Selling shares worth ₹3.1 crore to buy a ₹2.6 crore house. How much LTCG tax will I pay?

Full income-tax exemption under Section 54F of the Income-tax Act, 1961, is allowed only when you invest 100% of proceeds from the sale of listed shares in a residential house property. In case full sale proceeds are not utilised, then only a proportional exemption is allowed. Today's Q&A explains this rule further in response to a reader's query.

Under the grandfathering provisions, while calculating LTCG on the sale of listed shares, the closing price of such shares on 31 January 2018 was to be taken as the cost of the taxpayer. This grandfathering provision effectively makes appreciation till 31 January 2018 tax-free in your hands.

So, for computing the LTCG, the value of these shares on 31 January 2018 will be taken as your cost, and therefore your LTCG would be ₹1.50 crore, presuming you are able to sell these shares for ₹3.10 crore (₹3.10 crores market price – ₹1.60 crore being the market price of the shares on 31 January 2018).

The amount of LTCG will change if the shares are sold at different prices. I have not taken into account the initial long-term capital gain of ₹1.25 lakh into account, which is taxed at zero rate, for the convenience of calculation.

Section 54F provides for exemption in respect of LTCG arising on sale of any asset other than a residential house, provided the net sale proceeds from such capital asset are utilised for acquiring a residential house property within a prescribed time period. Please note that this exemption is not available if you own more than one house, except the house with respect to which the exemption is being claimed.

In case the full sale consideration is not utilised, the exemption available will come down proportionately.

Presuming that you are buying a house for ₹2.60 crores against the net sale price of ₹3.10 crore, your exemption will come down to approximately ₹1.26 crore (2.60/3.10*1.50 crore).

You will have to pay tax at 12.50% on the balance of ₹24 lakh.