The persons having long-term capital gain can avail exemption under various sections by making prescribed investments. The long-term capital gains are usually taxed @ 20%. This tax can be saved by making investments as per section 54, 54EC and 54.

Section 54: Profit on sale of property used for residence:

Capital gain arising on transfer of a residential house is exempt u/s 54 if such capital gain is reinvested. The capital gain is exempt if the following conditions are satisfied:

  • The asset is transferred by an Individual or a HUF, i.e., this exemption is only available to an Individual or HUF.
  • The Asset transferred is a residential house, the income of which is chargeable under the head Income from House Property. The house may be let out or Self-occupied.
  • The asset transferred is a long-term capital asset and hence there is a long-term capital gain.

Meaning of Long-Term Capital Asset:

For Immovable property being land or building or both, the period of holding is 24 Months to qualify as a long-term capital asset.

Important Note:

Earlier the period of holding was 36 months to qualify as a long-term capital asset. The Finance Act’2017 reduced the period of holding from 36 months to 24 months in case of immovable property, being land or building or both, to qualify as a long-term capital asset.

  • Investment of Capital Gain:

1) Purchase of ONE residential house in India within 1 year before or 2 years after the date on which transfer took place OR

2) Construction of ONE Residential house in India within a period of 3 years after the date on which transfer took place.

 Important Note:

The Exemption is available if the investment is made in one residential house situated in India. The Finance Act’2014 has restricted the benefit of investment to one residential house within India.

Quantum of Deduction:

  • Amount of Long-Term Capital Gains OR
  • Amount invested in the purchase or construction of the residential house.

Whichever is less.

Deposit in Capital Gain Account Scheme:

The assessee is given 2 years to purchase the house property or 3 years for construction of the house property, but the capital gain on the transfer of original house property is taxable in the previous year in which transfer took place.

Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the return otherwise the capital gain would become taxable.

The amount of capital gain, which is not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the return of income, shall be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return.

Consequences where the amount deposited in the Capital Gains Account Scheme is not utilized for the purchase or the construction of a residential house within the specified period:

The amount not so utilized shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires. The assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

Consequences if the New House is transferred within a period of 3 years of its Purchase or Construction:

The cost of Acquisition of New house property shall be reduced by the amount of capital gains exempt under this section.

Important Note:

There is a restriction on transfer of New house property within a period of 3 years from the date of its acquisition. If such house property is transferred within a period of 3 years, the Cost of Acquisition of such house property shall be reduced by the amount of capital gains exempt under this section.

The Finance Act’2017 reduced the period of holding from the 36 months to 24 months in case of immovable property, being land or building or both, to qualify as a long-term capital asset.

Thus, if such house property is sold after 2 years but before 3 years, the capital gain shall be long term. The benefit of indexation shall be available on the cost of acquisition determined after reducing the amount of capital gain exempt u/s 54.

Section 54EC: Capital gain not to be charged on investment in certain Bonds:

Long-Term Capital Gain arising on the transfer of any Capital asset is exempt u/s 54EC if the assessee has within the period of 6 Months after the date of such transfer invested the capital gain in the specified bonds.

  • This exemption is available to any assessee.
  • The asset transferred is Long Term Capital Asset.
  • The amount should be invested in the long-term specified assets within a period of 6 Months after the date of such transfer.

Meaning of Long Term Specified Assets:

Bonds redeemable after 3 Years

  • Issued by the National Highway Authority of India (NHAI).
  • Issued by the Rural Electrification Corporation (REC).
  • Any Other Bonds issued by the Central Government in this behalf.

The Central government has notified that bonds issued by Power Finance Corporation Limited issued on or after 15.06.17 or Indian Railway Finance Corporation issued on or after 08.08.17 are also eligible for exemption. (Notification No. 47/2017, dated 08.06.2017 and Notification No. 79/2017, dated 08.08.2017)

The cost of bonds which is considered for the purpose of exemption u/s 54EC shall not be eligible for deduction u/s 80C.

Maximum Amount of Investment:

Investment in bonds is limited to Rs. 50,00,000/-. The investment made by an assessee in the long-term specified asset, from capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

Consequences if the Bonds are transferred or Converted into Money within 3 Years:

The amount claimed as exempt u/s 54EC shall be deemed to be long-term capital gain of the previous year in which the bonds are transferred or converted into Money.

If the assessee takes any loan or advance on the security of such bonds, he shall be deemed to have converted such bonds into money on the date on which such loan or advance is taken.

Taxability of Interest on Bonds: Interest earned on these bonds is taxable as Income from other sources. 

Proposed Amendments by the Budget’2018 in Section 54EC:

The Budget 2018 has proposed major changes in the Section 54EC.

1) The scope of Exemption is restricted only to the capital gains arising from a long-term capital asset, being land or building or both.

Analysis:

Section 54EC proposed to be amended so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in the said section.

Thus, the scope of section 54EC is restricted only to the capital gain arising from the transfer of a long-term capital asset, being land or building or both. Earlier this benefit was available to long Term Capital Gain arising on the transfer of any Capital asset.

2) Tenure of the Bonds is increased from 3 years to 5 years.

Analysis:

Section 54EC proposed to be amended so as to provide that long-term specified asset for making any investment under the said section on or after the 1st day of April, 2007 but before the 1st day of April, 2018 shall mean any bond, redeemable after three years and issued on or after the 1st day of April, 2007 but before the 1st day of April, 2018 and for making any investment under the section on or after the 1st day of April, 2018 shall mean any bond, redeemable after five years and issued on or after the 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf

Thus, now the bonds will be redeemable after five years instead of three years

Section 54F: Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house:

Any long-term capital gain, arising to an Individual or HUF, from the transfer of any capital asset, other than residential house property, shall be exempt in full if the entire net sales consideration is invested in

  • Purchase of ONE residential house in India within 1 year before or 2 years after the date of transfer of such asset OR
  • Construction of ONE residential house in India within 3 years after the date of such transfer.

Where part of the net consideration is invested, it will be exempt proportionately.

Exemption = (Capital Gain * Amount Invested) ÷ Net Sale Consideration

Deposit in Capital Gain Account Scheme:

The amount of net consideration, which is not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the return of income, shall be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return.

Exemption is not available where:

(a)  the assessee, —

 (i)  owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

 (ii)  purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii)  constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b)  the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.

Consequences if the New House is transferred within a period of 3 years of its Purchase or Construction:

  • Capital Gain/loss on the transfer of new house will be chargeable to tax under the head capital gain.
  • Capital exempt earlier u/s 54F shall be treated as a long-term capital gain of the previous year in which the new asset is transferred.

Important Note:

There is a restriction on transfer of New house property within a period of 3 years from the date of its acquisition. If such house property is transferred within a period of 3 years, the capital gain is chargeable to tax as mentioned above.

The Finance Act’2017 reduced the period of holding from the 36 months to 24 months in case of immovable property, being land or building or both, to qualify as a long-term capital asset.

Thus, if New house property is transferred after 2 years but before 3 years, the capital gain arising on sale of the new asset shall now be long-term capital gain instead of short-term capital gain and benefit of indexation of cost shall also be allowed.

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Tags : section 54 (137) section 54EC (84) Section 54F (165)

3 responses to “Analysis of Section 54, 54EC and 54F- Exemption from Long Term Capital Gains”

  1. KAILASH GOYAL says:

    DEAR SIR ,

    The Finance Act’2017 reduced the period of holding from the 36 months to 24 months in case of immovable property, being land or building or both, to qualify as a long-term capital asset.

    Thus, if such house property is sold after 2 years but before 3 years, the capital gain shall be long term. The benefit of indexation shall be available on the cost of acquisition determined after reducing the amount of capital gain exempt u/s 54.
    Sir there is no change in se3ction 54 as regards holding period of new property it is not reduced from 3 years to two years . please

  2. MANJUNATHA says:

    Sir, your article is informative. Just want to know how and where to show the details of bonds purchased while filing our ITR when we want to claim exemption. In fact in ITR2 reference is there about “Amount deposited in Capital Gains Accounts Scheme before due date” but there is no column to furnish details of bonds purchased.

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