Section I: Income Tax and Your House

• Ques: Invest long-term capital gains from house property sale in another house to save tax
• Ans: Key points:
  • If you sell a residential property and invest the net capital gains (difference in the selling price and the indexed cost of the property) in purchase or construction of another residential property, then no income tax will be charged.
  • You should also fulfill the conditions mentioned below to save the tax on capital gains from sale of house property:
    1. The house, on which the capital gain has arisen, must have been held for more than 3 years.
    2. If you are "purchasing" a new house from the capital gains, then to save tax
       either you can purchase the new house within one year before you sell the old house (for e.g., if you purchased the new house on 31st January 2009 and you sold the old house on 30th January 2010, you can save tax on capital gains)
       or you can purchase the new house within two years after you have sold the old house
    3. If you are "constructing" a new house from the capital gains, then to save tax
       you can purchase the new house within three years after you have sold the old house
    4. You should not sell the new house within a period of three years from the date of purchase or construction.
  • If you sell any other asset and invest the full proceeds of sale in purchasing/constructing a residential house, then income tax on capital gains can be saved. You must hold the new house for at least 3 years.
• What is pre-construction period: The period starting from the date of borrowing till 31st March of the year immediately preceding the date of construction/acquisition is termed as pre-construction period. You can claim deduction of interest paid during this pre-construction period.
• What amount of pre-construction interest can be claimed as deduction: The interest for all the years during the pre-construction period is to be aggregated and claimed as deduction in five equal installments during five successive financial years starting with the year in which the construction/acquisition is completed. This deduction is not allowed if the loan is utilized for repairs, renewal or reconstruction.