The need for a roof over one's head is as strong today as it was during the Megalithic Age. The difference now is in the kind of shelter we seek -- and the price we pay for it. Buying a house is up there on most people's to-do list.
Banks and lenders have, for some time now, been making it easy to get hold of the money needed for a room of one's own, and falling interest rates make it even easier. Most important, however, are the tax breaks and incentives that are provided to homebuyers.
We take a look at the ways in which the government encourages people to buy residential houses, particularly under Section 54 of the Income Tax Act.
Capital gains: Under Section 54, an individual or HUF taxpayer gets exemption from tax in respect of the long-term capital gains arising from the sale of his residential house, if he invests an amount equivalent to the gains on buying or constructing another residential house within a specified time. If the amount invested is lower than the capital gains income, the exemption is proportionate.
Under Section 54F, a taxpayer can get a similar benefit if he uses the long-term capital gains from the sale of any capital asset (other than a residential house) to buy or build a residential house within a specified time.
While Section 54 grants exemption with respect to reinvestment of the capital gains, Section 54F grants exemption with respect to reinvestment of the net consideration, that is, sales proceeds net of expenses incurred exclusively in connection with the sale, including brokerage, transfer fees, etc.
Reinvestment timeframe: The specified time permitted under both Section 54 and Section 54F for reinvestment is the same. If reinvestment is by way of purchase, it must be done either one year before or two years after the date of sale of the original capital asset. If reinvestment is by way of construction, it should be made within three years from the date of sale of original capital asset.
There is no need for you to reinvest the very same funds that you receive from the sale of assets; the exemption is judged on the basis of reinvestment of equivalent value. But in order to claim exemption under either section, it is compulsory for you to deposit the amount in a Capital Gains Account Scheme with a bank if this amount is not reinvested till the due date of filing return of income.
The amount so deposited has to be subsequently utilised for reinvestment within the specified time.
To be able to avail the exemptions under these sections, you will also have to fulfil certain other conditions when you reinvest the amount in another residential house within the specified period.
Only residences: Most importantly, the new purchase must be a residential house, no matter of what size and locality. You can avail of the exemption whether you buy a room in a chawl or a flat in a co-operative society or an apartment or a row house or a bungalow, whether in a metro city or at a hill station or in a small town or village. All that matters is that you buy a residential house.
The very fact that the income tax law permits acquisition by way of construction of property would suggest that the land beneath the house would also constitute a part of residential house. In the case of a flat in a co-operative society, the price paid for the land indirectly forms a part of the price paid for the flat.
The modern concept of a residential house is an evolving concept. It is not restricted to four closed walls with doors and windows, but encompasses the amenities, facilities and utilities that can be associated with the house. Structures like garages, servants' quarters, swimming pools, verandahs, lifts, play courts and gardens can be considered as part of a residential house, if they form part of the house or flat.
To avail the exemption, you don't necessarily have to live in the residential house that you buy. You can buy the house and leave it locked for most of the year and use it as a holiday home. Or you can lease it or rent it out to other residential users. But you must ensure that the end use of the house is for residential purposes; you cannot, for instance, buy a house and lease it to a doctor who converts it into a clinic.
Cost components: The quantum of qualifying investment (known as the cost of acquired house) can be determined keeping in view the concept of a house as explained above. Broadly, costs and expenses that are incurred or are necessary to be incurred till the date the property is occupied (by a residential user) can be regarded as qualifying investment in the acquisition of house for capital gains exemption. The qualifying components of cost will include:
However, any expenditure on furniture and furnishing, soft furnishings, decoration items, paintings, closing of lofts, etc., cannot be regarded as part of the cost of house. All recurring expenses such as repairing, painting, replacements, etc., will also not qualify as acquisition cost for claiming the exemption. Since the house will need to be owned by the taxpayer, the amount paid as premium for securing tenancy of the house is not likely to qualify as cost of the house.
The tax officer has the right to verify the genuineness of any expenses. So it's best that you maintain a record of all expenses in respect of which exemption is being claimed and preserve all the bills and proof of payments.
The taxpayer also has the option of claiming deduction under Section 80C for payments made in respect of repayment of borrowing or for stamp duty, registration fee and other expenses incurred during the transfer of such a residential house in his name.
The author is a member of Bombay Chartered Accountants' Society.