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Section 54 of the income tax act provides exemption towards long term capital gains that arise on sale of residential property.
In this article we will discuss in detail all aspects of section 54.
Assets eligible for section 54 exemptions
The capital asset transferred should be a RESIDENTIAL HOUSE PROPERTY and the income from that house should be charged under the head “Income from House Property “.
How to claim section 54 exemption?
An individual or Hindu Undivided Family (HUF) who has sold one residential property and bought another property subsequent to the sale is eligible for claiming exemption under this section provide all the required terms and conditions are satisfied.
Conditions for section 54 exemptions
Below are the conditions to be satisfied for availing exemption under section 54;
- The exemption is available only to an individual or HUF.
- The asset transferred must be a residential house property taxable under Income from house property.
- The asset transferred must fall under the categorization of long term capital assets. It means the asset must be hold for a period of two years from date of purchase.
- The selling individual must have;
- Purchased one residential house in India either one year before or two years after the date of transfer. OR
- Constructed one residential house in India within a period of 3 years starting from the date of sale of property.
- The new house which is purchased or constructed cannot be transferred within 3 years of its purchase or construction.
Example of Section 54 exemption
B, purchased a residential house in 1998 for Rs. 3,50,000 and sold this house on 25.06.2018 for Rs. 35,00,000. The other expenses on the transfer were Rs. 70,000. He purchased a new house on 20.05.2019 for Rs. 6,50,000. Market value of house on 01.04.2001 is 9,00,000. Calculation of taxable capital gain are as follows: (CII for the F/Y 2018-19 is 280) .
|
Particulars |
Amount (Rs.) |
Amount (Rs.) |
|
Sale consideration |
|
35,00,000 |
|
Less: expenses |
70,000 |
|
|
Less: Indexed cost of acquisition |
25,20,000 |
25,90,000 |
|
900000×280/100 |
|
|
|
|
|
9,10,000 |
|
Less: exemption u/s 54 |
|
6,50,000 |
|
Taxable capital gain |
|
2,60,000 |
According to exemption under section 54, B spend Rs.6,50,000 to buy new house. Then the exemption is Rs. 6,50,000 and remaining Rs. 2,60,000 is taxable.
Capital gain accounts scheme
One of the mandatory conditions in section 54 requires time bound purchase or construction of house property. Time limit is 2 years for purchase and 3 years for construction of a house property.
But capital gain is taxable in the previous year in which the transfer took place.
For exemption in income tax return, the individual/HUF should decide whether they want to purchase or construct new house before the date of filing of the return.
If the Individual/HUF cannot use the amount of capital gain before the date of filing the return, the amount should be deposited under the capital gains accounts scheme by him before the due date of filing the return and the proof of deposit of such amount should be attach to income tax return.
So, the amount of capital gain, that is utilised by the individual/HUF and that is deposited in this scheme shall be deemed to the cost of the new house and shall be eligible for exemption.
Unutilized amount in capital gain account scheme?
Any amount deposited in the capital gain account scheme, if not used in 3 years from the year of sale of house property.
Then the unutilized amount shall be treated as the capital gain in the previous year in which the 3 years ended.
After that the individual/HUF can withdraw the amount from the scheme.
In the above example if B invested Rs. 8,00,000 in capital gain account scheme on 23.07.2019 and Rs. 2,00,000 on 01.08.2019. He purchased a house property on 05.11.2019 for Rs. 7,70,000 by withdrawing amount from the scheme. Furthermore, B did not make any investment. Date of filing of return is 31.07.2019. Calculate the amount of exempted and taxable capital gain.
The amount of exempted capital gain is 8,00,000 as the total amount invested or deposited in scheme is Rs. 8,00,000 before the due date of filing the return i.e. 31.07.2019 . In the previous year 2018-19, the taxable capital gain is Rs. 1,10,000 (9,10,000-8,00,000).
But the amount invested to purchase a new house is Rs. 7,70,000, and balance Rs.30,000 (8,00,000-7,70,000) which is unutilised, shall be taxable in the previous year 2021-2022.
Can the individual/HUF transfer the new house within 3 years of its purchase?
In that case, the cost of acquisition of the new house shall be reduced by the amount of capital gain which is exempted under section 54 and the capital gain on the sale of this new house shall also be treated as a short term capital gain.
The Finance Act 2019, has amended section 54. Now it provides for exemption by investing in two residential house properties, earlier it was one.
The recent amendment made in Finance Act 2019, which allows extension of benefits under this section. In this amendment, individual/HUF can make investment in two residential house properties instead of one, as long as the amount under the head of Long-term capital gains does not exceed INR 2 crores.
What is the amount exempted u/s 54?
The least of the following is allowable as exemption;
- Investment made towards construction or purchase of the residential house property.
OR
- Long term capital gains arising on transfer of the residential house property.
How to claim benefit under section 54?
The exemption available only to individuals and HUFs in case of long-term capital gains arising from sale of residential house property and to claim the exemption the assessee needs to reinvest the amount towards purchase or construction of new residential house property.
Can section 54 and 54F avail simultaneously?
Only one of the sections can be availed at a time. Both cannot be availed simultaneously.
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