Maximize Your Section 54 LTCG Exemption on a New Home: Key Reporting Tips for Joint Property Owners
You can sell a jointly owned property and still qualify for long-term capital gains (LTCG) tax exemption, even if you financed the entire purchase. According to tax experts, if you can prove that the funds for the original property came solely from you, the new property does not need to be jointly owned with your spouse to claim the exemption.
Joint Property Sale and LTCG Exemption
Shubham Agrawal, a Senior Taxation Adviser at TaxFile.in, stated that if an individual financed the entire joint property purchase, they would be considered the 100% beneficial owner. Consequently, the new property purchased through reinvestment can be registered solely in their name.
When selling a jointly owned property, it is crucial that the buyer deducts the full TDS against your PAN alone. You must report the entire sale proceeds and the resulting capital gain in your income tax return. Proper documentation of the payments made for the original purchase is essential to establish that the entire investment was funded by you. Additionally, the property sale may appear in your spouse’s Annual Information Statement (AIS) on the income tax portal, as this information is sourced from the sub-registrar. In such cases, your spouse should indicate on the portal that the transaction relates to another PAN or family member to avoid receiving a notice for unreported income.
What is Section 54 to Save Tax on Long-Term Gains from Selling a House?
Section 54 offers relief from long-term capital gains tax when an individual or Hindu Undivided Family (HUF) sells a residential house and reinvests the capital gain in another residential house in India. This exemption allows individuals to avoid a tax burden when transitioning from one home to another.
To qualify for the Section 54 exemption, the property sold must be a long-term capital asset and a residential house property. The holding period for the property must be at least 24 months. For example, if a house is sold before completing 24 months of ownership, the exemption cannot be claimed.
The taxpayer can purchase another residential house within one year before or two years after selling the old property. Alternatively, a new house can be constructed within three years from the date of transfer. The replacement property must be located in India, and a house purchased before the sale can also qualify if it was bought within the one-year window.
The exemption is limited to the lower of the capital gain or the amount invested in the new residential house. If the capital gain is Rs 1 lakh but only Rs 80,000 is invested in the new property, the exemption will be Rs 80,000. There is also a provision allowing investment in two residential houses, but only if the long-term capital gain does not exceed Rs 2 crore.
From Assessment Year 2024-25, if the cost of the new residential property exceeds Rs 10 crore, the excess amount is ignored when calculating the Section 54 exemption. If the capital gain is Rs 13 crore and a new house is purchased for Rs 14 crore, only Rs 10 crore can qualify for the LTCG exemption.
If the capital gain has not been utilized to purchase or construct the new house by the time the income-tax return is filed, the unutilized amount can be deposited into the Capital Gains Deposit Account Scheme. This allows the taxpayer to claim the exemption while getting additional time to purchase or construct the replacement property. The deposit must be made by the due date for filing the return; late deposits do not qualify for the exemption.
Section 54 comes with a lock-in condition. If the new house is sold within three years of purchase or completion, the earlier exemption is withdrawn. The exempted capital gain is deducted from the cost of the new house when calculating its capital gain.
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