Are you planning to buy a house in the next couple of years? There is a trick in the tax book that allows you to reinvest your capital gains, without paying any long-term capital gains (LTCG) tax, provided you use the money to buy a house or capital gains bonds. But for now, let’s just focus on your dreams of buying a house.

You need to safeguard all the taxable gains accumulated while selling shares, bonds, debt or equity mutual funds, and gold or diamond jewellery, by transferring the gains into a Capital Gains Account Scheme (CGAS). This can help you slash taxes by about 10-20 percent.

Not all gains can be saved in a CGAS. Only LTCG earned on selling the above assets can be utilized. What’s more, you need to hold your listed shares and equity mutual funds for at least 12 months before selling for your gains to be classified as long-term. If you hold unlisted and foreign shares, you need to hold on to them for at least two years before selling. Only then can you book the gains under LTCG.

Gains from selling debt mutual funds, and gold and diamond jewellery, can be classified as long-term only after a 3-year holding period.

You can avoid paying LTCG on such gains that are transferred to the CGAS if the same is used within two years of accrual to purchase a house, or three years to construct one (see graphic).

“The new immovable property needs to be purchased within two years from the sale of capital assets. If you are constructing a house, then three years are permitted to utilize the capital gains balance,” says Karan Batra, managing partner at CharteredClub.com, a taxation advisory.

A Hyderabad-based entrepreneur — who spoke to Moneycontrol on condition of anonymity — had amassed Rs 32 crore by selling the shares of his own company.  He saved the entire proceeds in a CGAS, and a year later, purchased a house for Rs 25 crore. Only the balance amount of Rs 7 crore was liable to tax, instead of the entire Rs 32 crore.

PARK THE ENTIRE AMOUNT, NOT JUST THE GAINS

Suppose you have invested Rs 1 lakh in stocks or a debt mutual fund, and you made a gain of Rs 80,000, then you will have to park the entire Rs. 1.8 lakh (principal + gains) in a capital gains account with any bank.

“One cannot just invest the gains made from the sale of the capital asset. The whole consideration has to be parked in the special account,” says Paras Savla, Tax Partner at KPB & Associates, a chartered accountancy firm.

You can utilize gains from the sale of both Indian as well as foreign shares. Even gains accumulated from selling unlisted shares can be utilized to build a corpus under the CGAS scheme.

At the end of the two-year period, you can use the amount to purchase a house or construct a house within three years by filling out Form C and withdrawing the CGAS balance.

CONDITIONS APPLY

But there are conditions laid out under the Income Tax Act of 1961, about availing of benefits under the CGAS. On the day you sell the shares or mutual fund units, you shouldn’t be owning more than one house property. And you need to use the amount to purchase a residential property. “You have to purchase a house using the amount. You cannot invest in land or commercial property,” says Savla.

Additionally, you would have to keep in mind the deadline for filing income tax returns to utilize the amount. “If you have sold the asset in September 2022, and your two-year period ends in September 2024, you would have to reinvest the gains and proceeds before filing your returns in 2024,” Batra adds. So, you need to reinvest by July 31, 2024, (non-audited) and not March 31, 2025.

HOLDING THE HOUSE

Having saved on taxes by reinvesting in a house, you cannot just sell the house and moonwalk away. Section 54 (F) of the Act says that you have to stay invested in the house for at least three years.

“If you sell the house before the end of three years, the entire tax benefit would be reversed. You would have to pay the tax, penalty and interest on the LTCG from the date of the sale,” explains Batra.

GETTING AROUND JOINT OWNERSHIP TO BUY HOUSES

You and your spouse might jointly own shares or mutual funds, but each of you wishes to reinvest these capital gains to buy a house.

The good news is that this doesn’t affect the taxation around house purchases. Fitness chain operator John Doe (name changed) said he and his wife worked this puzzle out in 2021 when they bought their dream homes.

“We had joint ownership in shares, which we sold. Later, we invested Rs 5 crore each in two separate houses last month. The transaction was planned so as to save maximum tax. We sought the help of a tax consultant, and this helped us save Rs 1 crore,” said Doe.

PLAN TO SAVE

While you can save taxes on the gains from the sale of capital assets such as shares, gold, and mutual funds, there are other ways of saving taxes as well.

“If you have invested in fixed deposits (FD) and do not need these funds in the immediate future, then you could instead park these monies in liquid mutual funds. While FD interest is taxable, income from the sale of liquid funds would be counted as capital gains and can be parked under CGAS,” suggested another chartered accountant.