The benefit of exemption spans across varied capital gains arising on transfer of any long-term capital asset.

Taxpayers can reap the benefit of tax exemption on capital gains if these are invested in various schemes introduced by the government. The Income Tax (I-T) Act grants total/ partial exemption of capital gains under various schemes. The benefit of exemption spans across varied capital gains arising on transfer of any long-term capital asset, i.e., capital gains arising from the sale of a house property, agricultural land, compulsory acquisition of land, plot of land, etc.

Exemption can also be claimed on sale of any other long-term capital asset (other than aforesaid). However, the claim of exemption is primarily dependent on type of long-term capital asset and secondly, on the underlying asset in the investment undertaken. Accordingly, the taxpayer becomes entitled to claim exemption under Sections 54, 54B, 54D, 54EC, 54F, 54GB of the Act.

Sale of assets other than house property

A blanket exemption is available upon sale of any type of long-term capital asset where the amount of capital gains is invested in specified bonds within six months of date of transfer the asset, which was held for a period of three years or more. Alternatively, another option exists for those who desire to invest in a residential property and not in specified bonds to claim exemption of gains arising from sale of any long-term capital asset except a residential house. Such taxpayers can claim exemption if they purchase a residential house property one year before or two years after the transfer of the property or construct within three years a residential house.

Capital gain exemption is not restricted to investment in a house property. Three different alternatives: specified bonds, residential house, equity shares are available for taxpayers selling a residential house property depending upon their choice and fulfillment of conditions. Similarly, exemption on capital gains arising from sale of agricultural land, compulsory acquisition of land is available upon investment in the specified asset.

Complications in claiming exemption

Many taxpayers have encountered difficulty in availing these exemptions. Certain positions are unclear and may be litigated by the tax authorities. Joint ownership can be a possible area of litigation wherein tax authorities may seek to deny the benefit on the basis of this single contention. Taxpayers have usually achieved favourable view on this issue from authorities at a higher level.

Many other issues ranging from date of investment, sale or purchase of more than one property, investment in under-construction property, possession not received within the specified time, purchase of specified bonds before the sale of property, claim of exemption under two different sections simultaneously may pose a challenge in claiming exemption. Taxpayers may have to deal with a dilemma in selection of the investment options provided by the Act, i.e., purchase of house or specified bonds.
With the Interim budget 2019, the government has taken steps to ease the aforesaid complexity. For improving real estate affordability and availability of accommodation, the benefit of capital gains exemption under Section 54 was increased from investment in one residential house to two residential houses for a taxpayer having capital gains up to Rs 2 crore. However, this benefit can be availed once in a lifetime.

Also read: Income tax filing: Know which ITR form is right for you

Exempting the capital gains with the help of these incentives is pivotal for the health of the economy and the investors. Designing of these incentives have been undertaken to remove the genuine hardships of the taxpayers.

The writer is executive director, Nangia Advisors (Andersen Global). Inputs from Radhika Arora