Say there is a case where you have purchased a house on 1-1-2005 and then purchased another one, 1 year before the purchase of the original one or two years after the purchase of the original one, in this case from 1-1-2004 to 1-1-2007 and have also sold off the original house.
In this case the capital gains that arise from the sale of your original property will not be charged directly but rather dealt with in a different manner which is as follows:
- Say the capital gains are greater than the cost of the new house. In this case the capital gains will only be computed on the difference. So if the profit from the sale of your original house is 20 lakhs and the new house is just for 10 lakhs then the tax that you have to pay will be on 10 lakhs. However if you buy a third house then the cost of the second house for the purpose of capital gains calculation will be 0.
- If the capital gain or profit that accrues from selling the original house is less than the cost of the new house then there will be no capital gains chargeable to tax at all.
- Now say you do not use the entire amount of capital gains towards building or buying a new house, in this case you will need to deposit the money in a specified account for getting exemption. There are rules applicable on when and how much you can withdraw from this account and these are to be followed after seeking legal counsel.
The above explanation is found from Section 54 of the Income Tax Act however this is just an indicative explanation of the act and serves to act as guidance when you are thinking about making such a transaction. Please seek legal counsel to get exact details on how the tax liability would be in your specific case from legal experts before engaging in any transaction of the above nature.