Capital Gains on Transfer of Residential House Property – Section 54 Exemption

Introduction

A person who has sold his old house and from the sale proceeds he has purchased another house. In this case the objective of the seller was not to earn income by sale of old house but to acquire another suitable house.

Section 54 gives relief to a taxpayer from the Capital gain arising on the sale of his residential house and from the sale proceeds he acquires another residential house.

Basic conditions

The benefit of section 54 is available:

1. Only to an individual or HUF.

2. The asset transferred should be a long-term capital asset, being a residential house property.

3. Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house.

4. 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).

5. 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.

6. No exemption can be claimed in respect of house purchased outside India.

However, 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 by way of purchase or construction subject to 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.

For example

A purchased a residential house in April, 2015 and sold the same in April 2022 for Rs. 10,40,000. Capital gain raised Rs 1,00,000. A can claim the benefit of section 54 since

1. The asset is long-term residential house property.

2. The benefit is available only to an individual or HUF and Mr A is individual.

3. A can claim the benefit by purchasing/constructing a residential house within the time-limit as provided under section 54.

Consequences if the new house is transferred

To check on mis-utilisation of this benefit, if a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn and the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house

Capital Gain Deposit Account Scheme

To claim exemption under section 54,

• The taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer.
• If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilized (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme). The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or 3 years, as the case may be.

Non-utilization of amount deposited in Capital Gain Deposit Account Scheme

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilized within the specified period for purchase/construction of the residential house, then the unutilized amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 2 years/ 3 years gets over.

Further Clarifications:

1. 24 month is the minimum period for treating the asset as long term.

2. If the asset is other than the residential house say Gold, the benefit of section 54 is not available however benefit can be claimed under section 54F subject to certain conditions.

3. Exemption is not available if capital gain raised from residential house, is invested other than the residential house property for example investment in a Shop

4. Exemption under section 54 will be lower of the following :

i. Amount of capital gains arising on transfer of residential house; or

ii. Amount invested in purchase/construction of new residential house whichever is lower