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Capital Gains Tax Exemption: A classic example of word play

As you know, you can get exemption from paying tax on your long term capital gains earned from the sale of assets such as residential property, shares, family business, farm house and more. Income Tax Act provides you with two alternatives to claim this benefit.

1.  Reinvest the gains / sales proceeds in a residential property or
2.  Invest the gains / sales proceeds in NHAI / REC bonds.

A detailed explanation of the same was covered in my earlier post 'Get Exemption from paying Capital Gains Tax'.

In the recent 2014-15 budget, a couple of significant amendments have been made in the relevant sections of the Income Tax Act under which this tax benefit can be availed.

One such change... regarding investment in the specified NHAI / REC bonds... has already been discussed in my blog post 'Govt. plugs Sec 54EC loophole'.

Let us look at the 2nd change [in sec 54 (sale of residential property) and sec 54F (sale of other assets)]. This deals with the tax exemption when the gains / sales proceeds are invested in a residential property.

The wordings in sections 54 and 54F mentioned that tax exemption can be claimed if the necessary amount is reinvested in "a residential house". This led to two kinds of disputes.

One was due to the simple word "a" that was deemed to include its plural meaning in a few verdicts passed by the Income Tax Applelate Tribunal. In other words, cases where gains was invested in more than one property too were granted the tax exemption.

Other was the absence of words "in India". Therefore, some people were of the opinion that tax exemption should be allowed even if someone invested the gains in a property outside India.

Both these ambiguities have now been removed. As clarified in the recent budget, this benefit was intended for one residential house within India. Accordingly, the sections 54 and 54F will now be amended and suitably reworded to include 'one residential house in India' to be eligible for exemption from paying capital gains tax.

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