How do you decide capital gains tax on property sale?

Sale/transfer of a house property triggers taxability of capital gains in the hands of a taxpayer, which can be either short-term or long-term in nature depending upon the period of holding of the property.

In the absence of an express mechanism under the Act to arrive at the date of acquisition of a house property, it has been a vexed issue over the years, especially in the context of under-construction properties.  Consider a case of Mr. A, who booked an under-construction property in January 2012.  He registered the property in March 2016 and obtained a housing loan.  A majority of the payments to the builder was made in May 2016.  The construction of the property is yet to be completed; however, Mr. A proposes to sell this to a willing buyer now in June 2019.  The issue that will arise is what is Mr. A selling—a property or a right to buy a property—and from when will he be regarded as the owner of the house?

Different interpretations

These are very subjective aspects, considering the varied prevailing practices as well as different schemes offered by builders/developers.  There has been a plethora of judicial precedents with different interpretations on the date of acquisition of property—i.e., date of possession, property registration, date of making majority payment, etc.  Facts and circumstances of each case warrant a detailed examination for taking an informed decision on this aspect.  Incidentally this also has an impact on the capital gains exemption, if any, on sale.

A home-buyer can claim an exemption against long-term capital gains if he/she invests such capital gains/sale proceeds of one house property/other long-term capital asset, to purchase/construct another house property in India within specified timelines. However, such exemption is not available if the construction is completed beyond three years. This condition causes undue hardship to a home-buyer for reasons beyond his/her control as there could be delay in construction for varied reasons beyond three years. Judicial Courts have held various principle(s) in this regard to construe a liberal interpretation of date of construction as it is a beneficial provision for taxpayers and should be followed as per intent and spirit of the statute. It has been held that the intention of the legislature was to encourage investments in the acquisition of a residential house and not strictly with the completion of construction or occupation of the property.

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Parizad Sirwalla

Partner and Head of Global Mobility Services – Tax|KPMG

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Further, under section 54 of the Act, in case you sell your residential house and earn long-term capital gains, there is exemption available on such gains if re-invested into one residential property in India.  The  Interim Budget 2019 has provided that a once in a life time exemption can be availed on such long-term gains if the gains are Rs 2 crore or less and are re-invested in two residential properties in India.  All other conditions for claiming this exemption remain unchanged.

Other exemptions

Apart from those mentioned earlier, there are other exemptions that may also be claimed from the sale of a residential house.

Some of these exemptions are allowed based on the purchase of property one year prior to the date of sale of the relevant asset on which capital gains have arisen. So, the income tax department has flagged an interesting issue in certain cases pertaining to the utilisation of sales proceeds to repay principal on housing loan taken on the purchase of new residential property on the basis of which the exemption is claimed.  However, the courts have held that the residential house should be purchased one year prior to the date of sale of the asset for which exemption is being claimed.  One-to-one correlation of sales proceeds and purchase funds in not necessary.

The government, in the last few years, has aimed to provide impetus to the housing sector by introducing measures such as the affordable housing scheme under the Pradhan Mantri Awas Yojana and tax incentives for first time home-buyers. Implementation of the Benami Transactions (Prohibition) Amendment Act, 2016 and Real Estate (Regulation and Development) Act, 2016 are also major reforms in this regard. Though many such measures and reforms have been introduced, the common man continues to experience some practical challenges in the housing sector. The Interim Budget 2019 though provided some relief. It would be interesting to see what changes will be brought in by the newly elected government in the full budget.

(The writer is Partner and Head, Global Mobility Services-Tax, KPMG in India)