How to Save Income Tax on Sale of Residential House: Section 54 Guide

How to save Income-tax on the sale of a Residential House in India under Section 54 of the Income-tax Act, 1961

In my previous articles, the method for calculation of Long-Term Capital Gains on the sale of properties has been discussed at length. Thank you everyone for the overwhelming response to the articles. For those who have not read, the links of the same is available at the bottom of the article for ready reference.

In this comprehensive guide, we’ll delve into the intricate details of how you can save income tax on the sale of a residential house in India using the provisions of Section 54 of the Income-tax Act, 1961. We’ll cover practical scenarios, exemptions, and important considerations to ensure you make informed decisions while navigating this aspect of taxation.

Mr. A purchased a residential flat in the Financial Year 2002-03 for a consideration of Rs. 25,00,000/-. He paid a stamp duty of Rs. 1,50,000/- and Registration charges of Rs. 30,000/- for the said purchase. Mr. A sold the said flat on 10.05.2023 for a consideration of Rs. 2 Crore. Now the question here is what are the tax implications and ways to save the taxes on the sale of the house? Since the house was held for more than 2 years by Mr. A, the capital gains will be Long-Term Capital Gains. Let’s compute the capital gains first:-

Full value of Consideration		Rs. 2,00,00,000/-(A)
Cost of acquisition Stamp duty Registration Charges Total Cost of Acquisition	Rs.25,00,000/- Rs.  1,50,000/- Rs.  30,000/- Rs. 26,80,000/-
Year of acquisition	F.Y. 2002-03
CII of 2002-03	105
Year of Sale	F.Y. 2023-24
CII of 2022-23	348
Indexed Cost of acquisition	Rs.26,80,000X348/105	Rs. 88,82,285/-(B)
Long Term Capital Gain (A-B)		Rs. 1,11,17,715/-
Tax on LTCG		Rs. 22,23,543/-

From the above calculation, it is evident that the sale of the flat by Mr. has for a consideration of Rs. 2,00,00,000/- yielded a Long-Term Capital Gain of  Rs. 1,11,17,715/-. Here it is pertinent to mention that no taxes are payable on the remaining amount of Rs. 88,82,285/- out of the receipt of Rs. 2,00,00,000/-. In the case of residential houses, only the Long-Term Capital Gain needs to be appropriated and not the entire sale proceeds, to save taxes. Here the receipt of Rs. 2,00,00,000/- will result in a tax liability of Rs. 22,23,543/-. So, what is the way out to save this tax of Rs. 22,23,543/-?

Invest the amount of capital gains in another Residential House:- Section 54 of the Income-tax Act,1961 provides an exemption from taxes arising out from the Long-Term Capital Gains on the sale of a Residential house. The section says that if any Individual or HUF has invested the Long-term capital gain amount arising out from the sale of a residential house into another residential house fulfilling the following criteria, then the taxes are exempted:-

• Have purchased another residential house within a period of one year prior to the date of sale of the residential house.
• Have purchased another residential house within a period of two years after the date of sale of the residential house.
• Have constructed another residential house within a period of three years after the date of sale of the residential house.

Let us understand the above provisions in detail:-

• Have purchased another residential house within a period of one year prior to the date of sale of the residential house:- A sold the flat on 10.05.2023 for a consideration of Rs. 2,00,00,000/-, which resulted in Long-term capital gains of Rs. 1,11,17,715/-. If Mr. A had already purchased another residential house within a period of one year before the date of sale of the house i.e. between 11.05.2022 to 10.05.2023, the long-term capital gains are exempted from tax and the working of taxation is done as under:-

 Scenario 1- Cost of the new house is equal to or more than the Long-term capital gains:- If Mr. A had already purchased another residential house between 11.05.2022 to 10.05.2023 of a value of Rs. 1,11,17,715/- or more, then he is not liable to pay any tax on the sale of the residential flat for a consideration of Rs. 2,00,00,000/-. Let’s assume that Mr. A had purchased another flat for a total consideration of Rs. 1,20,00,000/- between 11.05.2022 to 10.05.2023, then the entire taxes of Rs. 22,23,543/- is exempted.

Scenario 2- Cost of the new house is less than the Long-term capital gains:- If Mr. A had purchased another residential house between 11.05.2022 to 10.05.2023 of a value of less than Rs. 1,11,17,715/-, then the difference between the Long-term capital gain and the amount of actual investment will be taxable. Let’s assume that Mr. A had purchased another flat for a total value of Rs. 60,00,000/- between 11.05.2022 to 10.05.2023, then in this case his taxable Long-term capital gain shall be Rs. 51,17,715/- (Rs. 1,11,17,715/- less Rs. 60,00,000/-). In this scenario, Mr. A has to pay taxes @ 20% on Rs. 51,17,715/-.

Have purchased another residential house within a period of two years after the date of sale of the residential house:- A sold the flat on 10.05.2023 for a consideration of Rs. 2,00,00,000/-, which resulted in Long-term capital gains of Rs. 1,11,17,715/-. If Mr. A wishes to purchase another residential house between 10.05.2023 to 09.05.2025, the long-term capital gains are exempted from tax and the working of taxation is done as under:- 

Scenario 1- Cost of the new house is equal to or more than the Long-term capital gains:- If Mr. proposes to purchase another residential house between 10.05.2023 to 09.05.2025 of a value of Rs. 1,11,17,715/- or more, then he is not liable to pay any tax on the sale of the residential flat for a consideration of Rs. 2,00,00,000/-. Let’s assume that Mr. wishes to purchase another flat for a total consideration of Rs. 1,20,00,000/- between 10.05.2023 to 09.05.2025, then the entire taxes of Rs. 22,23,543/- is exempted.

Scenario 2- Cost of the new house is less than the Long-term capital gains:- If Mr. A proposes to purchase another residential house between 10.05.2023 to 09.05.2025, of a value of less than Rs. 1,11,17,715/-, then the difference between the Long-term capital gain and the amount of actual investment will be taxable. Let’s assume that Mr. A wishes to purchase another flat for a total value of Rs. 75,00,000/- between 10.05.2023 to 09.05.2025, then in this case his taxable Long-term capital gain shall be Rs. 36,17,715/- (Rs. 1,11,17,715/- less Rs. 75,00,000/-). In this scenario, Mr. A has to pay taxes @ 20% on Rs. 36,17,715/- only.

Have constructed another residential house within a period of three years after the date of sale of the residential house:- A sold the flat on 10.05.2023 for a consideration of Rs. 2,00,00,000/-, which resulted in Long-term capital gains of Rs. 1,11,17,715/-. If Mr. A wishes to construct another residential house after the date of sale of the house, and if the construction of the house is completed by 09.05.2026, the long-term capital gains are exempted from tax and the working of taxation is done as under:-

 Scenario 1- Cost of the new house is equal to or more than the Long-term capital gains:- If Mr. proposes to construct another residential house between 10.05.2023 to 09.05.2026 of a value of Rs. 1,11,17,715/- or more, then he is not liable to pay any tax on the sale of the residential flat for a consideration of Rs. 2,00,00,000/-. Let’s assume that Mr. wishes to construct another house for a total consideration of Rs. 1,30,00,000/- between 10.05.2023 to 09.05.2026, then the entire taxes of Rs. 22,23,543/- is exempted.

Scenario 2- Cost of the new house is less than the Long-term capital gains:- If Mr. A proposes to construct another residential house between 10.05.2023 to 09.05.2026, of a value of less than Rs. 1,11,17,715/-, then the difference between the Long-term capital gain and the amount of actual investment will be taxable. Let’s assume that Mr. A wishes to construct another house for a total cost of Rs. 80,00,000/- between 10.05.2023 to 09.05.2026, then in this case his taxable Long-term capital gain shall be Rs. 31,17,715/- (Rs. 1,11,17,715/- less Rs. 80,00,000/-). In this scenario, Mr. A has to pay taxes @ 20% on Rs. 31,17,715/- only.

Very Important Point to be taken care of for claiming exemption u/s 54 if the investments in the new house are proposed to be made after the sale of the house:- 

Deposit the unutilised Capital Gain amount into Capital Gain Account with a nationalised bank before filing of return of income for the year under consideration:- Please note that in the event of the purchase of a house within two years after the date of sale or the construction of a house within three years from the date of sale, the capital gain amount has to be invested before filing of the return of income for the year in which the Long-term capital gains are arising. If the same could not be invested for any reason, the same must be deposited in any nationalised bank in the Capital gain account scheme account before the filing of return of income and further payments should be made from this account only, failing which the exemption will not be available. Let’s understand it with the following example:-

As discussed above, Mr. A sold the flat on 10.05.2023 for a consideration of Rs. 2,00,00,000/-, which resulted in Long-term capital gains of Rs. 1,11,17,715/-. Mr. A wants to invest Rs. 1,20,00,000/- in another house to save the entire tax liability. Here, the long-term capital gain has arisen in F.Y. 2023-24. The due date for filing of return of income for F.Y. 2023-24 is 31.07.2024. So, in the case of Mr. A wishes to buy a residential house within 2 years from 10.05.2023 i.e. till 10.05.2025 or wishes to construct a house within 3 years from 10.05.2023 i.e. till 10.05.2026, he must invest Rs. 1,20,00,000/- towards the purchase/ construction before the filing of return for A.Y. 2024-25 i.e before 31.07.2024.

But if Mr A is unable to find a suitable house till July 2024 or the construction is not possible to be completed till July, 24. In this scenario, he must open an account with a nationalised bank in a capital gain account scheme and deposit Rs. 1,20,00,000/-in this account. Once the suitable house is found or construction activity is started, the payments towards purchase/construction have to be made from this account, then only the benefits of section 54 will be available. Please note that in the event of keeping the unappropriated long-term capital gain amount in any account other than the capital gain account after the due date of filing of return and although appropriated towards the purchase/construction of a house within the 2 or 3 years bracket, the exemption u/s 54 will not be available. If Mr. A does not open such an account and purchase a flat on 15.12.2024 ( which is well within 2 years bracket from 10.05.2023) for a consideration of Rs. 1,20,00,000/-, the exemption u/s 54 will not be available to Mr. A and he has to pay taxes of Rs. 22,23,543/-.

Return of Income must be filed:- Many times it is found that a person who doesn’t has any source of income or whose income is below the limit for filing tax returns, sold a residential house and purchased another one within the time limit, and invested all of his capital gains in the new house. So he is under the impression that since his income arising out of the sale of the house is exempted as he has invested the entire capital gain in another house, he is not liable to file the return of income. This is a wrong conception. To claim exemption u/s 54 filing of return of income is mandatory. One must file the return of income irrespective of the fact that whether he has any taxable income or not. If a return of income is not filed, the exemption u/s 54 will not be allowable and although he has invested the entire capital gains, he will be liable for taxation on it.

Example:- Mr. A sold his flat on 10.05.2023 for a consideration of Rs. 2,00,00,000/-, which resulted in a long-term capital gain of Rs. 1,11,17,715/-. Mr. A invested Rs. 1,20,00,000/- in another residential house on 31.07.2023. Thus, Mr. A has satisfied all conditions to claim exemption u/s 54 and no taxes are payable by him on the property transaction. Mr. A does not have any other sources of income. Under the impression that since no taxes are payable, Mr. A does not file his return of income by 31.07.2024. Please note if Mr. A fails to file his return of income for A.Y. 2024-25, he will loose the exemption u/s 54 and although he has invested Rs. 1,20,00,000/- in the new house, he will have to pay taxes of Rs. 22,23,543/- with interest. It is therefore advised to file the return of income without fail if you have sold any residential house which yielded capital gains.

I hope that the concept of claiming the exemption u/s 54 on the sale of a residential house is quite clear. Now I shall proceed toward some practical situations  and their remedies with the help of Questions and Answers:-

Q. I sold a flat for a consideration of Rs. 1,50,00,000/-. The long-term capital gain is worked out to Rs. 47,00,000/-. Do I need to invest Rs. 1,50,00,000/- in another residential house to save taxes on Rs. 47,00,000/-?

Ans: To save taxes on the capital gains of Rs. 47,00,000/-, you need not invest the entire sale consideration. If you invest 47,00,000/- or more in a new residential house within the timeline as discussed in the present article, you need not pay any taxes on the receipt of Rs. 1,50,00,000/-. Let us assume that you invested Rs. 50,00,000/- in a new residential house, then the remaining Rs. 1,00,00,000/- is your tax-paid money, which you may utilise as per your wish and no taxes are payable on the entire transaction.

Q. I have 4 residential flats. I wish to sell one flat for a consideration of Rs. 1.25 Crore. The LTCG is coming to Rs. 50,00,000/-. Can I claim exemption u/s 54 by investing this Rs. 50,00,000/- in another house as I possess more than one house?

Ans: This question is always asked. To claim exemption u/s 54 i.e. from the sale of a residential house, there is no cap on number of holding of houses/flats. Any individual and HUF can claim exemption u/s 54 irrespective of the no. of houses one possesses. In the present question, yes, the exemption u/s 54 is available.

Q. I have a residential flat in my single name. I wish to sell the same which will yield a Long-Term Capital Gain of Rs. 80,00,000/-. I want to purchase another flat for a consideration of Rs. 1,50,00,000/- jointly with my son. My son will be contributing the remaining Rs. 70,00,000/- from his own sources after obtaining a housing loan. Whether exemption u/s 54 will be available for me on the LTCG of Rs. 80,00,000/-?

Ans:  Yes, the exemption u/s 54 will be available for you. Since you are investing the entire LTCG of Rs. 80,00,000/- towards the acquisition of another residential house, you will get the exemption irrespective of the fact that it is jointly purchased with your son.

Q. I have two small flats in Mumbai. I want to sell both flats for a consideration of Rs. 1,00,00,000/- for the first flat and for a consideration of Rs. 90,00,000/- for the second flat. The long-term capital gains from the sale of both houses will be Rs. 45 lakhs and Rs. 35 lakhs respectively, totalling to Rs. 80,00,000/-. I am planning to buy a single flat for a consideration of Rs. 1,10,00,000/-. Whether exemption u/s 54 will be allowed on the LTCG of both flats or of only one flat as I am buying a single flat after selling two houses?

Ans: There is no restriction u/s 54 for claiming exemption on the sale of more than one house and investing the LTCG in a single house. Since you are investing the entire long-term capital gain of Rs. 80,00,000/- arising out from the sale of two houses in a single house, you will get a full exemption on Rs. 80,00,000/-.

Q. purchased a flat in the month of January 2023 for a total consideration of Rs. 1,20,00,000/- after availing housing loan of Rs. 90,00,000/-. I have another house in my hometown which I am selling in the month of September 2023 for a total consideration of Rs. 1,50,00,000/-. The sale of this house will result in a long-term capital gain of Rs. 80,00,000/-. What are the tax implications?

Ans:– You have invested Rs. 1,20,00,000/- in a residential house in January 2023 by availing housing loan of Rs. 90,00,000/-. Now you are selling another residential house in the month of September 2023, which will yield an LTCG of Rs. 80,00,000/-. Since investment in another residential house has been made in January 2023, which is in the bracket of “Have purchased another residential house within a period of one year prior to the date of sale of the residential house” you will get full exemption on the LTCG of Rs. 80,00,000/-. No taxes are payable on the sale of the house in your hometown for a consideration of Rs. 1,50,00,000/-. It is immaterial that the house you purchased in January 2023 was sourced by availing of a Housing loan.

Q. I sold my residential house for a consideration of Rs. 85,00,000/-. The working of LTCG is resulting in a loss of Rs. 5,00,000/-. What is the tax implication of receipt of this Rs. 85,00,000/-?

Ans: Since the calculation is not resulting in any gain, there are no tax implications on the receipt of Rs. 85,00,000/-. This Rs. 85,00,000/- will be treated as your tax-paid money and you may utilise the same as per your wish.

Q.I have sold my house for a total consideration of Rs. 3,50,00,000/-. The Long-Term Capital Gain coming out from the transaction is Rs. 1,85,00,000/-. I wish to purchase two flats of a value of Rs. 1,00,00,000/- each, totalling to Rs. 2,00,00,000/- from the sale consideration received from the sale of one house, and want to keep the remaining Rs. 1,50,00,000/- for my old age expenses. Is the exemption u/s 54 available on the investment in both flats or I will get an exemption on the investment of only one flat as the proceeds were received from the sale of one house?

Ans: It’s a very interesting question. As provided u/s 54, if any Individual or HUF sells a residential property, which yields Long Term Capital Gain upto Rs. 2 Crore, then the said Individual or HUF can invest the LTCG arising out from the sale on one house into purchasing or construction of TWO residential houses in India. This option is available only once in a lifetime. And in this scenario, exemption u/s 54 is available on investment in two residential houses/flats from the LTCG on the sale of a single house.

In the present question, the sale consideration of one house is Rs. 3,50,00,000 and the resultant long-term capital gain is Rs. 1,85,00,000/-. He wants to invest a total of Rs. 2,00,00,000/- in two separate houses. In this case, full exemption u/s 54 will be available on the amount of Rs. 1,85,00,000/- as the entire amount of LTCG is being invested although in two separate houses. No taxes are payable on the sale of the property for a consideration of Rs. 3,50,00,000/-. However, this option can be exercised only once, hence will not be available in the future. If the LTCG is more than Rs. 2 Crore, the option of investing in two separate houses is not available, in that case, the exemption will be limited to the investment made in a single house only.

Q. Our ancestral house is being sold and as a member of the extended family, I will receive an amount of Rs. 1,00,00,000/- from the sale consideration. The LTCG of my share is coming to Rs. 40,00,000/-. Is exemption u/s 54 is available for me if I invest Rs. 50,00,000/- in another house given the fact that I did not invest any money in my ancestral house?

Ans: Yes, you are entitled to get benefits of section 54 and no taxes are payable on the receipt of Rs. 1,00,00,000/- as you have invested more than the LTCG arising out of this receipt in another residential house.

Q. I received a house by way of a gift from my Uncle. I am selling the same for a consideration of Rs. 70,00,000/-. The LTCG from this sale transaction is coming to Rs. 35,00,000/-. I am planning to buy another flat for a consideration of Rs. 55,00,000/-. Will the exemption u/s 54 will be available to me?

Ans: Since you are investing Rs. 55,00,000/- in another residential house whereas the LTCG is only Rs. 35,00,000/-, no taxes are payable on the entire transaction although the house was received on gift.

Q. Our ancestral house has been sold and as a member of the extended family, I received an amount of Rs. 80,00,000/- from the sale consideration. The LTCG from this transaction is Rs. 30,00,000/-. I transferred the entire Rs. 80,00,000/- to my wife’s account and in turn She purchased a residential house in her single name. Whether exemption u/s 54 will be available to me in this scenario?

Ans: Since you have not purchased the residential house in your name and it is purchased in the sole name of your wife, the exemption u/s 54 is not available to you. You will have to pay taxes on the LTCG of Rs. 30,00,000/- @ 20%.

Conclusion: Navigating the intricacies of income tax regulations, especially when dealing with the sale of a residential house, can be complex. However, armed with knowledge about Section 54 and its provisions, individuals can strategically plan their property transactions to minimize their tax liabilities. Remember that each situation is unique, and seeking professional advice is advisable for ensuring compliance and making informed financial decisions.

Efforts have been taken to cover various aspects of claiming exemption from Long-Term Capital Gain u/s 54 on the sale of a residential house. The readers are requested to feel free to ask their questions.

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For any query or professional consultation on Income-Tax provisions, while entering into any property transaction and for NRI-TDS (Lower TDS Certificate),  the Author may be contacted through WhatsApp at +91 9967745680 or via email- at bdconsultantsindia@gmail.com