Roll over benefit for purchase of property as per Income Tax Act

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Buying a residential property could help one save on taxes by taking the benefits available under certain beneficial provisions of the Income Tax Act, 1961. Section 54 and 54F of the act prescribe rollover benefits that are available in case of property purchases. These beneficial provisions are available only to an individual or HUF.

Section 54 provides for exemption of capital gains on transfer of a residential property (after holding it for a minimum of three years) and requires the seller to buy another residential property, while Section 54F can be availed where any long-term capital asset (other than a residential property) is sold and a residential property is acquired within the time limit prescribed for acquiring (one year prior to transfer or two years after transfer) or constructing the new property (within three years of transfer).

The basic difference between the two sections is that Section 54 requires investment of gains, whereas Section 54F calls for the investment of sales consideration into the new residential property.

Courts have taken different stands in granting rollover benefits in case of transfer of multiple residential properties and investment into one or transfer of single property and investment into multiple residential properties. To bring in clarity, both these provisions were amended and accordingly the phrase ‘a residential house’ was replaced by ‘one residential house’.

Though there is still doubt whether several units in one building/compound would qualify as one residential house. Courts have held, including in a recent Delhi High Court ruling, that several independent units in a building could constitute a residential house property if they are built in such a way that they can be used as a residential property by an assessee and his/her family members.

Another common query in this respect is can similar benefits be enjoyed even in case of property investments made outside India? The courts have earlier held that even if a residential house property is acquired outside the country, rollover benefits will be available. But the law now states that any property purchased for claiming rollover benefits should be based in India.

In case there is a gap between transfer of property/asset and acquisition of new residential house property, the transferor will have to deposit the unutilised gains/net consideration, as the case may be, in a capital gains account scheme with specified nationalised banks. The amount can be withdrawn from this account for the purpose of acquisition/construction of residential house property.

The courts have taken a lenient view in cases where construction could not be completed in time for no fault of an assessee and granted rollover benefits by considering the intent of these beneficial provisions.

Delhi High Court, in a recent ruling, held that the rollover benefits specified under Section 54 and 54F could be claimed even in case of joint development agreements (JDAs) wherein a landowner hands over a building or land and receives constructed area in lieu thereof.

Rollover exemption provisions have been given a liberal interpretation, considering the intent of the lawmakers to encourage ownership of residential house property. The recent amendments are aimed at plugging the loopholes and avoid abuse of such provisions.

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