Can You Invest In A House Property Abroad To Avail Capital Gain Exemption In India?

Generally, a tax payer in India can invest in a house property to claim exemption on capital gain arising out of sale of another house property. An individual or HUF, may invest in a house property to save from paying capital gains tax and this is governed by Section 54 and Section 54 F of the Income Tax Act, 1961. 

Conditions of Exemption :
(i) The capital gains should arise from the transfer of the long term capital assets being buildings or lands that are residential property.
(ii) The income from such residential house shall be assessable under the head "Income from House Property".
(iii) The transferor assessee should have purchased a residential house within a period of one year before or two years after the date of transfer or in the alternaitve, the assessee should construct a residentail house within a period of three years from the date of transfer of the original house.
(iv) The amount invested in the purchase or construction of new residential house should either be equal to more than the gain, or where it is less than the amount of capital gain, the shortfall shall be taxable under section 45 (1) of the Act.

Amount of Exemption:
The capital gain accruing as a result of the transfer of the residential house to be dealt with as under:
(i) where the amount of capital gain is equal to or less than the cost of the new asset, being the new residential house purchased or constructed, the whole of the capital gain shall be exempt.
(ii) Where the amount of capital gain is higher than the cost of the said new  asset, the amount of capital gains not so invested or utilized is to be charged to capital gain under section 45 of the Act. In other words, only the amount equal to the cost of the new asset will be exempt.

What would be the amount of exemption?
The amount of exemption depends upon the fact whether the cost of the new asset exceeds of falls short of the net consideration arising out of the transfer of the net consideration arising out of transfer of the original asset. The amount of exemption will be determined as under:
(i) If the cost of the new residential house property is greater than the net consideration arising from the transfer of original asset, then the entire capital gains will be exempt from tax.
(ii)If the cost of the new residential house is less than the net consideration arising from the transfer of original asset, then the amount of exemption will be equal to

Capital gains on transfer of original asset * Cost of new asset / Net consideration.

(iii)Cost of new residential house held include the amount depreciated in an account under the Capital Gain Account scheme on or before due date furnishing return of income.

To avail of the exemption can the new residential house be acquired or constructed in a place outside India?
This is the common question most of the NRI s ask before selling their ancestral house or going for a second home.
Though the income tax Act is not explicit in this matter, there are judicial controversies at the level of income Appellate Tribunal. The decisions where divergent views have been taken are:
(i) Leena J. Shah v. Asst. CIT [2006] 6 SOT 721 (Ahd.).
In this decision, the Ahmedabad Tribunal has expressed the view that the words 'purchase/construction of a residential house', in section 54F on plain and simple reading, mean that the purchase/construction of a residential house must be in India and not outside India. Therefore, the benefit under section 54F is not allowable for residential house purchased/constructed outside India.
(ii) Mrs. Prema P.Shah v. ITO [2006] 282 ITR (AT) 211 (Mumbai)
This decision has been given in the context of the section 54 of the Act by the Mumbai Bench of the Inccome-tax Appellate Tribunal. In this case, the assessee sold a property in Mumbai and purchased one in London. She claimed exemption under section 54, showing long term capital gains as Nil .In the respect of the claims for exemption various issues were raised, one of which was that exemption cannot be allowed because the property acquired is in London - not in India. On this issue, the Tribunal decided in the favour of the assessee holding that section 54 did not exclude the right of the assessee non-resident in instant case to claim exemption in respect of the property purchased in a foreign country, if all other conditions laid down in the section were satisfied, merely because the property acquired is in a foreign country. Accordingly, the assessee was entitled to exemption under section 54.
(iii) The decision in the case of Mrs.Prema P.Shah has been followed by another Bench of the Tribunal in the case of ITO v. Dr.Girish M.Shah I. T. A. No. 3582/MUM/2009 dated February 17, 2010.
(iv) Recently. the Bangalore Bench of the ITAT vide order dated October 12, 2012, in the case of Vinay Mishra v. Asst. CIT[2012] 20 ITR (Trib) 129 (Bangalore) has taken a decision similar to that in case of Mrs. Prema P.Shah (supra) holding that exemption under section 54F cannot be denied on the ground that residential house acquired was situated outside India.



Considering the fact that several Tribunals have allowed exemption for capital gains for the investments abroad, it will not be inappropriate to claim exemption under Section 54 for the purchase of house property out of India till it is decided to the contrary in High Courts or Supreme court or notification is given in the Income Tax Act. However, this is a personal view of the author. For any queries about investing in a house property to avail capital gain exemption in India, please email karthikeyan.auditor@gmail.com or call +91 98422 10422