Budget 2025 Updates
As per Budget 2025, the income tax rebate u/s 87A has been increased to Rs.60,000, making an income upto Rs.12 lakhs as tax-free under the new tax regime. However, this increased rebate is not applicable on special grade incomes such as ‘Capital Gains’.
What is Section 54 of the Income Tax Act, 1961?
Section 54 of the Income Tax Act provides exemption on long term capital gains from the sale of residential property if the proceeds from such sale are reinvested in purchasing or constructing another residential property within a specified time frame. Section 54F exemption is allowed only on long-term capital gains.
To claim this tax benefit, certain prescribed conditions need to be satisfied. Let’s explore them one by one in this guide.
- Inclusion of Long-Term Capital Gains (LTCG) in ITR-1 and ITR-4
Previously, taxpayers with any LTCG were required to file more complex forms like ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or equity mutual funds under Section 112A can file using the simpler ITR-1 (Sahaj) or ITR-4 (Sugam) forms, provided there are no carried forward losses.
- Segregation of Capital Gains Based on Transaction Date
The updated ITR forms now require taxpayers to report capital gains separately for transactions executed before and after July 23, 2024. This change aligns with the revised capital gains tax rules introduced in the Union Budget 2024, which, among other things, reduced the LTCG tax on real estate to 12.5% without indexation from the previous 20% with indexation.
- Reporting of Buyback Proceeds as Deemed Dividends
From October 1, 2024, proceeds received from the buyback of shares by domestic listed companies are to be treated as deemed dividends. The updated ITR forms require these proceeds to be reported under 'Income from Other Sources.' Additionally, the capital gains schedule should reflect zero sale proceeds, allowing the cost of acquisition to be claimed as a capital loss, which can be carried forward for up to eight assessment years.
- Enhanced Capital Gains Reporting in ITR-7
For trusts, NGOs, and other institutions filing ITR-7, there is now a requirement to disclose capital gains separately for transactions before and after July 23, 2024. This change ensures accurate tax calculations in light of the revised capital gains tax rules.
- Increased Threshold for Asset and Liability Reporting
In the ITR-2 form, the threshold for mandatory reporting of assets and liabilities has been raised to ₹1 crore. This adjustment aims to reduce the compliance burden for taxpayers with assets below this threshold.
What are the Different Types of Capital Assets Under Income Tax?
For capital gains, the assets are bifurcated into two major sections:
Short-term capital assets-
Capital assets that the individual holds for not more than 24 months are called short-term capital assets. The gains from selling these assets are called short-term capital gains.
Long-term capital assets-
The assets the assessee holds for more than 24 months are called long-term capital assets. The gains from selling these assets are called long-term capital gains.
If unlisted shares, land, or other immovable property are held for more than 24 months, it is considered a long-term capital asset.
The following assets shall be treated as long-term capital assets if they are held for more than 12 Months:
- Listed securities
- Units of Equity oriented fund
- Zero-coupon bond
For Section 54 of the Income Tax Act, the house property should be held for more than 24 months to consider an asset as a long-term capital asset.
LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Taxation for mutual funds
| Product |
Before |
After |
| Period of holding |
Short Term |
Long Term |
Period of holding |
Short Term |
Long Term |
| Equity oriented MF units |
> 12 months |
15.00% |
10.00% |
> 12 months |
20.00% |
12.50% |
| Specified Mutual funds which has more than 65% in debt |
> 36 months |
Slab rate |
Slab rate |
> 24 months |
Slab rate |
Slab rate |
| Equity FoFs |
> 36 months |
Slab rate |
Slab rate |
> 24 months |
Slab rate |
12.5% |
| Overseas FoF |
> 36 months |
Slab rate |
Slab rate |
> 24 months |
Slab rate |
12.5% |
| Gold Mutual Funds |
> 36 months |
Slab rate |
Slab rate |
> 24 months |
Slab rate |
12.5% |
Note: The LTCG and STCG rates for FY 2025-26 is the same as FY 2024-25 as no changes in the tax rates were proposed in Budget 2025. However, slab rates have been revised in Budget 2024 under the new regime, applicable in case of short-term capital gains taxed at slab rates.
Who is Eligible to Avail of the Exemption Under Section 54?
According to this section, when an assessee sells a residential property, a long-term capital asset, and buys another residential house property, he or she can claim a taxation exemption. Given below are the conditions of eligibility for section 54 exemption.
- Only individuals or HUFs are eligible to claim this benefit. The companies cannot reap the benefits of this section.
- The house property the 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 the 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 the case of constructing a new house, the individual is given an extended time period to construct a house, i.e., within three years of the date of transfer or sale.
- The house property that is bought should be in India.
If the individual does not fulfill the above conditions, he or she is not liable to claim an exemption under Section 54 of the Income Tax Act. Only such transactions by the taxpayer are eligible for the exemption under Section 54 of the Income Tax Act.
Do you know?
The ₹10 crore cap on capital gains exemption is a major change impacting high-value property sales. Earlier, investors could reinvest unlimited capital gains into a new residential property to claim full tax exemption under Section 54. Now, any gains exceeding ₹10 crore will be taxable, restricting reinvestment options for HNIs and large investors.
Key Requirements for Claiming Section 54 Exemption
To avail the benefits under Section 54, the following conditions must be satisfied:
-
Nature of Asset:
- The asset must be classified as a long-term capital asset.
- The asset sold must be a residential house, with income chargeable under the head “Income from House Property.”
-
Timeline for Purchase or Construction:
- The seller must purchase another residential house either 1 year before or 2 years after the sale/transfer of the original property.
- For house construction, the seller has up to 3 years from the date of sale/transfer.
- In cases of compulsory acquisition, the timeline starts from the receipt of compensation (original or additional).
-
Location of New Residential House:
The new house must be located in India. Properties purchased or constructed abroad are not eligible for the exemption.
-
Exemption Limit:
From 1st April 2023, the exemption amount under Sections 54 and 54F is capped at ₹10 crore. Previously, there was no upper limit.
Important Note:
All conditions listed above are cumulative. Failing to meet even one condition disqualifies the seller from claiming the exemption under Section 54.
How to Calculate Capital Gain Exemption Available Under Section 54?
Section 54 of the Income Tax Act allows the lower of the two as an exemption amount for a taxpayer:
- Amount of capital gains on transfer of residential property or
- The investment made for constructing or purchasing new residential property
The balance amount (if any) will be taxable as per the Income Tax Act.
With effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new asset exceeds Rs. 10 crore, the excess amount shall be ignored for computing the exemption under Section 54.
For Example, Mr. Anand sells his house property and earns a capital gain of Rs. 35,00,000. With the sale amount, he purchased a new house for Rs 20,00,000. The exemption under Section 54 will be the lower amount of Rs 20,00,000.
The capital gains that are liable for taxation will be the balance of both, which is Rs 15,00,000 ( 35,00,000-20,00,000).
Section 54 Exemption Chart
| Changes Made under Section |
Sale of |
Sale amount invested in |
Exemption Amount |
| Section 54 |
Residential property |
New residential property |
10 crores |
| Section 54F |
Any long-term asset other than residential property |
New residential property |
10 crores |
Provisions for Transfer of Property Under Section 54
If the new house is sold within a period of 3 years from the date of purchase/construction, then the exemption claimed will be reversed and become taxable in the year of sale. In this case, let’s consider 2 different scenarios -
Case 1. The cost of new house purchased is less than the capital gains calculated on the sale of property
When the new property is sold within 3 years of the date of purchase, the cost of acquisition becomes nil and the balance amount becomes taxable.
Example -
Mr.A sold residential property in May 2022 leading to a capital gain of Rs.30,00,000. He purchased a residential property in June 2022 for Rs.18,00,000.
The new residential property is sold in December 2023 for Rs.35,00,000.
Capital Gains in 2022:
| Particulars |
Amount |
| Capital gain on transfer of residential house |
30,00,000 |
| Less: Investment made in residential house property |
18,00,000 |
| Taxable capital gains |
12,00,000 |
Capital Gains in 2023:
| Particulars |
Amount |
| Sale consideration |
35,00,000 |
| Less: Cost of acquisition |
Nil |
| Taxable capital gains |
35,00,000 |
Case 2 - Cost of new house purchased is more than the capital gains calculated on selling the original house
If the cost of new asset is more than the capital gains, then the entire capital gain will be exempted. However, if the new property is sold within 3 years, then the capital gains will be taxable.
Example -
Mr.Z sold a residential property leading to a capital gain of Rs. 25,00,000 in June 2021. In October 2021, Mr.Z purchased a new residential house property worth Rs.40,00,000. In January 2023, he sold this new residential property for Rs.55 lakhs. Here’s how the taxable capital gains will be calculated -
Capital Gains for 2021 -
| Particulars |
Amount |
| Capital gain on transfer of residential house |
25,00,000 |
| Less: Investment made in residential house property |
40,00,000 |
| Taxable capital gains |
Nil |
Capital Gains for 2023 -
| Particulars |
Amount |
| Sale consideration |
55,00,000 |
| Less: Cost of acquisition |
15,00,000 |
| Taxable capital gains |
40,00,000 |
Documents Needed for Section 54 Exemption
- Sale deed of the original property for proof of sale.
- Purchase deed of the new property for evidence of constructing a new residential property.
- Completion certificate for under-construction properties.
- Bank statements showing payment details related to the new property purchase.
- Form 10BA.
What is a 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 the sale of old house property will not be taxable either.
The Income Tax Act specifies Various conditions for deposition in the Capital Gains Account Scheme. They are:
- This can be done in authorized/approved bank branches. Rural branches of banks are not included.
- The deposition has to be done before the due date for filing income tax returns.
- The deposited amount has to be utilized to purchase/construct the house as per the provisions of the law.
Non-utilization of the amount deposited in the Capital Gain Account Scheme
Below are the regulations regarding non-utilization of the amount deposited in the Capital Gains Deposit Scheme by the assessee:
The amount deposited in the Capital Gains Deposit Scheme needs to be withdrawn for construction or the purchase 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 capital gain tax on property.
What are the Consequences of Transferring the New House Property Within 3 years?
If the assessee buys or constructs a new house within the prescribed time limit after selling the old house property, which is a long-term capital asset, he or she can claim an 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.
- If the builder of the new residential construction fails to hand over the property to the taxpayer within three years of purchase, the exemption is still allowed.
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 is exempt, while the property transfer will now be taxable, and the cost of acquiring new assets will be considered zero.
Case Study
Ms. Rekha had an LTCG of Rs.50 lakhs on a residential property in Jaipur in 2023. However, she was not ready to reinvest the LTCG amount to purchase a new property immediately and, therefore, was not able to claim the deduction under section 54F.
Upon consulting Tax2win’s tax experts, she found out that she can deposit the LTCG amount in a CGAS account until she is ready to reinvest it and claim the section 54 exemption. However, she must reinvest these funds within 2 years of depositing the amount to avail of the exemption. If she fails to do so, the exemption will be withdrawn.
Impact of the Finance Act 2023 on Section 54
The Finance Act 2023 introduced a significant change to Section 54 of the Income Tax Act, impacting the maximum exemption allowed for capital gains arising from the sale of residential property. Here's how it affects individuals:
- Previous Rule: Before the Act, there was no limit on the amount of capital gain exemption one could claim under Section 54 by investing in a new residential property.
-
New Rule: Effective from the Assessment Year 2024-25 (April 1, 2024, onwards), the maximum exemption allowed under Section 54 is capped at Rs. 10 crore. This means:
If the cost of the new residential property exceeds Rs. 10 crore, the excess amount invested will not be considered for exemption calculation.
Only the portion of the capital gain up to Rs. 10 crore invested in the new property will be exempt from tax.
Tax Implications of Reinvesting the Leftover Amount Under Section 54EC
Section 54EC of the Income Tax Act, 1961 allows exemption from capital gains tax on the sale of a residential property if the gains are invested in specific long-term infrastructure bonds within six months from the date of sale. However, the remaining amount becomes taxable if the invested amount is less than the total capital gain. Here's how reinvesting the leftover amount affects your taxes:
Reinvesting Leftovers in Eligible Investments:
No Additional Exemption:
- The exemption under Section 54EC is limited to the amount invested in the specified bonds.
- Beyond the amount invested in bonds, the leftover capital gain will be taxed at applicable capital gain rates (short-term or long-term, depending on the holding period).
Not Reinvesting Leftover Amount:
- The entire unutilized capital gain (leftover after investing in bonds) will be taxed at applicable capital gain rates.
- Short-term capital gains (holding period less than 24 months) are taxed at 30% (plus surcharge and cess).
- Long-term capital gains (holding period exceeding 24 months) are taxed at 20% with indexation benefit, effectively reducing taxable income.
Case Study
Mr.Arjun had long-term capital gains from the sale of a residential property worth Rs.25 lakh. He invested Rs.5 lakhs in specified bonds and claimed an exemption of the same under section 54EC.
He was looking for more ways to save taxes. He consulted an online CA. The expert suggested that he can invest the remaining amount for buying a residential property and claim a deduction for the remaining amount under section 54.
What are the circumstances in which exemption under section 54 can be withdrawn?
The exemption claimed by assessee under s ection 54 can be withdrawn in the following circumstances:
- Amount deposited in capital gains scheme account is not utilized in prescribed time limit: Where the amount deposited is not utilized for purchasing a residential house property within 2 years or construction of house property within 3 years from the date of transfer, the un-utilized deposit in capital gain account scheme is deemed to be long-term capital gains in the year in which the prescribed time limit expires.
- Transfer of new house within 3 Years: If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under s ection 54 will be deducted from the cost of acquisition of the new house.
What is the Difference Between Section 54 and Section 54F?
The Income Tax Act states various tax exemptions against capital gains that save 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.
- An entire capital gain needs to be invested to claim full exemption.
- When all capital gains are not invested, the leftover amount is charged for taxation as long-term capital gains.
- No rule is mandatory for the ownership of one or more residential properties.
- 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 the sale of any asset other than a residential property.
- Entire net sale proceeds need to be invested to claim full exemption.
-
If the entire net sale proceeds are not invested, the exemption is allowed proportionally. In this case, the 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 the sale of an old asset.
- If the individual sells the new property within the period of three years from the purchase/ construction of the new property or purchases another property within two years of the sale of the original asset other than the new house or constructs a new house within three years of the sale of the original property other than the new residential property, the exemption will be reversed. The exempted capital gains in such a case will be taxed as long-term capital gains.
|
Points to Note
- The property that is purchased after selling should be bought in the seller’s name and not in 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 the transfer, subject to other conditions, to save tax.
Few other examples for a 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 the sale of the house amounted to Rs 2,00,000. He purchased a new residential house in November 2018 for Rs 6,00,000. Can he claim the benefit of Section 54 with respect to 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, which is 21st April 2019; hence, he qualifies for the exemption under Section 54. He can claim the benefit of section 54 with respect to 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 the sale of the house amounted to Rs 2,00,000. Can he claim the 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 of 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.
Have you sold a property recently and earned capital gains? If yes, then you must know that these capital gains are subject to tax. However, there are various ways to save tax on your capital gains. If you are also looking to save your capital gain tax, look no further because our experts can help you maximize your tax savings by navigating the complex Income Tax Law to find the best possible tax saving options for you. Get Online CA Now to save capital gains tax.
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