Surrender of tenancy rights, purchase of property

Income Tax Income from Capital Gains
1

Hello,
We have surrendered our tenancy rights on a property, of which i was the tenant and proceeds came on my name to the tune of 1.5 crores
Few months later (in same financial year) I purchased a residence on my name to the value of 1.28 crores.
Am I liable for any capital gain or other tax?
Regards
Neeraj

2

Yes, you may be liable for capital gains tax on the surrender of tenancy rights. However, there are provisions under the Income Tax Act, 1961, that might provide you with relief depending on how you use the proceeds. Here’s a detailed analysis of your situation:

1. Capital Gains on Surrender of Tenancy Rights

  • Nature of Asset: Tenancy rights are considered a capital asset under the Income Tax Act.
  • Type of Capital Gain:
    • If you held the tenancy rights for more than 36 months, the gain would be classified as a long-term capital gain (LTCG). Otherwise, it will be a short-term capital gain (STCG).
  • Computation:
    • Sale Consideration: ₹1.5 crores
    • Cost of Acquisition: The cost of acquiring tenancy rights (often taken as NIL unless there was a premium paid earlier). Alternatively, if these rights were inherited or received, the previous cost could apply.

Thus, in most cases, the entire ₹1.5 crores (minus incidental expenses like brokerage or legal fees) will be the taxable capital gain.

2. Exemption Under Section 54F

Since you purchased a residential property in the same financial year for ₹1.28 crores, you may be eligible for exemption under Section 54F, subject to the following conditions:

  • You must not own more than one residential house (other than the one purchased) at the time of transferring tenancy rights.
  • You should invest the net consideration (₹1.5 crores) in purchasing a new residential property. If the full amount is not reinvested, the exemption will be proportionate:
  • Exempt LTCG=LTCG×Amount Invested/Net Consideration

In your case:

Exempt LTCG=₹1.5 crores×₹1.28 crores/₹1.5 crores=₹1.28 crores

The remaining ₹22 lakhs would be taxable as LTCG.

3. Other Conditions to Avoid Taxation

  • You must not sell the newly purchased house within 3 years; otherwise, the exemption will be revoked.
  • Deposit any unutilized amount in the Capital Gains Account Scheme (CGAS) before the due date of filing your income tax return.

4. Recommendations

  • If a portion of the sale proceeds remains uninvested (₹22 lakhs in your case), consider reinvesting it in another tax-saving option like Section 54EC bonds (up to ₹50 lakhs).
  • Ensure proper documentation for the transaction, including the surrender deed, purchase agreement, and receipts.

Would you like further assistance with tax planning or filing you can reach out to our team.

3

Surrendering tenancy rights can simplify the property purchase process, giving you full ownership and control. Ensure legal guidance to navigate agreements and secure a smooth transition.