax Act 1961 provides a deduction on long term capital gain (LTCG) arising from the sale of a dwelling house which has been held for more than two years.

This deduction is available when the amount of LTCG resulting from such sale is either invested to buy another residential house in India, within one year before or two years after the transfer of the original asset, or invested for build a new house within three years. of the transfer of the original asset.

The deduction will be available to the extent of the LTCG invested. In case the LTCG cannot be invested for the purchase / construction of the new house until the date of provision of the declaration under Article 139 of the law, then this amount can be deposited before the due date for filing tax returns in a specified Capital Gains Account Scheme (CGAS) bank account with approved banks and used in the prescribed manner, to benefit from the deduction.

We understand that you and your mother are selling your properties and plan to invest the proceeds of the sale to buy a new house in India, which would be jointly owned by you and your mother. As also ruled in court precedents. you and your mother can both claim a u/s 54 deduction, if the respective LTCG amount from the sale of the respective properties is either invested in (i) the new house in India and/or (ii) the same is deposited under the CGAS, before the due date for filing the original tax return.

However, please note that if you are unable to purchase/build the new home within the time period specified in this section, the deduction amount you claimed earlier will be considered taxable income in the year. during which the period of three years from the expiry date of the transfer of the original asset. Additionally, if the new home is transferred within three years of the date of purchase or construction, for the purpose of calculating the capital gain, the LTCG for which the deduction is previously claimed will be deducted from the cost acquisition of the new house.

Also, having a loan from the mother to repay the home loan on your original property and repaying it from the proceeds of the sale of the property would have no tax implications so long as that the amount of LTCG derived from the sale of the property is invested as mentioned above. In the event that the total amount of LTCG you have earned is not fully invested, the deduction would be limited to the extent of the amount invested by you and the LTCG balance will be taxable in your hands.

Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG India.

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