Profit on sale of property used for residence.

82(1)

Where an individual or Hindu undivided family––

• (a) has long-term capital gains arising from the transfer of a capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (original asset); and
• (b) has within one year before or two years after the date of such transfer purchased, or has within three years after that date constructed, one residential house in India (new asset), then, instead of the capital gain being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (i) if the capital gains exceeds the cost of the new asset, such excess shall be charged under section 67, and for computing capital gains arising from the transfer of the new asset within three years of its purchase or construction, the cost shall be nil; or (ii) if the capital gains is equal to or less than the cost of the new asset, no capital gains shall be charged under section 67 and for computing capital gains from the transfer of the new asset within three years of its purchase or construction, the cost shall be reduced by the amount of the capital gains.

82(2)

If the capital gains is not used by the assessee to purchase the new asset within one year before the transfer of the original asset, or is not utilised for the purchase or construction of a new asset before filing the return of income under section 263, then—

• (a) the unutilised amount shall be deposited in a specified bank or institution and utilised as per the scheme notified by the Central Government;
• (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under section 263(1); and
• (c) the proof of deposit shall be submitted along with the return on or before the due date of filing of the return.

82(3)

For the purposes of sub-section (1), the amount, already utilised for purchasing or constructing the new asset, together with the deposited amount under sub-section (2) shall, subject to sub-section (7), be deemed to be the cost of the new asset.

82(4)

If the amount deposited under sub-section (2) is not fully utilised for purchasing or constructing the new asset within the period specified in sub-section (1), then,—

• (a) the unutilised amount shall be charged to tax under section 67 as the income of the tax year in which the period of three years from the date of the transfer of the original asset expires; and
• (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.

82(5)

If the capital gains under sub-section (1) does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

• (a) for the purposes of sub-section (1)(b), “one residential house in India” shall be read as “two residential houses in India”; and
• (b) for the purposes of sub-sections (1)(b) and (2), “new asset” shall mean two residential houses in India.

82(6)

If during any tax year, the assessee has exercised the option mentioned in sub-section (5), he shall not be entitled to exercise such option for the same tax year or any other tax year.

82(7)

If the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of sub-section (1).

82(8)

If the capital gains on the transfer of original asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of sub-section (2).

Explanation

Section Summary:

Section 82 of the new income tax law provides relief to individuals and Hindu Undivided Families (HUFs) on long-term capital gains (LTCG) arising from the sale of a residential property. The section allows taxpayers to reinvest the capital gains into purchasing or constructing a new residential property in India to avoid immediate tax liability. The law also introduces provisions for depositing unutilised capital gains in specified accounts and extends the option to purchase two residential houses under certain conditions.

Key Changes:

1. Option to Purchase Two Residential Houses: Taxpayers with capital gains up to ₹2 crore can now opt to purchase or construct two residential houses in India, instead of one, to claim exemption under this section. This option can be exercised only once in a lifetime.
2. Deposit Scheme for Unutilised Gains: If the capital gains are not fully utilised for purchasing or constructing a new property, the unutilised amount must be deposited in a specified bank or institution as per the government-notified scheme.
3. Cap on Exemption: The exemption is capped at ₹10 crore for both the cost of the new asset and the capital gains from the original asset. Amounts exceeding ₹10 crore will not qualify for exemption.
4. Timeframe for Utilisation: The new asset must be purchased within one year before or two years after the sale of the original asset, or constructed within three years after the sale.

Practical Implications:

1. Taxpayers: Individuals and HUFs selling residential property can defer or avoid capital gains tax by reinvesting the proceeds into one or two new residential properties, subject to the ₹2 crore and ₹10 crore limits.
2. Compliance: Taxpayers must ensure timely reinvestment or deposit of unutilised capital gains to avoid tax liability. Proof of deposit must be submitted with the income tax return.
3. Lifetime Option: The option to purchase two houses is a one-time benefit, and taxpayers must carefully evaluate whether to use it.

Critical Concepts:

1. Long-Term Capital Gains (LTCG): Gains arising from the sale of a residential property held for more than 24 months.
2. Original Asset: The residential property sold, which generates the capital gains.
3. New Asset: The residential property purchased or constructed using the capital gains.
4. Deposit Scheme: A government-notified scheme where unutilised capital gains must be deposited if not reinvested within the specified timeframe.

Compliance Steps:

1. Reinvestment: Purchase or construct a new residential property within the specified timeframe (1 year before, 2 years after, or 3 years for construction).
2. Deposit Unutilised Gains: If the capital gains are not fully reinvested, deposit the unutilised amount in a specified bank or institution before filing the income tax return.
3. Submit Proof: Attach proof of reinvestment or deposit with the income tax return.
4. Exercise Option for Two Houses: If applicable, declare the option to purchase two houses in the tax return.

Examples:

1. Single House Purchase: Mr. A sells his residential property for ₹1.5 crore, resulting in LTCG of ₹1 crore. He purchases a new residential property for ₹1.2 crore within one year. The entire ₹1 crore is exempt from tax, and the cost of the new property for future capital gains calculation will be reduced by ₹1 crore (₹1.2 crore - ₹1 crore = ₹0.2 crore).
2. Two Houses Purchase: Ms. B sells her property for ₹2.5 crore, with LTCG of ₹1.8 crore. She opts to purchase two residential houses for ₹1 crore each within two years. The entire ₹1.8 crore is exempt, and the cost of each new property for future capital gains calculation will be reduced proportionately.
3. Unutilised Gains: Mr. C sells his property for ₹3 crore, with LTCG of ₹2 crore. He purchases a new property for ₹1.5 crore and deposits the remaining ₹50 lakh in a specified account. The ₹1.5 crore is exempt, and the ₹50 lakh will be taxed if not utilised within three years.

This section provides flexibility and tax relief for reinvesting capital gains from residential property sales, but taxpayers must adhere to strict timelines and compliance requirements to avail the benefits.