I sold my apartment in FY23-24 and put the capital gains from the sale (long-term gains) in the Capital Gains Account. Now, I am constructing the house on my land (in FY23-24) and wish to pay the builder from the Capital Gains Account amount — toget an exemption on capital gains under section 54. However, the builder asks me to pay 18 per cent GST if I make such a transaction i.e., pay the builder from my capital gains account. My query is,

(1) Am I indeed liable to pay 18 per cent tax rates or is there any catch? Because, if that is the case, then effectively,section 54 gives a 2 per cent exemption (as normal tax would have to be 20 per cent after indexation and with section 54 it’s 18 per cent in the form of GST)

(2) What are the ways to exempt/lower this tax liability?

Siddhartha

We assume that the house property sold by the individual is a long-term capital asset and certain funds have been invested in Capital Gains Accounts scheme to claim exemption under the Income-tax Act, 1961 (the Act) for Financial Year 2022-23 i.e. April 1, 2022, to March 31, 2023.

As per section 54 of the Act, an individual selling a residential property can avail tax exemptions from capital gains if such gains are invested in purchase or construction of residential property. The seller should purchase a residential house either one year before the date of sale/transfer or two years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, i.e. the seller will have to construct the residential house within three years from the date of sale/transfer. There are other conditions that also need to be met along with the above.

There might be circumstances where an individual is unable to use the full or partial amount of the sale proceeds to invest in the purchase or construction of a new house property before the tax filing due date. In such cases, the capital gain deposit account scheme can be used. An individual can deposit the amount in such accounts and then use the proceeds completely or partially to purchase or construct a residential house property within the stipulated timelines to claim tax exemption.

Additional exemption could be availed through section 54EC of the Act. As per said provisions, if the profit made on sale of a long-term capital asset — whether an immovable property or others — is invested by the individual taxpayer in ‘long-term specified assets’ within six months of the sale, then the capital gains are exempt from taxation. The ‘long-term specified assets’ referred to here are government notified bonds and securities, such as those released by the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). However, an individual can invest maximum up to ₹50 lakh under such bonds. Such amount is to be invested within six months of sale of asset. Further, interest received/accrued on such bonds would be subject to tax.

Separately, any balance capital gains amount would be subject to tax @ 20 per cent excluding surcharge and cess.

As regards payment to the builder for construction of your house property, generally, the builder quotes the cost of construction/consideration amount inclusive of Goods and Services Tax (‘GST’) as per the applicable rates. Therefore, payment to builder could be inclusive of GST. Please note the quantum and applicability of GST would depend on the nature of each such transaction.

Please note the levy of GST and the exemption of capital gains are separate independent transactions, i.e. GST is an indirect tax levy on purchase/construction of house property and it is separate from the income-tax applicable on the sale of house property.

The writer is a Partner with BDO India LLP

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