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I have sold a piece of non-agricultural land for ₹30 lakh on 15th April, 2022 which was bought by me in year 2000 for ₹10 lakh. Out of ₹30 lakh, I need ₹10 lakh for completion of my house which is under construction. Kindly suggest the best option to save tax on the full value of ₹30 lakh. Can I reinvest in a smaller piece of land costing about ₹16 to 18 lakh in addition to the ₹10 lakh towards completion of my house construction to save the tax?
There are two options for saving long term capital gains on sale of a non-agricultural land. You can either use one or both for claiming the exemption. First, exemption can be claimed under Section 54F by investing the sale consideration received on sale of the land for buying or constructing a residential house within prescribed time period. For claiming exemption in respect of investment in an under construction house, the law requires the house to get constructed within a period of three years from the date of sale of the land. The law does not stipulate anything about when the construction of the house should have been commenced.
So in my opinion, you can claim exemption in respect of capital gains attributable toward 10 lakh which you are planning to use for completing the under construction house as long as the same is completed within three years from the date of sale of the land provided you do not own more than one house on the date of sale of the land.
The amount of ten lakhs which you are planning to use for completion of the under construction house has to be used by 31st July 2023. Any amount remaining unutilised by 31st July 2023 has to be deposited with a bank under Capital Gains Account Scheme by that date. The amount so deposited can be used for making payment for the under construction house.
The second option is available under Section 54EC to invest in capital gains bonds of any of the specified financial institutions like Rural Electrification Corporation, National Highway authority, Indian Railway Finance Corporation and Power Finance Corporation within six months from the date of sale of the land. Please note that you are required to invest only the indexed capital gains attributable to the sale consideration of balance 20 lakhs.
There is no exemption available from long term capital gains by investing in land unless you wish to get a house constructed on it within the prescribed time limit of three years. Since you are planning to claim exemption in respect of your existing under construction house, you will not be able to claim exemption under Section 54F again for another house.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter