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As per the various relief measures announced by the Hon'ble Finance Minister on 24 March 2020 due to COVID-19 outbreak, taxpayers can make the investments for roll over benefits of capital gains upto 30 June 2020.

What is section 54 of the Income Tax Act, 1961?

We all know that on selling or transferring a capital asset like property, capital gains arise which are taxable in the hands of the assessee / taxpayer. Under Section 54 of the Income Tax Act, an individual or HUF selling a residential house property can claim exemption from such capital gains if they invest the proceeds in acquisition i.e. purchase or construction of another residential house property. For claiming this tax benefit, there are certain prescribed conditions which needs to be satisfied. The same has been explained one by one in this guide further.


What is a capital asset?

Any kind of property owned by an assessee which is known as a capital asset. It may be connected to business or profession or may not be connected.

Category Examples
Movable or immovable Land, building, house property etc
Tangible or intangible Vehicles, patents, trademarks, leasehold rights etc
Fixed or circulating Machinery, jewellery etc

What are the different types of capital assets under income tax?

For the purpose of capital gains the assets are bifurcated in two major sections that are:

  • Short term capital assets - Capital assets which are held by the individual for not more than 36 months are called short term capital asset. The gains from the sale of these assets are called short term capital gains.
  • Long term capital assets - Capital assets that are held by the assessee for more than 36 months are called long term capital assets. The gains from selling these assets is called long term capital gains.

In case of unlisted shares and land or other immovable property, if held for more than 24 months, it is considered as a long-term capital asset.

Following assets shall be treated as long-term capital asset if they are held for more than 12 months:

  • Listed securities
  • Units of Equity oriented fund
  • Zero coupon bond

For the purpose of Section 54 , the house property should be held for more than a period of 24 months to consider a asset as long-term capital asset.


Who is eligible to avail the benefits under Section 54?

According to this section, when an assessee sells a residential property which is a long term capital asset and buys another residential house property, he or she is eligible to claim exemption for taxation. To avail this exemption the individuals must satisfy the following conditions:

  • Only individuals or HUF are eligible to claim this benefit. The companies cannot reap the benefits of this section.
  • The house property; taxpayer is selling should be a long term capital asset.
  • The property that is to be sold should be a residential house. Income from this property should be charged under the head income from house property.
  • The new residential house property should be purchased either one year before the date of transfer or two years after the date of sale or transfer. In case of construction of new house the individual is given an extended time period to construct house i.e within three years of the date of transfer or sale.
  • The house property that is bought should be in India.

If any of the above conditions is not fulfilled by the individual, he or she is not liable to claim exemption under section 54 of the income tax act. Only such transaction by the taxpayer is eligible for availing the exemption under section 54.


What is the amount of capital gain exemption available under section 54?

The Section 54 of the Income Tax Act allows the lower of the two as exemption amount for a taxpayer:

  • Amount of capital gains on transfer of residential property, or
  • Investment made for constructing or purchasing a new residential property.

The balance amount (if any) will be taxable as per the income tax act.

For example: Mr Anand sells his house property and earned the capital gain of Rs. 35,00,000. With the amount of sale he purchased a new house property for Rs. 20,00,000. The exemption under section 54 will be the lower amount among both that is Rs 20,00,000. The capital gains that is liable for taxation will be the balance of both that is Rs 15,00,000 ( 35,00,000-20,00,000).


Which are the mandatory conditions for availing exemption u/s Section 54?

The taxpayer requires us to fulfil various conditions to avail the exemptions under section 54. They are as follows:

  • After the sale of the old house property the assessee must purchase a new residential property or construct a new house property to get benefit from this exemption.
  • The new residential property must be purchased either one year before the sale of the old property or two years after the sale of the house property or constructed within three years of the date of transfer or sale.
  • Only one house property can be constructed or purchased by the individual to claim the benefit.
  • If the individual fails to construct or purchase a new house property within the stipulated time period, he or she can deposit the capital gains proceeds in Capital gains Account Scheme in any public sector bank and avail the exemption from this section.

What is Capital Gains Account Scheme?

If the assessee is unable to purchase or construct property before the due date of furnishing of return of income for the year of transfer and still wants to save tax he or she can invest / deposit all the unutilized capital gain proceeds of the old house property in Capital Gains Deposit Scheme. In this way the new property can be purchased later and the capital gains from the proceeds of sale of old house property will not be taxable too.

Various conditions are specified for deposition in Capital Gains Account Scheme in the Income Tax Act. They are:

  • This can be done in authorised/approved bank branch. Rural branches of banks are not included.
  • The deposition has to be done before the due date for filing income tax returns.
  • Deposited amount has to be utilized to purchase / construct the house as per the provisions of the law.
Non-utilisation of the amount deposited in Capital Gains Account Scheme

Below mentioned are the regulations regarding non utilization of the amount deposited in Capital Gains Deposit Scheme by the assessee:

The amount deposited in the Capital Gains Deposit Scheme needs to be withdrawn for construction or purchasing of new house property within three years or two years after the date of transfer respectively. If the assessee does not withdraw this amount within the stipulated time period then the amount of capital gains will be taxable in the hands of the taxpayer. Thus, assessee has to pay the tax on the amount of capital gain.


What are the consequences if new House Property is transferred within 3 years?

If the assessee buys or construct a new house within the prescribed time limit after selling old house property which is a long term capital asset , he or she can claim exemption under section 54.
Further, if he or she wants to sell the new property owned by him or her, the individual must hold the property for a minimum of three years as per section 54.
If he or she sells before the stipulated time period the benefit given to him or her will be withdrawn and he or she has to pay the tax on capital gains exempted.

In case, if the new house property sold within three years of its purchase/ construction then two scenarios can happen. To calculate the taxability there are two cases:

If the cost of the new house property is less than the capital gains calculated from the sale of the original house property.

In this case, the capital gain exempted while transfer of property will now be taxable and cost of acquisition of new assets will be considered zero.


Illustrations

Mr Swastik has sold a long-term residential property in May 2016 for which the capital gains amounted to Rs. 40,00,000. In June 2016, he purchased a residential house property worth Rs. 20,00,000. Further, he sells the new residential house property (Purchased in June 2016) in December 2017 for Rs. 25,00,000.

Computation of his taxable capital gains will be as follows:

  • Financial Year 16-17 (Property sold in May 2016)
    Capital gain on sale of house property 40,00,000.00
    Less: Exemption u/s 54 on purchase of new residential property 20,00,000.00
    Taxable Long-term Capital Gains (Financial Year 16-17) 20,00,000.00
    Financial Year 17-18 (Property sold in December 2017)
  • Sale Consideration 25,00,000.00
    Less: Expenses on transfer Nil
    Taxable Short-term Capital Gains (Financial Year 17-18) 25,00,000.00

The new property was sold within three years from the date of acquisition, hence its cost of acquisition was considered as nil. Thus, the complete sale amount will be taxable as capital gains.

When the cost of the new house property purchased is more than the capital gains calculated on the sale of the original residential property.

In this case, the cost of acquisition of new house property will be reduced by the amount of capital gain exempted.

For Example

Mr Taha has sold a long-term residential property and the capital gains is Rs 35,00,000 in June 2015. In October 2015, he purchased a new residential house property of Rs 50,00,000. In January 2017, he sold the new residential Property for Rs 65,00,000.

  • Financial Year 15-16

    Capital gain on sale of house property 35,00,000.00
    Less: Exemption u/s 54 on purchase of new residential property 35,00,000.00
    Taxable Long-term Capital Gains (Financial Year 15-16) Nil
  • Financial Year 16-17

    Sale Consideration 65,00,000.00
    Less: Expenses on transfer Nil
    Less: Cost of acquisition of new house 15,00,000.00
    (50,00,000-35,00,000*)
    Taxable Long-term Capital Gains (Financial Year 16-17) 50,00,000.00

    *capital gain claimed for earlier house property

In simple language we can conclude that, if the new residential property is sold within a period of 3 years from the date of acquisition or from the date of completion of construction, then capital gains exempted will be taxable.


What is the difference between Section 54 and Section 54F?

The income tax act states various tax exemptions against capital gains that saves the tax for the assessee. Two of the major capital gain exemptions are stated under section 54 and section 54F. Both state exemptions on long term capital gains. There is a major difference between both the exemptions of the tax.

Section 54 Section 54F
  • Section 54 of the income tax act states exemption on long term capital gains for the sale of a residential property.

  • Entire capital gains needs to be invested to claim full exemption.

  • When entire capital gains is not invested the leftover amount is charged for taxation as long term capital gains.

  • No rule is mandatory for ownership of one or more residential property.

  • If the individual sells the new residential house property within the period of three years from purchase the exemption will be reversed and the exempted capital gains will be taxed.

  • Section 54F can be claimed on long term capital gains for sale of any asset other than a residential property.

  • Entire net sale proceeds needs to be invested to claim full exemption.

  • If entire net sale proceeds is not invested the exemption is allowed proportionally. In this case exemption will be as follows:

Exemption = Cost of the new house x Capital Gains/Net Sale Proceeds

  • One can not own more than one residential house at the time of sale of an old asset.

  • If the individual sells the new property within the period of three years from purchase/ construction of new property or purchase another property within two years of sale of the original asset other than the new house or construct a new house within three years of sale of original property other than new residential property the exemption will be reversed. The exempted capital gains in such a case will be taxed as long term capital gains.


Important Notes

  • The property that is purchased after selling should be bought on the name of the seller and not on any other name to claim the benefit.
  • When the cost of the new residential property is lower than the net sale proceeds of the original property, the exemption u/s 54F will be allowed proportionately. One can reinvest the leftover amount under section 54EC within six months of transfer subject to other conditions to save tax.

Few other examples for better understanding of Section 54 of the Income Tax Act,1961.

  • Mr. shekhar purchased a residential property in April, 2014 and sold the same on 21st April, 2019, for Rs. 12,40,000. Capital gain arising on sale of house amounted to Rs. 2,00,000. He had purchased a new residential house in November, 2018 for Rs. 6,00,000. Can he claim the benefit of section 54 in respect of the house constructed in November, 2018?
    Ans: The assessee purchased the new house property within the period of one year before the transfer of the old house property that is 21st April, 2019, hence he qualifies for the exemption under section 54. He can claim the benefit of section 54 in respect of his newly purchased house in November 2018.
  • Q- Mr. Kshitij purchased a residential property in April, 2018 and sold the same property in April, 2019 for Rs. 10,40,000. Capital gains arising on sale of house amounted to Rs. 2,00,000. Can he claim benefit of section 54 by constructing another residential house from the capital gain of Rs. 2,00,000?
    Ans: The residential property in this case is a short term capital asset as it is held for a period less than 24 months. The benefit of section 54 will not be available to mr. Kshitij as the period of holding immovable property under this section is less than 24 months before the transfer.

Conclusion

Section 54 of the Income Tax Act explains the benefits of exemption on sale of residential property. This section allows tax benefits on long term capital gains that is received from the sale of a residential property. One can claim this benefit by either purchasing/ constructing a new residential property or by depositing the amount of sale proceeds in Capital Gains Account Scheme in any authorised/approved bank.

Frequently Asked Questions

Q- Is the full amount received from the sale of property taxable?

Ans. No, the amount of sale consideration is not taxable.The amount of capital gain which is calculated as per the prescribed calculation is taxable if no exemptions have been claimed.


Q- Who pays TDS in case of sale of property?

Ans. Any person (Buyer or Transferee) who enters into an agreement with a resident seller for transfer of an immovable property (land or building or both but not an agricultural land) is required to deduct TDS @ 1% if sale consideration is Rs. 50 lakh or more.


Q- Sale of which type of property can avail the benefit of exemption under section 54?

Ans. Exemption under section 54 is only allowed on sale of a residential property which is a long term capital asset for the assessee.


Q- When is the taxpayer benefited under section 54?

Ans. When the assessee purchase a new residential house property within one year before or two years of the sale of the original house property or construct a new house property within three years of sale of old property, he or she is liable to get benefit from the exemption under section 54.


Q- How much exemption is allowed under section 54?

Ans. Under section 54 of the income tax act, amount of capital gain on the sale of the original residential house property or the amount of new residential property whichever is less is completely exempt.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.