Any kind of property owned by an assessee which is movable or immovable, tangible or intangible, fixed or circulating is known as capital asset. It may be connected to business or profession or may not be connected.
For the purpose of capital gains the assets are bifurcated in two major sections that are:
In case of land or other immovable property, if held for more than 24 months , it is considered as a long-term capital asset.
For the purpose of Section 54 , the house property should be held for more than a period of 24 months to consider a transfer as long -term capital asset.
According to this section, when an assessee sells a residential property which is a long term capital asset and buys another house property, he or she is eligible to claim exemption for taxation. To avail this exemption the individuals must satisfy the following conditions:
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 one such transaction by the taxpayer is eligible for availing the exemption under section 54.
The Section 54 of the Income Tax Act allows the lower of the two as exemption amount for a taxpayer:
The balance amount (if any) will be taxable as per the income tax act.
For example: Mr Anand sells his house property for 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 ( 3500000-2000000).
The taxpayer requires to fulfil various conditions to avail the exemptions under section 54. They are as follows:
If the assessee is unable to purchase or construct property within time period and still wants to save tax he or she can invest 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 Deposit Scheme in the income tax act. They are:
Below mentioned are the regulations regarding non utilization of the amount deposited in Capital Gains Deposit Scheme by the assessee:
If the assessee buys or construct a new house after selling old house property which is along term capital asset , he or she can claim exemption under section 54.
Further is 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 to claim benefit under section 54.
If he or she sells before the stipulated time period the benefit given to him or her will be withdrawn from the taxpayer and he or she has to pay the tax on capital gains due from last transaction.
In case if the new house property sold within three years of purchase then two scenarios can happen. To calculate the taxability there are two cases:If 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 asset will be considered zero.
Mr Swastik has sold residential property in May 2016 for which the capital gains amounted to Rs. 40,00,000. In June 2016, he purchased a 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:
|Capital gain on sale of house property||40,00,000.00|
|Less: purchase of new residential property||20,00,000.00|
|Taxable Capital Gains ( Financial Year 16-17)||20,00,000.00|
|Capital gain on sale of new house property||25,00,000.00|
|Less: Cost of acquisition||Nil|
|Taxable 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 residential property and the capital gains is Rs 35,00,000 in June 2015. In October 2015, he purchased a new house property of Rs 50,00,000. In January 2017, he sold the new residential Property for Rs 65,00,000.
Computation of taxable capital gains will be as follows:
Financial Year 15-16
|Capital gain on sale of house property||35,00,000.00|
|Less: purchase of new residential property||50,00,000.00|
|Taxable Capital Gains ( Financial Year 16-17)||Nil|
Financial Year 16-17
|Capital gain on sale of new house property||65,00,000.00|
|Less: Cost of acquisition of new house||15,00,000.00|
|Taxable Capital Gains ( Financial Year 16-17)||50,00,000.00|
*capital gains 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.
The income tax act states various tax exemptions against capital gains that saves the tax for the assessee. Two of the major capital gains exemptions are stated under section 54 and section 54F. Bothe are moreover similar and states exemptions on long term capital gains There is a major difference between both the exemptions of the tax.
Exemption = Cost the new house x Capital Gains/Sale Receipt
Few other exapmles for better unerstanding of Section 54 of the Income Tax Act,1961.
Any income earned by any means go hand in hand with taxation on the same income. This is in case of all income including salary, income from other sources, capital gains and so on. 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 a new property or by depositing the amount of sale proceeds in Capital Gain Account Scheme in any public sector bank.
Ans. Regulations regarding sale of property is stated under section 194-IA.
Ans. No, the profit earned by the individual on sale of property is taxable as tax on capital gains.
Ans. Exemption under section 54 is only allowed on sale of a residential property which is a long term capital asset for the assessee.
Ans. When the assessee purchase a new residential property within 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.
Ans. Under section 54 of the income tax act, amount from sale proceeds of the original house property or the amount of new residential property whichever is less is completely exempt.
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