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Unravel the intricacies of Capital Gains Exemptions under Sections 54, 54F, and 54EC in India. Learn the criteria, timelines, and distinctions for optimal tax planning.
The Article covers Section 54 : (Exemption on Sale of Residential House), Section 54F (Exemption on Sale of LTCA Other than Residential House), Section 54EC: Exemption on Investment in bonds and Differences between Section 54 and Section 54F.
Page Contents
Section 54 : (Exemption on Sale of Residential House)
- When Assessee incurs LTCG on Sale of Residential House, he can get LTCG exemption u/s 54
- Key Points :
- Sale of Residential House which is LTCA
- Assessee needs to invest the LTCG on Sale of RH
- He has to purchase within 2 years after date of Sale or within 1 year before date of Sale another Residential House or construct one RH within 3 years of date of Sale
- Example: If RH is sold on 10.03.2022, he can purchase another RH before 09.03.2024 or after 11.03.2021 or construct 1 RH before 09.03.2025
- If LTCG is more than 2 crores, only 1 RH can be purchased
- Assessee can invest in two RH if his LTCG is less than 2 crores. However , this option is available only one time. The Assessee can not use this option in any other Assessment Year
- The new RH purchased should not be sold before 3 years of acquisition.
- If it is sold within 3 years , it cost of acquisition of this new RH will be reduced by the exemption taken earlier
- Hence this LTCG will get charged to tax in the year in which new RH is sold (If sold within 3 years)
- Example 1: LTCG on sale of house is 1 crore. Investment in new RH is 80 lakhs, then Exemption under 54 will be 80 lakhs and only 20 lakhs will be charged to tax.
- If this new RH is sold within 3 years, then cost of this new RH for calculating LTCG will be (80-80) Nil.
- Example 2: LTCG on sale of house is 1 crore. Investment in new RH is 1.2 crores, then Exemption under 54 will be 1 crore and Taxable LTCG is Nil
- If this new RH is sold within 3 years, then cost of this new RH for calculating LTCG will be (1.2-1) 0.2 crore
- If the new asset is not purchased before filing return of income or before the due date of filing return under section 139(1), whichever is earlier, then the LTCG should be deposited in Capital Gains Account scheme before the above dates
- Example 1 : Last date of investing in RH is 31.12.2024,
- ITR due date is 31.07.2023 and ITR is filed on 30.06.2023
- Then if new RH is not purchased by 30.06.2023, it should be invested in CAGS and then ITR should be filed
- Example 2 : Last date of investing in RH is 31.12.2024,
- ITR due date is 31.07.2023 and ITR is filed on 31.08.2023
- Then if new RH is not purchased by 31.07.2023, it should be invested in CAGS by 31.07.2023 and then ITR should be filed
- If CAGS remains unutilized, then such unutilized amount will be charged to tax in the year in which 3 years from the transfer of Original Asset expires
Section 54F (Exemption on Sale of LTCA Other than Residential House)
- When Assessee incurs LTCG on Sale of a Asset other than Residential House, he can get LTCG exemption u/s 54F
- Key Points :
- Sale of any LTCA , other than RH
- Assessee needs to invest the entire Sale Consideration
- He has to purchase within 2 years after date of Sale or within 1 year before date of Sale, a Residential House or construct one RH within 3 years of date of Sale in India
- Example: If the LTCA is sold on 10.03.2022, he can purchase a RH before 09.03.2024 or after 11.03.2021 or construct 1 RH before 09.03.2025
- If cost of new asset is more than Sale Consideration, entire LTCG will be exempt.
- If COA of new asset < Sale Consideration, Proportionate LTCG will be exempt
- e. LTCG*Cost of new asset/ Sale Consideration
- Ex : LTCG : 1 cr, Cost of new Asset : 2.5 cr, Sale Consideration : 3 cr
- Exemption : 1*2.5/3 = 0.83 cr (83 Lacs)
- However following are the specific restrictions in this section :
1. The Assessee should have only 1 RH on the date of Sale (except new asset)
2. The Assessee cannot purchase any RH within 1 year from the Date of Sale (except new asset)
3. The Assessee cannot construct any RH within 3 years from the date of Sale (except new asset)
- If Assessee purchases another RH within 2 years of Sale or Constructs another RH within 3 years of Sale, the LTCG exempt earlier will be charged to tax as LTCG in the year in which it is purchased or Constructed
- Example 2: Date of Sale is 30.09.2022
- LTCG on sale of house is 1 crore. Exemption : 80 lacs
- If a new RH is purchased before 29.09.2024 or Contructed before 29.09.2025, i.e. on 28.08.2023, then LTCG of Rs. 80 lacs will be taxable in F.Y. 2023-24 (A.Y. 2024-25)
- The new RH purchased should not be sold before 3 years of acquisition.
- If it is sold within 3 years , the LTCG exempt earlier will be charged to tax as LTCG in the year in which it is sold
- Example 1: LTCG on sale of asset is 1 crore. Exemption based on proportion is 80 lacs.
- If this new RH is sold within 3 years, then LTCG of 80 lacs will become taxable in year of sale.
- If the new asset is not purchased before filing return of income or before the due date of filing return under section 139(1), whichever is earlier, then the LTCG should be deposited in Capital Gains Account scheme before the above dates ( Same condition as in Section 54)
- Example : Last date of investing in RH is 31.12.2024,
- ITR due date is 31.07.2023 and ITR is filed on 30.06.2023
- Then if new RH is not purchased by 30.06.2023, it should be invested in CAGS and then ITR should be filed
- Example : Last date of investing in RH is 31.12.2024,
- ITR due date is 31.07.2023 and ITR is filed on 31.08.2023
- Then if new RH is not purchased by 31.07.2023, it should be invested in CAGS by 31.07.2023 and then ITR should be filed
- If CAGS remains unutilized, then such unutilized amount will be charged to tax in the year in which 3 years from the transfer of Original Asset expires
Section 54EC: Exemption on Investment in bonds
- This section is very specific
- Key Points :
- There should be transfer of LTCA, being land or building or both
- LTCG amount to be invested within 6 months from Date of Transfer in bonds issued by NHAI or REC (redeemable after 5 years)
- E.F. 1.04.2018, lock-in period is 5 years
- If the bonds are sold within lock-in period, the LTCG exempted earlier will become taxable in the year of Sale
- Even if the bonds are not sold but converted to money in any form, then the LTCG exempted earlier becomes taxable
- Even if Loan is taken on security of such bonds, it will become taxable
- Note : Even if the six months period covers 2 F.Y.s ,ex 20.3.2023 to 19.09.2023, the Total Investment limit will be 50lacs only (and not 50 lacs*2) : 2nd Proviso
Differences between Section 54 and Section 54F
- Section 54 : LTCA RH should have been transferred
- Section 54F : LTCA other than RH should be transferred.
- Section 54 : Only LTCG to be invested in New Asset
- Section 54F : Entire Net Sale Consideration to be invested in New Asset
- Section 54 : No restriction on additional purchases of RH in next 2 years
- Section 54F : Restriction on additional purchases of RH in next 2 years
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I need some clarification on Sec 54, 54EC and 54F
Can you please contact me. I am a subscriber in taxguru.in and I have uploaded an Income Tax Calculator in Excel in taxguru.in
Govind