Your taxes

I owned a flat in Mumbai purchased in 2002 which I sold in June 2017. I made long-term capital gain of ₹142 lakh after deducting original cost enhanced by indexation. I invested ₹50 lakh in REC bonds in March 2018 and intend investing another ₹50 lakh in April 2018. I am left with ₹42 lakh which I have to invest in a property or keep in a separate account (long-term capital account) pending reinvestment. I propose to buy (a) flat in Kerala or (b) some land to save tax. After the sale of the flat in Mumbai, I do not own a house in my name. I seek your advice on the following:

1) Is my investment of ₹50 lakh each in 2017-18 and 2018-19 under Sec. 54EC permissible as per IT Act.

2) Whether I can buy a plot of land for the balance ₹42 lakh though the capital gain is made on sale of a flat. Or is it mandatory to reinvest the ₹42 lakh on a house/flat.

SSR Warrier

According to the provisions of Section 54EC of the Income Tax Act, 1961, in case an individual invests LTCG earned on sale of any long-term capital asset in Rural Electrification Corporation (REC) bonds within six months from the date of sale, such amount invested shall be considered to be exempt from tax (up to a maximum of ₹50 lakh).

I understand that since the investment has been done by you in REC bonds in March 2018 for ₹50 lakh (that is, after six months from sale of long-term capital asset in June 2017), no exemption under Section 54EC shall be available to you. Hence, it would be advisable that no further amount be invested in REC bonds in April 2018 for the purpose of claiming capital gain tax exemption. It is pertinent to note that as per the proviso inserted under Section 54EC of the Act, wef April 1, 2015, total amount of investment eligible for exemption is ₹50 lakh even if the investment is made in two different financial years.

However, as per provisions of Section 54 of the Act, you may invest your capital gains amount for purchase or construction of one new residential house property (new property) and claim exemption against your capital gain tax. In case of purchase of new property, amount of capital gain is required to be invested one year before or within two years after the date of sale.

On an assumption that no amount has been invested one year before the sale of your flat, you may still invest the capital gain amount up to June 2019 (that is, two years from sale) for purchase of new property and claim the benefit. In case you are constructing a new property, you may invest the capital gains for purchase of a plot of land for which the construction should be completed within three years of sale (up to June 2020). Till the time investment is made for new property and to claim exemption from capital gains tax, you shall be required to keep the amount of capital gains amount in the capital gains account scheme as notified by the Centre which should be done on or before the statutory due date of filing the original tax return for FY 2017-18.

The author is a practising chartered accountant

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