This question come in the minds of many how to save tax when we sale or transfer residential house property and then invest those amount to buy any other asset. Income tax provides tax exemptions to individual or HUF who sold his old house and from the sale proceeds he purchased another house.
Under Section 54 the Income Tax Act, an individual or HUF selling a residential property can get tax exemptions from Capital Gains if the capital gains are invested in purchase or construction of residential house property.
Following conditions need to be satisfied to avail the benefit of the said section:
- Asset must be classified as a long-term capital asset.
- The asset sold is a Residential House. Income from such a house should be chargeable as Income from House Property.
- The seller should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, i.e. the seller will have to construct the residential house within 3 years from the date of sale/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 compensation)
- The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller cannot avail the benefit of the exemption under Section 54.
With effect from Assessment Year 2021-22, the Finance Act, 2020 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties also
The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. If assesse exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.
Amount of Exemption available under Section 54 of the Income tax act:
The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
Long Term Capital gains arising on transfer of residential house property.
or
Investment made in purchase or construction of a new residential house property.
Hence, the balance capital gains (If any) will be taxable
Illustration 1:
- Mr ram sells his house property for Rs 55,00,000/-
- With the proceeds of the sale, he purchases another house for Rs 27,00,000/-
- Capital Gains will be computed as follows
| Particulars | Amounts (Rs) |
| Sale proceeds on transfer of residential house | 55,00,000.00 |
| Less: Investment made in residential house property | 27,00,000.00 |
| Balance – Capital Gains | 28,00,000.00 |
The exemption will be lower of the Capital Gains (Rs 28,00,000) or investment in new property (Rs 27,00,000), so the exemption will be Rs 27,00,000
Illustration 2:
Mr. Raja purchased a residential house in April, 2017 and sold the same in April, 2021 for Rs. 10,40,000. Capital gain arising on sale of house amounted to Rs. 3,00,000. Can he claim the benefit of section 54 by purchasing a shop from the capital gain of Rs. 3,00,000?
Answer :
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of a capital asset, being long-term residential house property. This benefit is available if another residential house is purchased form the capital gains. In other words, the benefit of section 54 is available if the capital gain arising on transfer of residential house is invested in another residential house.
The benefit of section 54 is not available if the capital gain arising on transfer of house is invested in capital asset other than a residential house. In this case Mr. Raja wants to purchase a shop (i.e., capital asset other than a residential house) and, hence, the benefit of section 54 is not available.
Illustration 3
Mr. Paresh purchased a residential house in March, 2017 and sold the same on 25th April, 2020, for Rs. 10,40,000. Capital gain arising on sale of house amounted to Rs. 3,00,000. He had purchased a residential house in March, 2021 for Rs. 8,00,000. Can he claim the benefit of section 54 in respect of the house purchased in March, 2021?
Answer:
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. To claim exemption under section 54, another house should be purchased within a period of one year before or two years after the date of transfer of house. In this case the old house was transferred in April , 2020, hence, any house purchased within a period of 1 year before 25th April, 2021 i.e. on or after 26 th April , 2021 can qualify for exemption under section 54. Hence, House purchased March, 2021 will qualify for exemption under section 54.
Illustration 4:
Mr. Ketan purchased a residential house in the previous year 2006-07 for Rs. 2 crores. The house property is sold for Rs. 10 crores in the previous year 2021-22 and the capital gain is invested in two residential house properties worth Rs. 4 crores each. Can he claim the benefit of section 54 in respect of both houses ?
Answer:
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2021-22, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores. Since, the gain arising in hands of Mr. Khan is more than Rs. 2 crore, he cannot claim the benefit of section 54 by making investment in two house properties.
General provisions relating to the transfer of property after claiming benefit under Section 54:
If the new house is sold within 3 years from the date of purchase or construction, then the exemption claimed earlier under section 54 shall be indirectly taxable in the year of sale of the new house property. Let’s consider two scenarios when the new house is sold within 3 years from the date of purchase or construction
Generally, when a house is sold, the profit is considered as capital gains. However, when the new house is sold within 3 years from the date of purchase or construction, then the cost of acquisition will be considered as NIL. Hence, there will be an indirect increase in taxable capital gains
Illustration:
Mr Paresh has sold residential house property in May 2016 and the capital gains amounted to Rs. 31,00,000/- In June 2016, Mr Y purchased a residential house property worth Rs. 19,00,000/- Mr Y sells the new residential house property (Purchased in June 2016) in December 2017 for Rs. 35,00,000/- Based on the facts mentioned above, compute the taxable capital gains for Mr Paresh for FY2016-17?
| Particulars | Amounts (Rs) |
| Capital gain on transfer of residential house | 31,00,000.00 |
| Less: Investment made in residential house property | 19,00,000.00 |
| Balance – Taxable Capital Gains In FY 16-17 | 12,00,000.00 |
Now when Property sold by Mr Paresh in December 2017 then we have to re compute the capital gain FY 16-17 (Property sold in December 2017)
| Particulars | Amounts (Rs) |
| Consideration for transfer (Sale Consideration) | 35,00,000.00 |
| Less: Cost of Acquisition | NIL |
| Balance – Taxable Capital Gains In FY 16-17 | 35,00,000.00 |
Note: As the new property for which deduction was claimed under Section 54 was sold in December 2017 (i.e. within 3 years from the date of acquisition), hence it’s cost of acquisition was considered as NIL. As a result, the entire sale consideration was considered as capital gains. If the property had been sold after 3 years, i.e. after June 2019, then in such case the cost of acquisition would be available as a deduction and capital gains would reduce.
Capital Gains Account scheme:
If the asset is sold in the PY, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assesse is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.
The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction. However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).
Illustration:
Mr. Rajesh is a salaried employee. He had purchased a residential house in April, 2015 and sold the same on 25th, April, 2020 for Rs. 18,40,000. Capital gain arising on sale of house amounted to Rs. 4,00,000. He could not purchase/construct another house by 31st July, 2022, however, in July, 2021 he deposited Rs. 400,000 in Capital Gains Account Scheme. Will he be entitled to claim any exemption under section 54?
Answer:
To claim exemption under section 54, the taxpayer should purchase a residential house within a period of one year before or two years after the date of transfer of old house. or can construct a house within a period of three years from the date of transfer.
In this case, the old house was transferred on 25th April, 2021, hence, he has to purchase another house within a period of 2 years from 25th April, 2021. Alternatively, he can construct another house within a period of 3 years from 25th April, 2021.
The old house is transferred in the year 2021-22 and the due date of filing the return of income of the year 2021-22 is 31st July, 2022. If Mr. Rajesh cannot purchase/construct another house by 31st July, 2022, then he has to deposit Rs. 4,00,000 in Capital Gains Account Scheme. By depositing Rs. 4,00,000 in the Capital Gains Account Scheme he can claim exemption of Rs. 4,00,000 under section 54. In this case, he has deposited Rs. 4,00,000 in the Capital Gains Account Scheme and, hence, he can claim exemption of Rs. 4,00,000 under section 54. To continue the exemption he has to utilize the funds deposited in the scheme to purchased/construct the house within the specified period of 2 Years/3 years, as the case may be.
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This article has been written for providing information. In case any further explanation or clarification any one can contact to me at caparagsavale@gmail.com
Author Bio
Sir, in this article the method of arriving the capital gains is not explained. It will be more useful if that is also explained.