Where to keep the money until house investments are made for Section 54 exemption?

I plan to dispose of a flat I bought about 16 years ago. With the sale proceeds, I intend to construct an independent house. However, the process of acquiring a plot and commencing the construction is expected to begin only after a gap of 10-12 months from the date of the sale of the flat. Please let me know whether I have to keep the sale proceeds in any specified form of investment to avoid capital gains tax. If so, I would like to know which of these investments are available and whether I can withdraw them at will after parking the funds in these investments.

Section 54 gives exemption to an individual and a HUF from tax on long-term capital gains arising on the sale of a residential house, provided the assessee invested the number of long-term capital gains for the purchase of a residential house within two years from the date of sale of the existing residential house. The exemption can still be claimed if the assessee has already bought a residential house within one year before the date of sale of the house. In case of construction, the assessee gets an extended period of 3 years from the date of sale, within which construction of the house needs to be completed.

How to avoid capital gains tax when selling a flat and constructing a new house

If only a part of the long-term capital gains required to be invested is used for these purposes, the exemption would be available to the extent of the long-term capital gains invested in residential houses, and the balance would be chargeable to tax. For tax payment, the resident individual and HUF can pay tax at 20% on indexed profits or at 12.50% on unindexed profits. Please note that the indexation benefit is not available to compute the amount required to be invested.

In case the full or part of the amount required to be invested is not utilised for the purpose of acquiring the house before the due date of filing of the ITR, the unutilised amount has to be deposited in a special account with a bank called the Capital Gains Accounts Scheme (CGAS).

The amount deposited in such an account before the last date of furnishing returns of income (or the actual date, if earlier), along with the amount already utilised as required, is deemed to be the amount utilised for the purpose, and exemption under Section 54 can be claimed while filing the ITR.

Withdrawals can be effected from this account only to make payment for the purchase or construction of a residential house. Suppose the amount is not utilised wholly or partly for the stipulated purpose within the prescribed period. In that case, the amount of capital gain related to the unutilised portion of the deposit in CGAS shall be charged as the capital gains of the year in which the prescribed period expires.

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Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his X handle.

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