A foreign home may not save your capital gains

I am an NRI living in the US. I booked a flat in March 2009 in a project and sold the old flat in September 2009. The agreement for the new flat was made in November 2009. Possession will be given in December 2011. Between March 2009 and February 2010, almost the entire amount of capital gain has been invested in the new project. Will I get capital gain tax benefit in this transaction and which of the two dates is relevant — booking or the agreement?    — Neetu
For saving capital gains tax on sale of property, the amount of capital gain has to be invested in another property. This has to be done within two years of date of sale. You have sold your old property in September 2009. By February 2010, you have invested the entire capital gain proceeds in new property. Hence you would not be liable to pay capital gains tax. The booking date, etc, is not relevant, the time within which the money is invested in new property is what is relevant.

I am senior citizen of India. My daughters are married and settled in Australia and the US. It has therefore become necessary to sell my property in India and buy small accommodation near one of the three daughters and live a retired life. My worry is over capital gains tax. I have come across a tribunal case law of Prema Shah which is in our favour. My problem is if the income-tax officer does not allow this, (because it is not a Supreme Court judgment), heavy penalties will have to be paid. Does the new tax law make it crystal clear? I shall be obliged for your guidance as I have no capacity to pay penalties or to fight the case.  — B S Jachak
While it is true that the Income Tax Tribunal in the case of Prema P Shah (Citation 282 ITR 211) has ruled that the exemption offered by Section 54 (saving long-term capital gain by investing in a house) can indeed be extended to a property purchased in a foreign country, there exists a diametrically opposite view in [2006] 6 SOT 721 (Ahd) ITAT Ahmedabad Bench D Leena J Shah vs Assistant Commissioner of Income-Tax, Circle 1(1), Baroda where it was held that the exemption is not available for purchase of property located abroad.

Consequently, we would not advise claiming exemption on property purchased abroad. In any case, in our opinion, the law seems to have been drafted in order to give a boost to the domestic housing sector. Buying immovable property abroad serves no purpose or benefit to the domestic economy and hence, though it is not spelt out, in spirit at least, we feel the law never intended for the benefit to be extended to purchase of properties located abroad.

The writer is director, Wonderland Consultants a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com