Surrender of Tenancy Rights - Whether a Capital Gain or not?
This query is : Resolved
13 March 2010
1. Whether Surrender of Tenancy Rights comes in the ambit of Capital Gain?
2. If an amount of Capital Gain recieved (from sale of property) is put in a Savings Bank Account and within 1 year a new property is purchased - will it attract Capital Gain Tax?
3. If yes, then what is the best way to avoid the Capital Gain Tax?
2. If an amount of Capital Gain recieved (from sale of property) is put in a Savings Bank Account and within 1 year a new property is purchased - will it attract Capital Gain Tax?
3. If yes, then what is the best way to avoid the Capital Gain Tax?
13 March 2010
1. The tenancy right is a capital asset, and capital gains arises on the transfer of this asset from assessment year 1995-96 onwards.
2. Possible,provided the savings bank account should be opened under Capital Gains Account Scheme,1988 under 'deposit account-A' scheme.
3. ?
2. Possible,provided the savings bank account should be opened under Capital Gains Account Scheme,1988 under 'deposit account-A' scheme.
3. ?
28 May 2010
1. What if it takes time longer than 1 year to buy new house & the amount kept in Capital Gain Deposit A Account?
2. How much tax will it attract?
3. What is the best possible way to save tax in such a situation considering that the house can only be bought(ready posession) and not constructed?
2. How much tax will it attract?
3. What is the best possible way to save tax in such a situation considering that the house can only be bought(ready posession) and not constructed?
12 June 2010
1. What if it takes time longer than 1 year to buy new house & the amount kept in Capital Gain Deposit A Account?
2. How much tax will it attract?
3. What is the best possible way to save tax in such a situation considering that the house can only be bought(ready posession) and not constructed?
2. How much tax will it attract?
3. What is the best possible way to save tax in such a situation considering that the house can only be bought(ready posession) and not constructed?
26 July 2025
Let’s go step-by-step through your query regarding **surrender of tenancy rights** and the implications under **capital gains tax**, as well as how to save on such tax.
---
### **1. Whether Surrender of Tenancy Rights is a Capital Gain?**
✅ **Yes**.
As per **Section 2(14) of the Income Tax Act**, tenancy rights are considered a **capital asset**.
So, when tenancy rights are surrendered (i.e., given up for consideration), **capital gains tax is applicable**.
📌 This was clarified in multiple judgments, including:
* *CIT vs. D.P. Sandu Bros. Chembur (P.) Ltd.* (2005) 273 ITR 1 (SC)
* Applicable from **A.Y. 1995-96** onwards.
---
### **2. If Capital Gains from Surrender of Tenancy Rights are Deposited in a Savings Account & New Property is Purchased within 1 Year, is it Taxable?**
🛑 **Yes, taxable**, **unless** the deposit is made under the **Capital Gains Account Scheme (CGAS), 1988**.
* A **normal savings account** is *not sufficient* to claim exemption.
* To claim **exemption under Section 54F** (if you don’t own more than one house) or **Section 54** (if capital gain is from a residential property), the **amount must be deposited under CGAS before the due date of filing the return u/s 139(1)**.
---
### **3. What If It Takes Longer than 1 Year to Buy a New House?**
If the **purchase or construction of a residential house** takes longer than:
* **2 years (for purchase)** or
* **3 years (for construction)**
from the date of transfer (i.e., surrender), you must:
➡️ Deposit the unutilized amount in **Capital Gains Account Scheme (CGAS)** before the due date of filing return under section 139(1) — usually **31st July** or **31st October**.
🔒 The money must remain **earmarked** for purchase/construction.
If it’s not used within **2/3 years**, the unutilized balance is **taxed as capital gain in the year the period expires**.
---
### **4. What Is the Best Way to Save Tax in This Situation (Only Buying Ready Possession House)?**
To **save capital gains tax**, you may choose from:
#### ✅ **Option 1: Section 54F (if surrender of tenancy right is the only capital asset sold)**
* Purchase of **any residential house** within **2 years**, or
* Construct a house within **3 years**, or
* Purchase before 1 year from transfer date.
* Must deposit unutilized amount in **CGAS** before ITR due date.
#### ✅ **Option 2: Section 54EC**
* Invest the capital gains **within 6 months** in **NHAI or REC bonds**.
* Max limit: **₹50 lakhs per financial year**
* Lock-in period: **5 years**
#### ✅ **Option 3: Section 54 (only applicable if original asset was a residential house, so likely not applicable in your case)**
---
### **Summary Table**
| Situation | Exemption Section | Conditions |
| ---------------------------------- | ----------------------- | ---------------------------------------------------------------- |
| Surrender of tenancy rights | Taxable as capital gain | LTCG/STCG based on holding period |
| New house purchased within 2 years | 54F | No other house owned (except one); entire sale proceeds invested |
| New house takes > 1 year | CGAS Deposit mandatory | Before ITR due date u/s 139(1) |
| Cannot invest in property | 54EC | Invest in NHAI/REC bonds within 6 months |
---
---
### **1. Whether Surrender of Tenancy Rights is a Capital Gain?**
✅ **Yes**.
As per **Section 2(14) of the Income Tax Act**, tenancy rights are considered a **capital asset**.
So, when tenancy rights are surrendered (i.e., given up for consideration), **capital gains tax is applicable**.
📌 This was clarified in multiple judgments, including:
* *CIT vs. D.P. Sandu Bros. Chembur (P.) Ltd.* (2005) 273 ITR 1 (SC)
* Applicable from **A.Y. 1995-96** onwards.
---
### **2. If Capital Gains from Surrender of Tenancy Rights are Deposited in a Savings Account & New Property is Purchased within 1 Year, is it Taxable?**
🛑 **Yes, taxable**, **unless** the deposit is made under the **Capital Gains Account Scheme (CGAS), 1988**.
* A **normal savings account** is *not sufficient* to claim exemption.
* To claim **exemption under Section 54F** (if you don’t own more than one house) or **Section 54** (if capital gain is from a residential property), the **amount must be deposited under CGAS before the due date of filing the return u/s 139(1)**.
---
### **3. What If It Takes Longer than 1 Year to Buy a New House?**
If the **purchase or construction of a residential house** takes longer than:
* **2 years (for purchase)** or
* **3 years (for construction)**
from the date of transfer (i.e., surrender), you must:
➡️ Deposit the unutilized amount in **Capital Gains Account Scheme (CGAS)** before the due date of filing return under section 139(1) — usually **31st July** or **31st October**.
🔒 The money must remain **earmarked** for purchase/construction.
If it’s not used within **2/3 years**, the unutilized balance is **taxed as capital gain in the year the period expires**.
---
### **4. What Is the Best Way to Save Tax in This Situation (Only Buying Ready Possession House)?**
To **save capital gains tax**, you may choose from:
#### ✅ **Option 1: Section 54F (if surrender of tenancy right is the only capital asset sold)**
* Purchase of **any residential house** within **2 years**, or
* Construct a house within **3 years**, or
* Purchase before 1 year from transfer date.
* Must deposit unutilized amount in **CGAS** before ITR due date.
#### ✅ **Option 2: Section 54EC**
* Invest the capital gains **within 6 months** in **NHAI or REC bonds**.
* Max limit: **₹50 lakhs per financial year**
* Lock-in period: **5 years**
#### ✅ **Option 3: Section 54 (only applicable if original asset was a residential house, so likely not applicable in your case)**
---
### **Summary Table**
| Situation | Exemption Section | Conditions |
| ---------------------------------- | ----------------------- | ---------------------------------------------------------------- |
| Surrender of tenancy rights | Taxable as capital gain | LTCG/STCG based on holding period |
| New house purchased within 2 years | 54F | No other house owned (except one); entire sale proceeds invested |
| New house takes > 1 year | CGAS Deposit mandatory | Before ITR due date u/s 139(1) |
| Cannot invest in property | 54EC | Invest in NHAI/REC bonds within 6 months |
---
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