Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

GLOBALISE YOUR INVESTMENTS!

Sell a Land in Ahmedabad & Enjoy Tax Exemption

Via Investment of an Apartment in London!

It may appear too good to be believed, but it is true! With the Foreign Exchange Management Act (FEMA) having liberalized remittances by resident Indians for their annual overseas investments upto US $ 2,00,000 and with the Income-tax Act enabling tax exemption of long term capital gains (LTCG) in case of an investment made in either the purchase or construction of a residential house, you can now plan to sell your land in Ahmedabad and invest funds even in a London apartment so as to enjoy tax holiday.

Under Section 54 of the Income-tax Act, an exemption is available to a taxpayer who is an individual or a Hindu Undivided Family, in respect of the transfer of a residential house (whether self-occupied or let out) held for more than 36 months, where the capital gains arising from the transfer are invested either for the purchase of another residential house (whether old or new) within a period of one year before or two years after the date of transfer or the construction of another residential house within a period of three years after the date of transfer.

Under Section 54F, a similar exemption is available in respect of the transfer of any long term capital asset other than a residential house (e.g. land, jewellery, securities etc.), where the net consideration arising from the transfer is invested either for the purchase or construction of a residential house. This exemption will, however, not be available in a case where the taxpayer owns more than one residential house, on the date of transfer of such long term capital asset.

It is important to note that neither Section 54 nor Section 54F prescribe any restriction in regard to the location where the investment in the residential house is required to be made. Thus, the house to be purchased or constructed by the taxpayer, for the purpose of availing the LTCG tax exemption, can be either in India or even overseas. All that is required to be ensured is that the investment in the house should be completed within the time limit as prescribed.

Even the Mumbai Bench of the Income-tax Appellate Tribunal has, in the case of ‘Mrs. Prema P. Shah vs. ITO’ 100 ITD 60(Mum.), held that the language of Section 54 does not exclude the right of the taxpayer to claim exemption in respect of a residential property purchased in a foreign country, if all other conditions laid down in the section are satisfied.

BENEFIT OF LIBERALIZED REMITTANCE SCHEME

This provision of the Income-tax Act has opened new opportunities for availing tax exemption, more particularly after the Reserve Bank of India (RBI) announced the Liberalized Remittance Scheme for resident Indians upto US $ 2,00,000 per financial year, for any current or capital account transaction or a combination of both. Under this facility, resident Indians are free to acquire and hold immovable property or shares or any other asset outside India without prior approval of the RBI. Indian residents are now also permitted to maintain and hold foreign currency accounts in their name with any bank outside India for making remittances under the scheme.

And if you are keen to invest even more than US $ 2,00,000 in your new dream home overseas, you need not be disappointed. Just remember that the RBI limit of US $ 2,00,000 is applicable per financial year. That means, you can invest US $ 2,00,000 before 31st March, 2011 and again remit US $ 2,00,000 in April, 2012. In this case, your tax exemption for the LTCG arising in FY 2010-11 will still remain intact, because you would have completed the investment before your due date for filing your tax return in July, 2012.

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