The Indian tax laws allow an individual or an HUF to claim exemption on long-term capital gains (LTCG) tax, under Section 54, arising on sale of a residential property, if the indexed LTCG are invested for purchasing another residential house, one year prior to or two years after the date of sale of the house, or for constructing a residential house within three years from the date of sale of the house. Likewise, under Section 54F, an Individual or an HUF can claim LTCG exemption arising on sale of any asset other than a residential house, if the net consideration is invested for acquiring another residential house with the time limits prescribed under Section 54. However, there are a few grey areas in this exemption which we will discuss.
Number of houses, in which the investments can be made
A question that arises, is whether the assessee can invest in more than one residential house to claim LTCG exemption under Section 54 or 54F. In Gita Duggal case (in 257 CTR 208), the Delhi High Court had held that the expression ‘a residential house’ should be understood in a sense that the building should be a residential one and that the word ‘a’ should not be understood to indicate a singular number. The court interpreted ‘a residential house’ to mean any residential house, in contradistinction to any ‘commercial house property’. Consequently, tax payers were able to claim LTCG exemption by investing in more than one house property. However, an amendment was made to the income tax laws, which replaced ‘a residential house’ with ‘one residential house’, with effect from April 1, 2015. So, presently, one can claim these exemptions by making investments in one residential house only.
In the interim budget 2019, the finance minister has proposed to amend Section 54, for LTCG exemption arising from the sale of a residential house. The proposal provides that a tax payer will be entitled to invest the indexed capital gains in two separate residential houses, to claim the exemption available under Section 54. This option is available to the tax payer only once in his lifetime, provided the indexed capital gains do not exceed Rs two crores. It may be noted that the option to make investment in two residential houses has been extended under Section 54, for claiming LTCG exemption on sale of residential house only and not to LTCG for other assets under section 54F.
This amendment, along with the proposal to allow a tax payer to have two self-occupied house properties, will incentivise people to diversify their investment portfolio, with increased allocation to real estate. This will, in turn, spur demand for residential houses across the country, including tier-2 and tier-3 cities. Since this is a one-time opportunity, the benefit in other cases will be available for making investment in one residential house only, for claiming LTCG exemption under Section 54 and 54F.
Legal position, for investment in more than one flats to be used as a single residential unit
Is it possible for one to claim long-term capital gains tax exemption, if the investment is made in more than one residential units which are used as a single residential unit by the family, by treating such investment as one residential house? The answer is provided by two decisions.
The first one is that of CIT vs D Ananda Basappa 309 ITR 329 (Kar.), where multiple flats were purchased in the same complex and were used as one unit. In this case, the tax exemption was allowed. A special leave petition filed by the Income-Tax Department against this decision, was also rejected by the Supreme Court.
Hence, it can reasonably be inferred that one can still invest in more than one house and claim the LTCG tax exemption under Section 54 and 54F, if the taxpayer can prove that all such flats are used as a single residential unit by the family. In the abovementioned case, two residential units were purchased, which were separated by a wall and were purchased from two different vendors, under two separate sale deeds. The exemption was still granted to the tax payer, because both the flats were capable of being used as a single residential unit.
The second decision was rendered by a special bench of the Mumbai Tribunal, in the case of ITO vs Suseela M Jhaveri 26 (ITAT Bom) where it was held that if the assessee has purchased more than one residential house and the houses are in different locations, then, the assessee could claim exemption only with respect to one house. However, the taxpayer would be entitled to exemption for investment in more than one unit, if the two adjacent or continuous units are converted into one residential house and the two units are intended to be used as a single house, for the family’s residence.
(The author is a tax and investment expert, with 35 years’ experience)