Long term capital gain invested in construction of house
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
17 February 2013
Dear Members,
I have sold my 10 year old flat in April 2012 and registered & got possession of my under construction flat, which I had booked in December 2008, in May 2012.
Can I show my long term gain in the new flat as technically the construction of flat is within 3 years (1 month) from the sale of my old flat.
I have sold my 10 year old flat in April 2012 and registered & got possession of my under construction flat, which I had booked in December 2008, in May 2012.
Can I show my long term gain in the new flat as technically the construction of flat is within 3 years (1 month) from the sale of my old flat.
17 February 2013
Technically it is not construction as you have booked it.
.
It's Purchase of the flat.
.
The amount invested by you after April 2011-( say Rs 5.00Lac) (before 1 year from sale of old flat ) can be deemed to be utilised for the purpose of purchasing the flat. Capital gain to that extent of (Rs. 5.00 lac) may be got exempted.
.
.
It's Purchase of the flat.
.
The amount invested by you after April 2011-( say Rs 5.00Lac) (before 1 year from sale of old flat ) can be deemed to be utilised for the purpose of purchasing the flat. Capital gain to that extent of (Rs. 5.00 lac) may be got exempted.
.
Querist : Anonymous
Querist :
Anonymous
(Querist)
17 February 2013
Will circular 672 not applicable to builders, as their scheme is similar to DDA self financing scheme.
Also I have used borrowed funds to the extent of 80% will that be eligible for rebate.
Also I have used borrowed funds to the extent of 80% will that be eligible for rebate.
03 August 2024
Let's break down your situation and address each query regarding the long-term capital gain (LTCG) exemption under Section 54 of the Income Tax Act, considering your specific circumstances:
### **1. LTCG Exemption for Construction of House**
**Scenario**: You sold a flat in April 2012 and received possession of an under-construction flat in May 2012, which you had booked in December 2008.
**Key Points**:
- **Eligibility for Exemption**:
- Under **Section 54** of the Income Tax Act, the LTCG from the sale of a residential property can be exempted if it is invested in the construction of a new residential property. The new property should be constructed within **3 years** from the date of sale of the old property.
- **Possession Date**:
- If you received possession of the new flat within 3 years from the sale of the old flat, you would generally qualify for the exemption under Section 54, assuming all other conditions are met.
### **2. Applicability of Circular 672**
**Circular 672**:
- **Circular 672** issued by the CBDT (Central Board of Direct Taxes) provides clarification on the definition of "construction" and the time frame for claiming exemptions under Section 54.
- **Applicability to Builders**:
- This circular typically applies to cases where the construction is undertaken by builders or developers and outlines how the exemption is to be claimed if the construction is not completed within the prescribed time.
- **DDA Self Financing Scheme**:
- The scheme similar to the DDA self-financing scheme should generally be in line with the principles of Circular 672. However, you should verify if there are specific exemptions or provisions related to the builder’s schemes. It’s advisable to consult with a tax professional for precise guidance.
### **3. Use of Borrowed Funds**
**Scenario**: You used borrowed funds to finance 80% of the construction cost.
**Key Points**:
- **Eligibility for Rebate**:
- **Interest on Borrowed Funds**: While the principal amount of borrowed funds used for construction does not directly affect the exemption under Section 54, the interest on such borrowed funds is eligible for deduction under Section 24(b) of the Income Tax Act (under the head "Income from House Property").
- **Investment Amount**:
- Ensure that the entire capital gain is invested in the construction of the new property. The exemption is allowed on the amount of LTCG invested. If you used borrowed funds, it does not impact the eligibility of the LTCG exemption, as long as the LTCG is fully utilized for the construction.
### **Summary and Recommendations**
1. **Claiming Exemption**: Since you received possession of the new flat within 3 years from the sale of the old property, you should be eligible for the exemption under Section 54. Ensure that the investment aligns with the prescribed conditions.
2. **Circular 672**: Generally, Circular 672 provides guidelines on construction timelines, and it should be applicable to your case unless there are specific provisions that exempt builder schemes. Consulting a tax expert can provide clarity on specific provisions.
3. **Borrowed Funds**: While you cannot claim the principal of borrowed funds for exemption under Section 54, you can claim the interest paid on such funds under Section 24(b) if the new property is let out or deemed to be let out.
4. **Documentation and Compliance**: Keep thorough documentation of all transactions, construction progress, and loans to support your claim for exemption.
If you have any further questions or need detailed guidance, consulting a tax professional or financial advisor would be beneficial.
### **1. LTCG Exemption for Construction of House**
**Scenario**: You sold a flat in April 2012 and received possession of an under-construction flat in May 2012, which you had booked in December 2008.
**Key Points**:
- **Eligibility for Exemption**:
- Under **Section 54** of the Income Tax Act, the LTCG from the sale of a residential property can be exempted if it is invested in the construction of a new residential property. The new property should be constructed within **3 years** from the date of sale of the old property.
- **Possession Date**:
- If you received possession of the new flat within 3 years from the sale of the old flat, you would generally qualify for the exemption under Section 54, assuming all other conditions are met.
### **2. Applicability of Circular 672**
**Circular 672**:
- **Circular 672** issued by the CBDT (Central Board of Direct Taxes) provides clarification on the definition of "construction" and the time frame for claiming exemptions under Section 54.
- **Applicability to Builders**:
- This circular typically applies to cases where the construction is undertaken by builders or developers and outlines how the exemption is to be claimed if the construction is not completed within the prescribed time.
- **DDA Self Financing Scheme**:
- The scheme similar to the DDA self-financing scheme should generally be in line with the principles of Circular 672. However, you should verify if there are specific exemptions or provisions related to the builder’s schemes. It’s advisable to consult with a tax professional for precise guidance.
### **3. Use of Borrowed Funds**
**Scenario**: You used borrowed funds to finance 80% of the construction cost.
**Key Points**:
- **Eligibility for Rebate**:
- **Interest on Borrowed Funds**: While the principal amount of borrowed funds used for construction does not directly affect the exemption under Section 54, the interest on such borrowed funds is eligible for deduction under Section 24(b) of the Income Tax Act (under the head "Income from House Property").
- **Investment Amount**:
- Ensure that the entire capital gain is invested in the construction of the new property. The exemption is allowed on the amount of LTCG invested. If you used borrowed funds, it does not impact the eligibility of the LTCG exemption, as long as the LTCG is fully utilized for the construction.
### **Summary and Recommendations**
1. **Claiming Exemption**: Since you received possession of the new flat within 3 years from the sale of the old property, you should be eligible for the exemption under Section 54. Ensure that the investment aligns with the prescribed conditions.
2. **Circular 672**: Generally, Circular 672 provides guidelines on construction timelines, and it should be applicable to your case unless there are specific provisions that exempt builder schemes. Consulting a tax expert can provide clarity on specific provisions.
3. **Borrowed Funds**: While you cannot claim the principal of borrowed funds for exemption under Section 54, you can claim the interest paid on such funds under Section 24(b) if the new property is let out or deemed to be let out.
4. **Documentation and Compliance**: Keep thorough documentation of all transactions, construction progress, and loans to support your claim for exemption.
If you have any further questions or need detailed guidance, consulting a tax professional or financial advisor would be beneficial.
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