Section 54/54F, of the Income Tax lay down rules of exemption of Long Term Capital Gain where the sale proceeds of the assets are invested into the new residential property. As per the law, exemption from long term capital gain is available if invested in a new residential property within one year before or two years after the sale of an asset. The period is extended upto three years if the proceeds are utilized for construction of new property. The tax payer is required to utilize the capital gain towards purchase of new asset before the filing of Income Tax return. However, if the tax payer does not utilize the full gain before the filing of return, then he is required to deposit the unutilized money in a specified bank account before the due date of filing of return. If the entire amount of LTCG is not invested or deposited, the unutilized portion of the gain shall be subject to tax.

There has been instances where the tax payer has taken a plea, that if the value of new residential house purchase is equivalent to or more than the gain and the same has been utilized within the specified period of 2/3 years (as the case may be) then the full gain should be given exemption even if the unutilized portion is not deposited into the specified bank account before the due date of filing of return.

The Mumbai High Court in a recent judgement in the case of “Humayum Suleman Merchant vs The Chief Commissioner of Income Tax, Mumbai” provided clarification and interpretation of law holding that, “The amount which has not been utilized in construction or purchase of property before the filing of return of income must be necessarily deposited in the specified bank account”.

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