EXEMPTION FOR CAPITAL GAINS ARISING ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY U/S 54 OF INCOME-TAX ACT, 1961

  • Jain Anurag
  • 03 May, 2022


When a taxpayer sells his residential house and from the sale proceeds he acquires another residential house, he can avail tax relief u/s 54 subjects to the condition mentioned in this section.

The salient feature of section 54 is below.

  •  Relief under Section 54 is available only to an individual.
  • The asset transferred should be a long-term capital asset, being a residential house property.
  • The new residential house should be located in India.
  • The number of Capital Gains should not be invested in any commercial space.
  • Income from such house should be chargeable under the head “Income from House Property”

 

Amount of exemption

Exemption under section 54 will be lower of the following:

Amount of capital gains arising on sale of residential house

OR

Amount invested in purchase/construction of new residential house property

If the amount of Capital Gains exceeds Rs. 2 Crores, 1 residential house in India should be purchased within one year before or two years after the date of transfer of old house OR constructed within 3 years after the date of transfer of old house.

If the amount of Capital Gains does not exceed Rs. 2 Crores, then 2 residential houses in India can be purchased within one year before or two years after the date of transfer of old house OR constructed within 3 years after the date of transfer of old house.

If during any assessment year, the assessee has exercised the option to purchase/construct 2 residential houses, then he shall not be entitled to exercise the option for the same or any other assessment year.

If a taxpayer purchases/constructs a house and claims relief under section 54 and then transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit claimed under section 54 will be invalid.

At the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

Capital Gain Deposit Account Scheme

The taxpayer should purchase another house within one year before or two years after the date of transfer of the old house or should construct another house within three years from the date of transfer to be eligible to claim exemption u/s 54. If till the due date of filing the return of income, the capital gain arising on the sale of the house is not utilized (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988.

The new house can be purchased or constructed by withdrawing the amount from the Capital Gains Deposit Account within the specified time limit of 2 years or 3 years, as the case may be.

Consequences of Non-utilisation of the amount deposited in Capital Gain Deposit Account Scheme.

If the amount deposited in the Capital Gains Account Scheme for which the taxpayer has claimed exemption under section 54 is not utilized within the specified period for the purchase/construction of the residential house, then the unutilized amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 2 years/3 years gets over.

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