Long-term capital gains from sale of property are exempt from income tax if you invest the proceeds within two years.
Recently, the government extended the income tax return (ITR) filing due date further to December 31 for assessment year 2020-21. While there are many who are appreciating the government's decision, there are others who want an extension or exemption in statutory deadlines in other cases too. An extended period for investing long-term capital gains (LTCG) is one of them.
Khetis Maheshwari, 54, a resident of Mumbai, sold his property in September 2018 and made LTCG of a few lakh rupees. His plan was to reinvest this in another residential property to claim exemption from tax on the capital gains. According to Section 54 of the Income Tax Act, 1961, exemption from capital gains tax is allowed to a taxpayer if such gains are reinvested in another residential property within two years of transfer.
A year passed searching for an appropriate property, doing the due diligence and negotiating. Maheshwari was close to finalizing a deal, when COVID-19 struck and a lockdown was imposed. And being in a high-risk containment zone, Maheshwari was unable to conclude his deal within the stipulated timeline. “The taxpayers missing this due date of two years in the pandemic-affected distressed market are the ones who are facing huge tax exposure,” says Sandeep Jhunjhunwala, partner, Nangia Andersen LLP. So, it's no wonder that Maheshwari is a worried man.
Initially, considering the hardships that people were facing due to the pandemic and the lockdown, the government extended the tax-related time limit expiring between March 20 and September 29, 2020, till September 30, 2020. However, the government has not extended this deadline further in many cases, even though the pandemic prevails and people are still restricted in their activities.
Many experts believe that the government should allow more time to taxpayers who are willing to reinvest their LTCG to save on taxes. “Considering the after-effects of the pandemic on the economy and the current spending behaviour of taxpayers, the government should consider granting a further extension of such timelines,” says Jhunjhunwala.
Sandeep Sehgal, Director - Tax and Regulatory, AKM Global, a consulting firm, echoes the thought. “As the due dates have been extended for filing tax returns, the extension can be considered for this as well, since in some of the areas facing extended or intermittent lockdowns, people could be facing difficulty in buying houses,” says Sehgal.
Jhunjhunwala believes that extension in such cases will have other advantages too. “This would benefit not only the affected individuals, but also take care of subdued demand in the real estate sector, per se,” he added.
Many experts believe that the government should allow more time to taxpayers who are willing to reinvest their LTCG to save on taxes. “Considering the after-effects of the pandemic on the economy and the current spending behaviour of taxpayers, the government should consider granting a further extension of such timelines,” says Jhunjhunwala.
Jhunjhunwala believes that extension in such cases will have other advantages too. “This would benefit not only the affected individuals, but also take care of subdued demand in the real estate sector, per se,” he added.
The other option
Besides buying a ready property within two years, tax exemption on LTCG is allowed if a taxpayer constructs a new property within three years from the date of transfer. The three-year window is also available to those who buy an under-construction property. “Interestingly, these individuals are left with an additional one year to explore the option of investing in an under-construction project, provided the construction is likely to be completed within three years of the original transfer by the investor,” says Jhunjhunwala.
So, people like Maheshwari have the option of buying an under-construction property to claim LTCG tax exemption, provided the property gets completed within three years from date of transfer – September 2021 in this case. That’s the big challenge. If you invest in an under-construction property, you should get the possession certificate from your builder within three years. And going by so many project delays in the real-estate sector, banking on an under-construction project remains a challenge.
Alternatively, where the period of three years has expired, says Jhunjhunwala, “the government could also consider providing a special window for investment in specified bonds under Section 54EC of the Income Tax Act, i.e. bonds of NHAI, RECL, Power Finance Corporation Ltd, etc, to claim a deduction from the capital gains earned from sale of residential property.”
Whether the government will extend or relax the rules for people like Maheshwari has to be seen.
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