Is It Possible to Buy 2 Houses to Save Tax on Long-Term Capital Gains?

Section 54 of the Income Tax Act provides relief to individuals and Hindu Undivided Families (HUFs) from long-term capital gains (LTCG) tax if the gains are reinvested in a residential property. It is crucial to note that the exemption applies to the amount of capital gains, not the entire sale consideration. This distinction ensures that only the profit portion derived from the sale is eligible for reinvestment to claim tax exemption.

What Qualifies as Long-Term Capital Gains?

Capital gains arise when a capital asset, such as a residential property, is sold at a price higher than its indexed acquisition cost. However, with changes in tax laws, the benefit of indexation is no longer applicable while calculating exemption under Section 54. Therefore, taxpayers must invest the actual difference between the sale price and the original cost to claim the exemption.

Investment Requirement: 1 Residential House or 2?

As a general rule, the Income Tax Act mandates the reinvestment of LTCG in one residential house property located in India. However, the law allows a one-time exception to this requirement.

Under this exception, an individual or HUF can claim exemption by investing in 2 separate residential house properties, provided:

• The capital gains do not exceed ₹2 crores.

• The taxpayer has not availed of this benefit in the past.

• This option can be exercised only once in a lifetime.

Time Frame for Investment in the New Property

To be eligible for the exemption:

• The new residential property(ies) must be purchased within 2 years from the date of sale of the original house, or

• The purchase can also be made within 1 year before the sale, or

• If opting for construction, it must be completed within 3 years from the date of sale.

The flexibility in timing ensures that both prior and future purchases related to the sale can qualify for exemption as long as they meet the stated conditions.

Unutilised Gains and the Capital Gains Account Scheme

If the capital gains are not fully utilised for purchasing or constructing the new residential house(s) before the due date for filing the Income Tax Return, the remaining amount must be deposited in a Capital Gains Account Scheme (CGAS) with a notified bank. This deposit acts as a placeholder for the intended investment and preserves the eligibility for exemption.

Funds in this account must be used exclusively for the purpose of acquiring or constructing the new residential house property, and any withdrawal must comply with the rules laid out under the scheme.

Conclusion

While Section 54 provides substantial relief from tax on long-term capital gains, it is essential to strictly follow the prescribed conditions to claim the exemption. The option to invest in 2 properties instead of one can be a strategic benefit, but it is allowed only once and is subject to specific monetary limits.

This article is for informational purposes only and does not constitute tax advice. For personalised guidance, always consult a qualified tax professional.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.