CA Rohit R Sharma

CA Rohit R SharmaHello Everyone,

As we had discussed about the taxation rules on sale of immovable property, in the article on Capital Gain on Immovable Property we are here to understand the benefits that can be claimed under section 54, 54EC & 54F to save tax on long term capital gains.

At the time of sale of any Long term Capital Asset, the gain is taxed at a steep rate of flat 20%. In order to save up on those taxes, the act has given us an option of claiming exemptions from paying such Capital Gains if the tax payer reinvests the amount in certain specified forms of Investment and thereby save up on Long Term Capital Gain Tax.

Section 54: Proceeds from Sale of Old Residential Property used to Purchase a New Residential Property.

Any Long term Capital Gain arising either to an Individual or a HUF from the sale of a Residential Property shall be exempt to tax to the extent such Gain is invested in:

  • The Purchase of another residential property within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or
  • Construction of a Residential House Property within a period of 3 years from the date of transfer.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

The Assessee should take a note that with effect from assessment year 2015-16 exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

Amount of Exemption:

Exemption under section 54 will be lower of following:

  • Amount of capital gains arising on transfer of residential house; or
  • Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)

Consequences if the New House is Transferred:

Provided the new residential House Property purchased / constructed should not be transferred within a period of 3 years from the date of transfer. If the new property is transferred within a period of 3 years from the date of transfer then the benefit granted under section 54 will be withdrawn. The ultimate impact of the restriction is as follows:

  • The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.
  • 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 section 54 will be deducted from the cost of acquisition of the new

Capital Gain Account Scheme:

To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme).

The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or3 years, as the case may be.

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised 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 is completed.

Section 54EC: Proceeds from Sale of Any Capital Asset used to Purchase a Specified Bonds.

Capital Gains arising from sale of any Long Term Capital Asset are exempt under section 54EC if the assesse has within a period of 6 months from the date of transfer invested the gains in Long Term specified bonds as notified by the Govt. for a minimum period of 3 years.

In cases where the assesse converts the specified asset into cash, or takes a loan or advance on the security of such specified asset within a period of 3 years from the date of its acquisition, the amount of Capital Gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.

Amount of Exemption:

Capital gain shall be exempt to the extent of amount of investment in such specified bonds upto a maximum of Rs.50 Lcas within a period of 6 months the date of such transfer.

Section 54F: Proceeds from Sale of Any Capital Asset used to Purchase a Residential Property.

Any Capital Gain arising either to an Individual or a HUF from the sale of any Long Term Capital Asset shall be exempt to tax if the entire sales proceeds and not only such Gain is invested in :

  • The Purchase of one residential property within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or
  • Construction of a Residential House Property within a period of 3 years from the date of transfer.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

If the entire sale proceeds is not invested and only a part of the sale consideration is invested, then even the benefit shall also be proportionately allowed i.e

Amount claimed as Exempt = Capital Gain * Amount Invested ÷ Net Sale Consideration

The Author is a Chartered Accountant and can be reached at rrco1905@yahoo.com or 9920930544.

Posted Under

Category : Income Tax (20861)
Type : Articles (10792) Featured (3626)
Tags : section 54 (90) section 54EC (66) Section 54F (106)
  • Dileep Karthikeyan

    What is the exemption available if the amount of capital gain arising out of the sale of 1st residential property (OR entire sales proceeds) is used to repay the housing loan availed for acquiring 2nd residential property?

  • vswami

    Hello
    May you study and clarify the doubt (correct me if me wrong)
    indicated below:

    You say that, –

    “If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised 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 IS COMPLETED.” –

    However, as per reading of the text with me, the Proviso to sec 54, – so
    also the correspondingly applicable Proviso to sec 54F (4) – which is not seen to have been covered by you- is noted to provide differently.

    In this context, also my comments posted itatonline on the recently
    reported Bom HC judgment deciding the point of issue under sec 54F (4) adverse to taxpayer are of relevance.