Income tax exemption on sale/transfer of property used for residence- Section 54 of Income tax Act, 1961
Section 54 provides exemption on long term capital gain arising from the sale or transfer of a long term capital asset being a residential house property.
The exemption can be availed if the following conditions are satisfied
(a) Who can claim exemption:
Only an individual or HUF can claim exemption
(b) Which asset is qualified for exemption
Only sale of residential house property whose income is taxable under the head income from house property is qualified for tax exemption. The house property may be self-occupied or let out.
The house property should be a long term capital asset (i.e. it must be held for a period of more than 24 months before sale or transfer)
(c) Which new asset should be purchased or constructed
To avail exemption u/s 54, the assessee should purchase or construct one residential house property
(d) Time limit for Purchase or Construction
The new residential house property should be purchased within 1 year before the date of transfer or within 2 years after the date of transfer of the old residential house property. The construction should be completed within 3 years from the date of transfer.
In the case of compulsory acquisition, the above time limit of 1 year, 2 year and 3 year is applicable from the date of receipt of compensation ( whether original or additional)
(e) New Asset should be situated in India
Exemption is available only if the new residential house property is located in India.
(f) The house property so purchased or constructed should not be transferred within a period of 3 years from the date of purchase or construction
Amount of exemption
The amount of exemption is equal to
a. the actual amount of capital gain (upto AY 2023-24). From AY 2024-25 the amount of capital gain available for exemption is restricted to Rs. 10 crore ;or
b. the amount invested in purchasing or constructing (including amount deposited in capital gain scheme account) new residential property.
whichever is lower
In other words, if the amount of the capital gain is less than the cost of the new house property, the entire amount of capital gains is exempt from tax. If the amount of the capital gain is greater than the cost of the new house property, the difference between the amount of capital gain and the cost of new asset is chargeable to tax as capital gains.
One time option to purchase two residential house properties
From A.Y. 2020-21, if the amount of capital gain does not exceeds Rs. 2 crore, the assessee may at his option, purchase or construct two residential houses. This option is available only once in the lifetime of an assessee.
Consequences if the new residential property is transferred within 3 years
If the new residential property is transferred within a period of 3 years from the date of its acquisition or completion of construction, the capital gain generated from sale of the new asset would be treated as short term capital gain and cost of new asset would be reduced by the amount of exemption of capital gain availed earlier.
Capital Gain Deposit Account Scheme
If the amount is not utilized for purchase/construction of the new property till the due date of submission of return of income, then it should be deposited in “Capital Gain deposit account scheme”. On the basis of the amount utilized in acquiring the new property and amount deposited in capital gain account, the Assessing officer will give exemption u/s 54. If the amount deposited is not utilized fully for purchase or construction of new residential property within the stipulated period then the amount not so utilised shall be treated as long term capital gain of the previous year in which the period of 3 years from the date of transfer of original asset expires.
Also Read: Income Tax on ESOPs or Sweat Equity Shares
Also Read: Form 15CA and Form 15CB under Income Tax Act
Like Us On Facebook
