No tax benefit on LTCG from sale of house if it’s invested in commercial space

If I sell a residential property in Mumbai and use the proceeds to buy a commercial property—office space, shops or real estate investment trusts—will I have to pay long-term capital gains (LTCG) tax?

—Tejas Prakash Jhaveri

It is assumed that the residential property is held by you for at least 24 months.

A roll-over exemption for LTCG on the sale of residential property is available towards the following investments, each of them being subject to the prescribed conditions and timelines: 1) Under Section 54 of the Income-tax Act, by investing LTCG in a new residential house in India; 2) Under Section 54EC, by investing LTCG in specified notified bonds; 3) Under Section 54GB, by investing the net consideration in equity shares of an eligible startup.

As investment in a commercial property is not covered in any of the roll-over exemptions above, LTCG (after indexation) arising on the sale of residential property would be subject to tax in your hands.The tax is payable at 20% (plus applicable surcharge and cess) on your share of the resulting LTCG.

I booked a flat under construction in December 2018 and I am likely to get its possession in April 2021. Once I get the possession, I plan to sell the flat I am living in. Will I get tax benefit under Section 54?

—Hasmukhrai P. Sheth

As per the provisions of Section 54 of the Income-tax Act, LTCG arising out of the sale of a residential house is exempt from tax to the extent that such LTCG is invested in (i) purchase of new residential house one year before or two years after the date of transfer of the residential house or (ii) construction of a new residential house within a period of three years after the date of transfer of the house, subject to satisfaction of other conditions.

It may be noted that in view of the various property arrangements prevailing in the market and the various judicial precedents in this regard, one would need to review the detailed facts and property documents such as stages of completion, payment schedule and date of transfer of property, to ascertain whether the new house acquired by you would qualify as a purchase or construction of a new house. The timelines would apply accordingly.

Depending upon the exact facts, if it is considered that the new house was purchased by you in April 2021, you will need to sell your existing house within a year of such purchase, to avail of the exemption under Section 54.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Views at mintmoney@livemint.com