A Tale Of Two Flats!

I bought a flat in Andheri in Nov 2000 Rs 14 lakhs. In May ‘06 I bought 2 under-construction flats (same building, same floor) in Kharghar 57 lakhs (loan of 51 Lakhs). I got possession in Dec ‘06. In March ‘07, I sold my Andheri flat for 30.5 lakhs. After repaying loan of 13 lakhs on that flat, gain was 17.5 lakhs (without adj for cost indexn). Am I eligible for capital gains exemption for full amount of gains under Sec 54 because I sold the Andheri flat within 10 months of purchase of Kharghar flats? Also what happens if I sell any of the Kharghar flats in future? Also can both the flats in Kharghar be treated as 1 unit and what happens if I let out only 1 of them ?Your Email advaaitaiyer@…………com

The section 54 , as it stands today, states that exemption from long term capital gain is allowed to individuals /HUF/AOP provided:

1. The property sold should be buildings or land appurtenant thereto,and must be residential house.
2. The income from such residential house must be assessed under income from house property.
3. The new property purchased must be residential house.
4. The new residential house is

• purchased within one year from the date of transfer of house sold ,Or ;
• purchased within two years after the date of transfer of sold house or;
• within three years constructed a residential house .

5. The amount of exemption will be to the extent of the cost of new house purchased or constructed.

I find that your purchase of new residential house one year before the sale is satisfied , therefore you should get the exemption.

Will You get Exemption On Two Houses?

In your case, you have purchased two flats . The provision contained in the Income Tax Act however mention the words “a residential house” . Therefore , purchasing two house on the same floor may not be regarded as purchasing one residential units because neither will the registration be done as one unit nor will the municipal record show it as one unit. Therefore, in my opinion ,you can claim the exemption in case of one unit only. Read this posting.

What happens if new flat is sold ?

The flat on which you claim exemption can not be sold within a period of 3 years from the date of purchase or construction, the capital gain on the new asset shall be shall be sale value as the cost is taken as NIL if capital gain was more than cost of the house and in case capital gain was equal less than the cost of house which is being sold now , the cost will be reduced by the amount of capital gain on earlier asset.