Dec 17, 2024, Posted by Admin
Understanding Capital Gain Deductions under Section 54 and Section 54F
When selling a property, capital gains can significantly increase your tax liability. To ease this burden, the Income Tax Act of India offers relief through deductions under Section 54 and Section 54F. These provisions encourage taxpayers to reinvest their capital gains into specified assets, primarily residential properties. Let’s dive deeper into these sections to understand their implications and benefits.
A. Section 54: Deduction on Sale of Residential Property
Applicability:
Section 54 applies when a taxpayer sells a residential property (house or flat) and reinvests the capital gains in another residential property.
Key Conditions:
1. Type of Property Sold: The property sold must be a long-term capital asset (held for more than 24 months).
2. Type of Property Purchased/Constructed: The new property must be a residential house.
3. Time Limit for Reinvestment: - Purchase of new property must be made within 1 year before or 2 years after the date of transfer.
- Construction of a new property must be completed within 3 years from the date of transfer.
4. Number of Properties: Effective from AY 2021-22, the taxpayer can claim a deduction for reinvestment in two residential properties, provided the capital gain does not exceed Rs. 2 crore. This benefit is available only once in a lifetime.
5. Holding Period of New Property: The new property must not be sold within 3 years from its purchase/construction.
Amount of Deduction:
The deduction is limited to the capital gains arising from the sale. If the reinvested amount is less than the capital gain, the deduction will be restricted to the amount reinvested.
Section 54F applies when a taxpayer sells any long-term capital asset (other than a residential property) and reinvests the sale proceeds in a residential house.
1. Type of Asset Sold: The asset sold must be a long-term capital asset, excluding residential property.
2. Reinvestment in Residential Property: The taxpayer must invest the entire sale consideration in a residential property.
3. Time Limit for Reinvestment:
- Purchase must be made within 1 year before or 2 years after the transfer.
- Construction must be completed within 3 years from the transfer.
4. Ownership of Residential Properties:
- The taxpayer should not own more than one residential house on the date of transfer of the original asset.
- The taxpayer must not purchase or construct another residential house (other than the new one) within 2 years or 3 years, respectively.
The deduction is proportionate. If the entire sale consideration is reinvested, the full capital gain is exempt. Otherwise, the deduction is calculated as:
Exemption = (Capital Gain × Amount Reinvested) / Net Sale Consideration
1. Capital Gains Account Scheme: If the taxpayer cannot reinvest the amount before filing the income tax return, they must deposit the gains in a Capital Gains Account Scheme (CGAS) to avail of the deduction.
2. Penalty for Non-Compliance: If the reinvested property is sold within 3 years, the deduction claimed will be added back to the taxpayer’s income in the year of sale.
Sections 54 and 54F offer significant tax relief, provided the reinvestment criteria are met. Taxpayers should carefully evaluate these provisions to maximize savings while complying with legal requirements. Consulting a tax professional can help ensure proper planning and utilization of these deductions.
At Jain Anurag & Associates, Chartered Accountants, a professionally managed CA firm based in Mumbai, we specialize in providing consultancy and advisory services to plan Tax for long-term capital gain. If you're looking for reliable and strategic TAC and financial advisory services, feel free to reach out to us.
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