• Notification Date: 08-11-2021
• Notification No: 18/2021-22

How to save income tax on gains from the sale of property

I have sold my house in my home town and have shifted to Bangalore. It was originally a residential house. I inherited part of it and paid money to other members to get ownership of the full property. One younger brother’s portion was bought in 2018 at commercial rates showing his portion of 350 sq. feet as commercial as he asked full money by cheques and the rates matched with commercial rates. On 26th August 2021, the entire house was sold as residence cum commercial but the valuations paid for by buyers for the whole area was calculated much more than the circle rate applicable for residential property and was computed on commercial rates. The house was never given on rent and never any business activity was performed. My question is, I am 70 years old and if I invest the whole amount in a residential house, to claim capital gains exemption in a residential house then what will happen in case of a medical emergency? Please guide.

In respect of long-term capital gains on the sale of any capital asset, you are eligible to claim an exemption if you invest in buying a residential house. The quantum of the amount which you are required to invest differs depending on whether the asset sold is a residential house or a capital asset other than a residential house including commercial property. To claim exemption from long-term capital gains on the sale of a residential house property, you are required to invest only the amount of capital gains and that too after availing the benefit of indexation. In contrast, for availing long term capital gains exemption in respect of a commercial property you have to invest the whole of the sale consideration in a residential house. So if the property sold is a residential one, the amount of investment one has to make is significantly lower than what is required to be invested in the case of the sale of a commercial property.

I understand your problem. I feel there was no need for you to treat the property as commercial just to get higher consideration. There is no restriction under the law to sell your property above the circle rate and you could have sold this property as residential property at that rate. Since you have admittedly treated this property as commercial property in the sale deed, now you cannot claim that this is a residential property by the principle of estoppels. As a last resort, you can find out whether the same property is shown as residential or commercial property under the gram panchayat or municipal records.

To determine whether a property is to be treated as commercial or residential, the fact that it was never used for business or it was never let out is not relevant.