The Finance Bill, 2007, says that by opting right time to make long-term capital gains, it is possible to make differences in terms of taxation under the Income-tax Act, 1961. Investors having long-term capital gains can receive gains after October 1 in a financial year.
Suppose, you sell a your residential house for Rs 2 crore and the indexation cost is Rs 40 lakh, say, so you can make a long-term capital gain of Rs 1.60 crore. Now, if you do not want to buy another residential house and want to save income tax as well, then you have the option to invest your capital gain in the capital gains bonds for a minimum period of three years as provided for in section 54EC of the Act.
But, this investment is restricted to Rs 50 lakh per financial year and such investment has to be made within six months from the date of sale of the house.
If sell your same house in September 2007, you can invest upto Rs.50 lakh in these bonds and the balance of Rs.1.10 crore will be subject to income-tax. But, if you sell your house in November 2007, then you can invest Rs.50 lakh in bonds before 31.3.2008 and make a further investment of Rs.50 lakh in bonds during April 2008 as you will still be within the period of six.
Hence, you will be taxed on Rs.60 lakh only instead of Rs.1.10 crore i.e. you could save upto Rs.11.33 lakh by way of tax by selling your house after October 1. It is recommended to invest in the bonds by April 1 so as to avoid last day difficulties such as availability and allotment of bonds.
There is also another option to avoid payment of income tax on long term capital gain on transfer of property used for residence is provided in section 54 of the Act. Here, the period is of one year for capital gain to be invested in purchase of a new residential before the transfer or two years after the transfer or by constructing a residential house within three years after that date.
If you do not want to invest the whole capital gain, then the tax benefit, available only to an individual or Hindu Undivided Family, would be in proportion to the amount invested as laid down in the Act.
As per section 54, if the capital gain is not utilized for purchase of the new residential house prior to the next due date of furnishing the income-tax return, then the capital gain is required to be deposited in an account under the Capital Gains Account Scheme with any authorized bank.
While making investment in a residential house under section 54, the person has to hold the new residential house for a minimum period of three years, failing which the tax benefit could be lost.