LTCG Exemptions for Home Buyers in Interim Budget 2019

What is Capital Gain?

Capital gain is any profit or gain that arises out of the sale of a capital asset. It is considered as an income, and therefore is subject to income tax in the year in which the capital asset transfer takes place. Capital gains tax can either be short-term or long-term. In case an asset is inherited, then capital gains are not applicable because in that case it is a transfer and not a sale, and the Income Tax Act has exempted capital assets that are received as gifts through will or inheritance.

LTCG exemptions in Budget 2019

In the new Budget for the financial year 2019-2020, Finance Minister Piyush Goyal has announced a proposal to increase Long-Term Capital Gains (LTCG) benefits, by making the sale of a house from one to two residential houses.

The current income tax laws state that if an individual invests the capital gains in one new house property, the person can save tax on LTCG arising from the sale of the house. But after the Parliament passes this Budget proposal, a taxpayer can invest the gains in two residential house properties and save tax. This LTCG tax benefit can only be availed if the capital gains obtained from the sale of the residential house property doesn’t exceed above Rs. 2 crores, and this benefit can only be availed once in a lifetime.

This means that if an individual sells a house which leads to long-term capital gains of Rs. 1 crore, you can invest the capital gains of Rs. 1 crore for buying two residential houses instead of just one, and save income tax on LTCG arising from the sale of a house. Again, this benefit can be only availed once in your life.

In the current situation, if an individual wants to save tax on LTCG from the sale of property, he/she can invest in another residential house property, or by constructing another house, or else investing the gains in 54EC capital gains bonds. To save LTCG tax, an individual needs to buy a house within two years after the date of sale, or construct the house within three years of the same.

The Budget of 2017 had reduced the holding period for capital gains to qualify for long-term, to two years. And the Budget of 2018 has increased the same holding period to five years and has also limited the definition of the capital asset only to building and land.