Saved tax by selling your house? Violating this 3-year rule could lead to a notice.

Capital Gains Tax: Have you claimed a tax exemption under Section 54 or 54F after selling an old house? Violating the 3-year lock-in rule or the conditions of the Capital Gains Account Scheme (CGAS) could result in the revocation of the exemption, along with the imposition of interest and penalties.

House Sale Rules: If you have claimed an exemption under Section 54 or 54F to save on capital gains tax upon selling an old house, adhering to the rules is mandatory. Negligence could lead to paying penalties in addition to the tax. According to the Income Tax Act, tax is payable when an individual sells a house or other immovable property and realizes a Long-Term Capital Gain (LTCG).

However, an exemption from this tax can be claimed by purchasing a new house under Section 54 or Section 54F. Section 54 applies to the sale of an old residential house, while Section 54F offers relief when purchasing a house using proceeds from the sale of other long-term capital assets (such as plots or shares); however, the obligation does not end simply by purchasing the new house.

The Income Tax Department imposes a 3-year lock-in period on this property. If the rules are violated during this time, the tax exemption granted may be withdrawn, and the department may issue a notice.

What is the 3-year rule?

A new house purchased after claiming a tax exemption under Section 54 or 54F cannot be sold before the completion of the 3-year lock-in period. If the taxpayer sells the house within this period, the previously claimed capital gains tax exemption is revoked. Consequently, the exempted amount is included in the taxable income for that financial year or factored into the tax calculation as per applicable rules, potentially leading to a fresh tax liability. Additionally, interest and penalties may be levied for violating the rules.

What are the rules regarding CGAS?

If the funds intended for the tax exemption have been deposited in the Capital Gains Account Scheme (CGAS), they must be utilized to purchase or construct a new house within three years. Failure to do so will bring the remaining amount under the tax net. Therefore, be sure to verify all records related to the CGAS account and the property before filing your ITR.