I just sold my land and intend to purchase a residential flat which is under construction and will be ready in another 1 year or so. Can I invest this money in the meantime in mutual funds or shares for 1 year to create more wealth instead of FDs? And what are the tax implications?
Reply by CA (Dr.) Suresh Surana
Tax Implications
If an assessee sells land, the resulting gains are taxable under Section 112 of the Income Tax Act, 1961. The applicable tax treatment is as follows:
Ø If the transfer is made before 23 July 2024, then in such cases tax on long-term capital gains arising from the transfer of land, buildings, or both shall be levied at the rate of 20%.
Ø If the transfer is made on or after 23 July 2024, then in such cases the tax rate applicable to such gains will be reduced to 12.5%.
However, the taxpayer would be eligible to opt for taxing such capital gains at 12.5% without claiming the benefit of indexation or at 20% post-claiming the benefit of indexation, whichever is more beneficial in the case where such land is purchased or acquired before 23 July 2024.
Tax Exemption u/s 54F – Tax Exemption for Investment in Residential Property
Section 54F allows individual and HUF taxpayers to save tax on capital gains arising from the sale of a long-term capital asset, other than a residential property, by investing the gains in a new residential property. Thus, the gains derived from selling one’s stake in a company can be claimed as exemption u/s 54F provided such gains are long-term in nature and the amount of net consideration received is invested in accordance with the provisions of S. 54F of the IT Act as mentioned below:
Ø Such new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of the old house or should be constructed within a period of 3 years from the date of transfer of the old house.
Ø The assesse should not transfer the newly acquired asset for a period of 3 years from the date of acquisition or construction. In case of any such transfer or conversion made, the exempted gains would be subjected to tax in the year of such transfer or conversion.
Ø Assessee should not own more than 1 Residential House Property on the date of transfer of Capital Asset
Ø During the period of 2/3 Years, the assessee must not purchase/construct any other House Property
The Capital Gains Tax Exemption Calculation u/s 54F would be as follows:
Capital Gains x Investment in New Residential Property
Net Sale Consideration
Herein, the Net Sale Consideration is the amount received from the sale of the capital asset after deducting any expenses related to the sale.
Proportional Exemption:
Ø If the entire capital gains are reinvested in the new property, the taxpayer can claim the full exemption on the capital gains tax amount. However, where the cost of a new residential asset exceeds Rs 10 crores, the amount exceeding Rs. 10 crores shall not be taken into account while computing the exemption.
Ø If only a part of the gains is invested, only the proportionate amount of such long-term capital gains will be exempt.
Tax Exemption u/s 54EC – Investment in certain Specified Bonds
· Section 54EC of the IT Act provides an individual or HUF tax exemption from long-term capital gains from house property by way of investing such gains in certain specified bonds within 6 months from the date of transfer of house property.
· Investment in the following specified bonds (redeemable after 5 years) is eligible to claim exemption u/s 54EC of the IT Act
– Rural Electrification Corporation Limited or REC bonds,
– National Highway Authority of India or NHAI bonds (Discontinued w.e.f. 31st March 2023),
– Power Finance Corporation Limited or PFC bonds,
– Indian Railway Finance Corporation Limited or IRFC bonds.
· The aforementioned bonds would be subjected to a lock-in period of 5 years. In case the taxpayer availing exemption u/s 54EC transfers or converts such bonds into money within 5 years from the date of its acquisition, the exempted capital gains would be subject to tax in the year of transfer/ conversion.
· The exemption is available up to lower of the amount of capital gains or investment in specified bonds (maximum investment amount restricted to Rs 50 lakh)
Capital Gains Account Scheme
If the capital gains are not utilized for the purchase or construction of the new house before the due date of filing the income tax return, the unutilized amount must be deposited in a Capital Gains Account Scheme (CGAS). The deposited amount must be used to purchase or construct the new property within the prescribed time limits as aforementioned. If not utilized, it will be taxed as capital gains in the year in which the time limit for utilization for such amount expires.
As such, the unutilized amount cannot be invested in Mutual Funds/ shares but is mandatorily required to be invested in the Capital Gains Account Scheme in order to claim tax exemption u/s 54 of the IT Act. If the taxpayer is planning to invest the sale proceeds in mutual funds or shares, the exemption under Section 54 will not apply, and the entire capital gain will be taxed at the applicable rates as mentioned above.
However, It is pertinent to note the facility of CGAS is only available u/s 54, 54D, 54B, 54F etc. of the IT Act. As such, the said Scheme is not applicable in the case of Section 54EC (which provides tax exemption upto Rs 50 lakhs on capital gains derived from immovable property provided such gains are invested in specified bonds within 6 months from the date of sale/ transfer of land). If the amount in CGAS is not utilised for the purpose of reinvestment within 60 days from the date of its withdrawal, such unutilised amount will be taxable as capital gains.