Planning house sale after redevelopment: Is the magic number 2 years or 3 for LTCG exemption?

Selling a property after its redevelopment and saving tax on the long-term capital gains (LTCG) can be tricky unless you consult a tax expert or familiarise yourself with relevant tax rules. But don't worry, if you are planning such a sale. Today's Q&A will clarify the situation in which the LTCG tax exemption applies.

The income tax law allows an individual and a Hindu Undivided Family to claim exemption for long-term capital gains arising from the sale of a residential house, by investing the long-term capital gains to buy or construct another residential house within the prescribed time frame.

The law also requires you not to sell or transfer the newly acquired property before completion of three years, else the long-term capital gains claimed exempt earlier are reduced from your actual cost of the newly acquired house, thereby effectively reversing the exemption claimed earlier.

If the house is transferred within two years, the whole of the capital gains, including the appreciation in the price of the newly acquired house, get taxed as short-term capital gains.

However, if the house is sold after two years but before completion of three years, the capital gains shall be taxed as long-term capital gains, but the actual cost of the house for computing the capital gains shall be reduced by the amount of long-term capital gains claimed exempt earlier.

In respect to a redeveloped residential property, this exemption is already availed by you when you got possession of the redeveloped house.

Let us understand it with an example.

The market value of the redeveloped property was ₹70 lakh at the time of possession and you claimed long-term capital gain exemption of ₹30 lakh against the redeveloped property. If you sell this property within two years for ₹75 lakh, your short-term capital gains would be ₹35 lakh (₹30 lakh of long-term capital gains exemption claimed earlier and ₹ 5 lakh for appreciation in the price of the redeveloped property). If you sell the property after two years but before three years for the same price of ₹75 lakh, your profit of ₹35 lakh shall be treated as long-term capital gains.

Tax treatment based on when the redeveloped property is sold

Disclaimer: The views and opinions expressed above are those of respective experts/commentators and do not reflect the views of Upstox. The above Q&A is only for informational purposes and should not be considered investment or tax advice from Upstox. Please consult a tax expert for your complex tax problems.