Budget 2024: Selling assets and buying a new house? Beware of the tax pitfalls – Times of India

For buying a house, typically, the salaried masses do rely on home loans. In addition, they also have to dip into their savings and sell existing assets (be it shares or a house property).
The sale of any asset – be it shares or an old house, results in taxable profits which in tax terminology refers to capital gains. If these assets are held for a certain period prior to their sale (for listed equity it is 12 months, for a house property it is 24 months), the resultant profit on their sale is a long-term capital gain.
The Income-tax (I-T) Act allows for an exemption on such long-term capital gains, if an investment is made in a new house in India, subject to certain conditions. The two sections to note in this regard are section 54-F and section 54. There is a need for parity between the provisions of the two sections so as to benefit the taxpayers, will Budget 2024 do the needful?
It should be noted that exemption under both these sections are available both under the old and new tax regimes.
Section 54-F: Restrictive conditions when an asset (other than a house) is sold, and investment is made in a new house
When a taxpayer earns long-term capital gains from any asset (other than a house), the I-T on the gains can be saved by taking the benefit of section 54-F and investing the ‘net sale proceeds’ in a house (let’s call it a new house). Net sale proceeds denote the sale price minus expenses directly attributed to such sale.
“The quantum of exemption would depend on the amount invested in the new house. The section expects the entire net sale consideration to be invested in the new house. If the amount invested is less than the net sale consideration then the exemption would be proportional,” explains Ameet Patel, tax partner at partner at Manohar Chowdhry & Associates.
The new house is required to be purchased either one year before the sale of the ‘original asset’ (eg: shares or commercial property that was sold and in respect of which the long-term capital gains exemption is being claimed) or two years after the sale of the original asset. Or the new house must be constructed within three years of the sale of the original asset.
There are certain restrictive conditions that need to be met. This exemption is not available if:

“In the latter two instances, the amount that has been claimed as an exemption earlier, is deemed to be the long-term capital gains of the year in which such violation took place,” explains Patel.
Need for an amendment to section 54-F to ensure parity:
These restrictions, outlined above, do not apply when a taxpayer is investing the long-term capital gains arising on sale of a residential house, in another residential house. Thus, there is an anomaly.
“Under section 54, which provides for an exemption from long-term capital gains on sale of a residential house property, there is no restriction of having only one residential house, or of not being able to invest in more than one house (in addition to the one in respect of which the exemption is being claimed,” Patel goes on to illustrate his statement.
Illustration:

“This anomaly is unfair and illogical and hopefully, we will see an amendment,” sums up Patel.
Further, under 54 If the capital gains do not exceed Rs.2 crores, a once in a lifetime exemption is available for investment in 2 properties. So, while in the normal course, investment has to be made only in one house property, if the gains do not exceed Rs 2 crore, then a once in a lifetime option is available to invest in two houses instead of one. This would be useful for families going in for a split or where larger space is required for a growing family, adds Patel.
Other amendments required:
In case of purchase of a house under both sections 54-F and 54, the taxpayer can invest one year before or two years after the sale of the original asset. In case of construction, the taxpayer can construct within three years from the date of sale of the original asset.
A bit of a buffer in terms of timeline for the purpose of investment in a house is available, to the extent that the taxpayer has the facility to park the funds in a special capital gains account before the due date for filing the return for the year in which the capital gains is earned.
Tax experts suggest that when construction of a house is complete one year prior to the transfer of the original asset, the tax benefit should be available. Further, when the new house is being constructed post the sale of the original asset, the time period for completion of construction should be extended from three years to a suitable time frame of say five years.
Hinesh R. Doshi, chartered accountant, states, “Construction of property takes more time for Large sized building. Currently the exemption is provided to the property under construction for three years without considering the area and size of building. The time limit for purchase of new property which is under construction should be five years for townships and large sized buildings and three years for medium and small sized buildings”.
Cap on capital gains tax deduction and the need for an amendment:
Budget 2023 restricted the deduction limit under both section 54 and 54F. The explanatory memorandum to the Finance Bill, 2023 provided the rationale:
The primary objective of the sections 54 and section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by high-net-worth taxpayers are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections. 3. In order to prevent this, it is proposed to impose a limit on the maximum deduction that can be claimed by the taxpayers under section 54 and 54F to rupees ten crore. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be ten crores. This will limit the deduction under the two sections to ten crore rupees.
Doshi explains a challenge that has arisen for taxpayers. “Section 54 exemption is available on investment of sales proceeds less cost of acquisition and Section 54 F exemption is available on proportionate basis (the formula is LTCGs divided by net sale consideration multiplied by the cost of property purchased). So, the same exemption limit of Rs 10 crore should not be set for both section 54 and section 54F. A cap on the amount of exemption and not a cap on the cost of new asset of Rs 10 crore be made,” explains Doshi. The Chamber of Tax Consultants in their pre-budget memorandum have brought out this anomaly.
Doshi also adds: “Since the population and cost of living is different in different cities, exemption limit should be accordingly set for Tier 1, Tier 2 and Tier 3 cities. In my view, for Tier 1 exemption limit should be 25 crore, for Tier 2 it should be 15 crore and for Tier 3 it should be 10 crore. Entire country should not have one exemption limit as property prices are different depending on cities.”
The need for parity