Can I show an out-of-court settlement amount received from a builder as long term capital gain

Can I show an out-of-court settlement amount received from a builder as long term capital gain

I invested around 82 lakhs in an apartment project in Kerala. The date of handover was Sep 2019. After about 3 years the builder could not complete and handover the project. I filed a complaint in RERA but the issue was settled out of court. I received the refund of 82 lakhs rupees and in addition received additional amount at the rate of 10% simple interest (around 31 lakhs rupees) as part of settlement. Total amount i received is around 1.13 crores
Can i show this interest income as long term capital gain while i file my ITR ? If so then can i invest this 31 lakhs in a capital gain account to claim deduction so that i can use the amount to buy a home in about 6-12 months and avoid paying capital gain tax?

Asked 2 months ago in Capital Gains Tax

Hello Dr. Sreenath,

The interest income of ₹31 lakhs you received as part of the settlement is taxable under the head "Income from Other Sources" and cannot be classified as long-term capital gain. Therefore, you cannot invest this interest amount in a capital gains account to claim a tax deduction under sections related to capital gains tax exemption.

Here's your actionable plan:

Report Interest Income: Declare the ₹31 lakhs interest as "Income from Other Sources"

For detailed, personalized advice, consider a phone consultancy.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal

CA, Delhi

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Hello Sir,

In India, long-term capital gains (LTCG) arise from the sale of assets such as real estate, stocks, or mutual funds held for more than 24 months. LTCG is taxed at a lower rate compared to short-term capital gains (STCG).

Regarding your situation:

The interest income received as part of the settlement from the builder may be considered as income under the head "Income from Other Sources" rather than capital gains, as it arises from a legal settlement and not from the sale of a capital asset.

Whether the interest income can be considered as long-term or short-term would depend on the nature of the legal settlement and the duration for which the amount was held. If the interest income accrued over a period of more than 24 months, it could potentially be treated as long-term.

If the interest income qualifies as long-term capital gains, you may be eligible to claim deductions under Section 54 of the Income Tax Act by reinvesting the capital gains amount into specified assets within the stipulated time frame to avoid paying capital gains tax.

Under Section 54, you can invest the LTCG amount in another residential property to claim an exemption from capital gains tax. Alternatively, you can deposit the LTCG amount into a Capital Gains Account Scheme (CGAS) before the due date of filing your income tax return for the relevant financial year.

You must utilize the amount deposited in the CGAS to purchase or construct a residential property within the specified time frame to claim the exemption. Failure to utilize the amount for the specified purpose within the stipulated time may result in tax implications.

Thanks
Damini

Damini Agarwal

CA, Bangalore

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