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In many cases, the owners of residential properties need to sell their houses due to reasons like moving to a new city, switching jobs, retirement, etc., Under section 54 of the Income Tax Act, if the seller of a residential property acquires or constructs another residential property from that amount, he or she gets benefits in capital gains tax. In other words, when an assessee sells a residential property and purchases or constructs another residential house property, he or she is exempt from capital gains under Section 54 of the Income Tax Act. In this article, let’s discuss section 54 of income tax in detail.
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 property. For claiming this tax benefit, there are certain prescribed conditions need to be satisfied. Let’s explore them one-by-one in this guide.
Any kind of property owned by an assessee is known as a capital asset. It may or may not be connected to business or profession.
Category | Examples |
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Movable or immovable | Land, building, house property etc. |
Tangible or intangible | Vehicles, patents, trademarks, leasehold rights etc. |
Fixed or circulating | Machinery, jewellery etc |
For capital gains, the assets are bifurcated in two major sections that are:
If unlisted shares and land or other immovable property is held for more than 24 months, it is considered as a long-term capital asset.
Following assets shall be treated as long-term capital assetFor Section 54, the house property should be held for more than a period of 24 months to consider an asset as a 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 residential house property, he or she is eligible to claim an exemption for taxation. To avail of this exemption the individuals must satisfy the following conditions:
If any of the above conditions are not fulfilled by the individual, he or she is not liable to claim an exemption under section 54 of the income tax act. Only such transaction by the taxpayer is eligible for availing the exemption under section 54.
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 and earns 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).
The taxpayer requires us 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 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 the Capital Gains Account 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:
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 then the amount of capital gains will be taxable in the hands of the taxpayer. Thus, the assessee has to pay the tax on the amount of capital gain.
If the assessee buys or constructs 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 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 is 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.
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 sold 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 the 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 |
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 ExampleMr 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.
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 |
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Exemption = Cost of the new house x Capital Gains/Net Sale Proceeds
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Few other examples for better understanding of Section 54 of the Income Tax Act,1961.
Section 54 of the Income Tax Act explains the benefits of exemption on the sale of residential property. This section allows tax benefits on long term capital gains that arereceived 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 the Capital Gains Account Scheme in any authorised/approved bank.
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.
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 agricultural land) is required to deduct TDS @ 1%, if sale consideration is Rs. 50 lakh or more.
Exemption under section 54 is only allowed on sale of a residential property which is a long term capital asset for the assessee.
When the assessee purchases new residential house property within one year before or two years of the sale of the original house property or construct new house property within three years of the sales of old property, he or she is liable to get benefit from the exemption under section 54.
Under section 54 of the income tax act, the 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.