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 54F.

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.

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:

1. 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.

2. With effect from Assessment Year 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.

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 assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.

Quantum of Deduction:

  • Amount of Long-Term Capital Gains OR
  • Amount invested in the purchase or construction of the new 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 capital gains exempted earlier will be chargeable to tax in year of transfer of new asset.

Now there will be a possibility of 2 scenarios:

a. If the new house property is less than the capital gains calculated from the sale of the original house property

In this case, the capital gain exempted while transfer of property will now be taxable and cost of acquisition of new asset will be considered zero.

b. When the cost of the new house property purchased is more than the capital gains calculated on the sale of the original residential property.

In this case, the cost of acquisition of new house property will be reduced by the amount of capital gain exempted.

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

Long-Term Capital Gain arising on the transfer of land or building or both (Amended by Finance Act, 2018) 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 restricted to only transfer of Land or building or both by Finance Act 2018.
  • 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:

For making any investment under this section on or after the 1st day of April, 2018, means any bond, redeemable after five years and issued on or after the 1st day of April, 2018 which is Issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) or Any Other Bonds issued by the Central Government in this behalf.

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. 

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 long term 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.

Author Bio

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Company: Tarun Harish Kumar & Co.
Location: Delhi, New Delhi, IN
Member Since: 25 Apr 2017 | Total Posts: 42
A passionate Chartered Accountant having practical exposure of working with the Start-ups and NGOs. I also do have an interest in blogging and teaching. I am active blogger and authored various blogs on Taxation matters, that have been published in the print media and leading newspapers as well as w View Full Profile

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20 Comments

  1. G Subramaniam says:

    Dear Sir,
    I am a senior citizen who has sold his residential property in April 2021. The Agreement for sale was executed and registered on 8th April and the final payment was received on 30th April 2021. I do not intend to buy any other residential property . I need the following clarifications: 1. I plan to invest Rs 50 lakhs in Capital Gains Bonds of REC and NHAI . Can I do this online without having to submit applications in physical mode to the bank ? What is the time limit that I have for making this investment ? In the interim , can the funds be invested in MFs ? 2. I will be paying Tax on the balance Capital Gains . As a senior Citizen who is exempt from paying Advance Tax , what is the time limit for making this Tax payment ? . Can I pay this Tax amount as Self Assessment along with my normal Tax return which will be due in July 2022.? Kindly provide the correct Tax position With warm regards G Subramaniam

  2. VIDHYA says:

    I had sold a property in the year Fy 19-20, after all deduction under indexation and acquisition my LTCG value comes to 12 Lakhs but wherein i had invested under section 54EC capital gain for Rs.14 Lakhs. shall I take balance amount of Rs.2 Lakhs in future year for some other sale consideration of similar property falls under same Head of LTCG.

  3. Amit Kumar says:

    Sir, My uncle purchase a house in 2012-13 at Rs. 40 Lac at that time it was Residential property but now it is a commercial property in 2019-20. They are selling it in Rs 5 Crores. Profit Approx Rs. 3.5-4 Crore. They already purchase a House Property under Section 54 in past year when he sale house before 5-6 Years. Please suggest how we save our capital gain tax and can take benefit of second house purchase.

  4. Rajshekhar Shetty says:

    I have sold my residential property in the month of August 2020 for Rs.10Lacs ( Longterm Capital Gain. Rs.6Lacs) During the month of Feburary 2020 i.e before sale of my old property I have purchased a new residential Property for Rs.13lacs, which is fully paid. Can I claim Exemption u/s 54?

  5. SURYA says:

    Sir,
    Can we take benifit of Section 54F and 54EC both together on sale of a shop for Rs. 1.50 crores, by investing 1 Crore in a residential house and balance of Rs. 50Lakhs in specified bonds u/sec 54EC.

    Thank you,
    SURYA, Advocate.

  6. Surya says:

    Mr.Tharun,
    My father sold a 10 years old shop for 1.5 Crores, can he claim exemption under sections 54F and 54EC together, like investing 1 Crore in a residential Flat and Balnce 50Lakhs investing in Specified Bonds.

    Thanks and Regards,
    SURYA

  7. Dhyey says:

    Hello sir,
    Sir i want to know that whether Exemption U/S 54EC is available if a partnership firm is sold 1. As a slump Sale
    2. If assets(Land &Building) are sold separately ;and if yes in option 2. then will it be available on CG on sale of Building a Depreciable asset as it will be a short term gain?
    And sir requesting you to guide which option will be beneficial and is there any other option available to save tax other then 54G or 54GA.
    Thank you so much for your reply sir🙏

  8. Vikrant Singh says:

    If I sold one property in 2019 and have bought NHAI bonds of 50.lakh and thus taken benefit of Section 54
    Now if I sell another land in 2020 can I again invest the capital gain in NHAI Bonds

  9. V VARADARAJAN says:

    Sir, can you clarify my query.
    Whether one avail benefit of both Section 54 and 54EC towards investing CG on sale of residential property, that is purchase of residential property partly and Rs.50,00,0000 investment in REC bonds etc.,
    Please enlighten me.

    with regards,

    V.Varadarajan

  10. Prasun Kumar Paul says:

    Sir, your article is very useful. Just want to know that if any person invest 50 Lakhs in NHAI in 54EC and it is matured after 5 years. After that also same person can invest 50 Lakhs in NHAI. Or it is 50 Lakhs in his life time?

  11. sheela says:

    Dear Sir
    Thanks for the informations provided . Kindly address my query . NRI having LTCG On Shares listed in BSE , ( No other Income ) can get the exemption under Sec 54 F if he enter into a contract to purchase a Flat with the builder and invested the LTCG that flat . Which sections are specifically dealing with the NRI taxation and exemptions on LTCG ?

    Thanks
    Sheela

  12. A Shrinagar says:

    An assessee owns more than one residential accommodations (houses and flats) on the date he sells the one he was residing in.The flat sold fetches capital gain.How will then assessee save the long term capital gain tax.

  13. Akshay says:

    Hi, I am buying a property for 2 Cr in Mumbai and will sell an existing one in Mumbai for 1 Cr within 1 year period (I bought this property 5 years back). Also, I hold 1 more property in Mumbai which I will continue to hold. Can I still avail exemption benefit under Sec 54 on LTCG incurred on sale of that 1 Cr flat?

    Thanks a lot.

  14. 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

  15. 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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