Individuals

Exemption from Capital Gains on sale of property under Section 54 – should you buy property in name of relatives/spouse if you want to avail capital gains exemption

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Most tax payers in India have encountered a situation where they have sold an earlier property and earned substantial capital gains on the same. This amount is to be invested in acquisition/construction of another property within three years in case of construction of new property and a period of 1 year before sale (of old property) and two years after sale, to enable the capital gain to be tax free (Section 54F).

In India, it is common for assessee’s to purchase properties in names of close relatives and more typically in the name of spouse or jointly with their spouse.

However, Delhi ITAT has ruled in the case of Kaushal Kishore Maheshwari that the assessee would not be entitled to deduction as the sale proceeds were invested in name of spouse who was a separate tax payer.

Considering this adverse ruling, it may be advisable that the new property should be in the name of the same assessee (or joint assesses) who have earned the capital gain on sale of the first property to avoid any tax demands. This is even more relevant if the spouse/other person is a separate tax payer.

There have been alternate judgements that permit exemption from capital gains even when property is purchased in name of others, it is also possible that higher courts may take a more lenient view of the case. However, individual assesses may wish to exercise caution to avoid unwarranted litigation with the tax department.

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