CA Ruchika Bhagat, MD, Neeraj Bhagat & Co

Ruchika Bhagat carries the legacy forward with an aim to promote Strength, Inspiration, Entrepreneurship, and a focussed vision to take the business to new heights, after Mr. Neeraj Bhagat- Founder, Neeraj Bhagat & Co. passed away on 4th May 2021.  Neeraj Bhagat & Co. which is an ISO 9001: 2008 UKAS certified organization was founded by Late. Mr. Neeraj Bhagat in 1997. Since its inception in July 1997, Neeraj Bhagat & Co has been serving its clients successfully with a commitment towards adding value and optimizing their business goals.  As an integrated team of financial analysts, payroll specialists, and certified business accountants, the Company shares skills, insights, and resources, and is well known for providing top-notch accounting support to industry clients based on a deep understanding of business.  Our clients include domestic and international entities of various sizes across diverse industries worldwide.

 

Buying a home is one of the important financial decisions of an individual. As it is truly said, “There is no satisfaction, no greater gratification, than that you receive when you close on the purchase of your own home.”

Buying a dream home is not a cakewalk, at times one has to sell off some of the important assets like stocks, gold, mutual funds etc. to buy a home. Therefore, proper tax planning is required at the time of selling assets and then on the purchase of the property. Indians have a tendency of buying gold not only as a piece of jewellery but also for investment. And when it comes to buying a home, gold is always a good option to be used as its value is always appreciated.

Three important rules for selling gold to purchase house property:

  • Check whether the selling of gold attracts long-term or short-term capital gains.
  • The time period within which sale proceeds of gold are to be utilized for the purchase of the property.
  • Ascertaining the amount to be utilized for the purchase of the property so that maximum tax benefit can be claimed

So as per golden rules first the time period of holding gold need to be ascertained, in case it is held for less than three years then it will attract short-term capital gains and no tax exemption is available on investing the sale proceeds in the purchase of house property. But if it is held for more than three years and then sold then long-term capital gains are attracted. In such cases, if assesses purchases house property within a specified time then he can claim an exemption under section 54F.

Section 54 of The Income Tax Act

Under Section 54F of the Income Tax Act, one can claim income tax exemption on net wealth gained from the sale of capital assets such as stocks, bonds, gold etc., but other than a house property. However, the claim can be possible only if the whole money received from the gold sale proceeds is used for buying of a residential property.

Condition for availing exemption under section 54F

    • The assesses must be an individual or HUF.
  • The asset transferred must be any long-term capital asset other than a residential house property.
  • The net consideration received on the transfer of long-term capital assets must be utilized in the following manner:

1] Buying a new residential property one year before the sale of the capital asset; or

2] Purchasing residential property within two years from the sale date of the capital asset; or

3] Build/Construct a residential property within three years from the sale date of the capital asset.

Exemption  under Section 54F of Income Tax

The exemption amount under Section 54F of the Income Tax Act depends on the proceeds spent on a property. Here are two different scenarios for tax exemption under this section:

Scenario 1

If a person decides to utilize the entire net consideration towards purchase of house property or construction, the whole amount of long-term capital gain is tax-exempt.

Scenario 2

If a person decides to utilize the proceeds partially, then the tax exemption will be applicable partly. In this case capital gain exemption will be computed as follows.

Exemption = Long term capital gain * Amount re-invested / Net consideration

*Net Consideration means Sale consideration less expenditure on such sale such as Brokerage

Exemption Under Section 54F Is Not Applicable

There are a few situations in which exemption under Section 54F are not applicable. 

  • If an individual already has more than one house property in his own name as on the date of transfer of gold.
  • If a taxpayer constructs an additional property in less than three years from the date of sale of gold.

The assesses purchases additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of one year from the date of transfer of gold.

Keeping these points in mind will help taxpayers claim tax exemption u/s 54F of the Income Tax Act without any hassle.

Deposit in Capital Gain Account Scheme

If the sale proceeds of gold are not re-invested within the last date of filing of return of income. Then, the assesses is required to deposit the unutilized amount into the capital gain deposit account scheme. The unutilized amount deposited into the account can be used for purchasing or constructing the residential house within the period of two years or three years as the case may be. In such case he will be getting tax exemption as discussed earlier. But  if the assesses fails to utilize the amount within the specified period of two or three years, then, the unutilized amount would be treated as capital gain on proportionate basis based on exemption claimed earlier as per clause (a) and clause (b) of Section 54F(1) in the previous year

In which the period expires.

Circumstances under which Section 54F Exemption would be withdrawn

Circumstances under which Section 54F exemption would be withdrawn 

The assesses cannot transfer the newly purchased or constructed residential house for a period of three years from the date of purchase or date of construction, as the case may be. 

Amount deposited in capital gain account scheme has to be utilized within two years in case of purchase or three years in case of construction.

In above cases the capital gain exempted under section 54F would be withdrawn and  long-term capital gain  will be charged to tax in the previous year in which the residential house is transferred or when three years of date of deposit in Capital Gain Account Scheme expire.

Conclusion 

The provisions of Section 54F clearly provides that the exemption will be available only in case of buying of residential property within a period of 1 or 2 years or constructing a residential property within a period of 3 years from the date of sale of gold.

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