Income tax implications on the sale of residential property

• December 7, 2023
• CA Chandan Agarwal's Office

The exemption in respect of long-term capital gains on the sale of a residential house held for 2 years or more can be claimed if the indexed long-term capital gains are invested for the purchase of another residential house within two years from the sale of the original property.

I sold my residential house in June 2022 which was acquired by me in 2014. I invested the fully indexed long-term capital gains in another residential house in December 2022 to claim exemption from tax on long-term capital gains. Now I am planning to sell the new house, bought in December 2022 in January 2024. What are the tax implications of this transaction?

As per Section 54 of the Income Tax Act, the exemption in respect of long-term capital gains on the sale of a residential house held for 2 years or more can be claimed if the indexed long-term capital gains are invested for the purchase of another residential house within two years from the sale of the original property. So for residential house properties sold in June 2012, you were eligible to claim this exemption as you had invested the whole of the indexed long-term capital gain for the purchase of another residential house property within the prescribed time.

The law further requires the assessee to hold the new house for a minimum period of three years from the date of its purchase. If the new house is sold before the completion of three years, the cost of the house being sold shall stand reduced by the amount of exemption claimed earlier. This will effectively tax the exemption claimed earlier. The same shall get taxed as short-term capital gains if the house is sold before two years.

Since you are planning to sell the new house within two years from the date of its purchase, the profits shall be taxed as short-term capital gains. Moreover, the long-term capital gains claimed exempt earlier shall be reduced from the cost of the house for computing the cost of this house for capital gain purposes. This transaction will effectively tax your earlier long-term capital gains claimed as exempt as short-term capital gains now. I would advise you to sell this house after completing two years so the long-term capital gains claimed exempt earlier get taxed as long-term capital gains. Please note that any profit over the actual cost of the house shall also be taxed as short-term capital gains if you sell this house within two years.

Source: https://www.livemint.com/money/ask-mint-money/explained-income-tax-implications-on-the-sale-of-residential-property-11701845776696.html