The Income Tax Act grants total or partial exemption under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54H.

♣ Capital Gains Arising from Transfer of Residential Property – Section 54

Section 54 provides exemption on capital gains arising from the transfer of a residential house, being building or lands appurtenant (belonging) thereto, and the income of which is chargeable under the head Income from House Property; provided certain conditions are satisfied:

  • The House property is transferred by an individual or Hindu Undivided Family.
  • The house property (either self-occupied, let out or deemed let out) is a long term capital asset (i.e. is held for a period of more than 24 Months* before sale or transfer)

*36 Months if transfer takes place before 1.4.2017

  • To avail the benefit the assessee will have to purchase or construct one residential house*. The new residential house shall be purchased one year before or within two years after, the date of transfer of the residential property. Alternatively the assessee can construct a new residential property, construction of which should be completed within three years from the date of transfer of asset (Commencement date of construction is irrelevant, it can be started even before the date of transfer)

*If the amount of Capital Gain does not exceed Rs 2 Cr, the assessee can purchase/construct two residential house properties (applicable from assessment year 2020-2021). This concession can be availed once in a life time.

Word writing text Capital Gains with Open red marker

  • The house property purchased or constructed shall be situated in India.
  • The house property so purchased or constructed is not transferred within the period of 3 years from date of purchase or construction. If the same is sold within the period of 3 years, the cost of acquisition of new house sold shall be reduced by the exemption so claimed for the previous house transferred.
  • Amount of Exemption:

The amount of exemption is equal:

i. Amount of capital gain generated on transfer of residential house property, or

ii. Amount invested in purchase or construction of new residential house property

Whichever is lower.

  • Deposit of the capital gain amount in Capital Gains Account Scheme,1988 Where the amount of capital gain is not appropriated or utilized by the assessee for purchase or construction of new residential house property before the due date of furnishing the return of income under section 139 (1) , it shall be deposited by him on or before the due date of furnishing return of income, in the Deposit Account in any branch of a public sector bank . The amount so utilized for purchase or construction along with the amount deposited in Deposit Account shall be deemed to be the amount utilized for the purchase of new house under section 54.

Provided that the amount so deposited is not utilized fully for purchase or construction of new house within the stipulated time period, then the amount so not utilized shall be treated as long term capital gain of the previous year in which the period of three years from the date of original transfer expires.

Questions and supporting Judgments

1. Whether Construction of new house can precede the sale of old house? Suppose Mr. A started construction of his new house on 31.05.2019, while the date of actual transfer of property 31.12.2019. Under this when shall the period of 3 years end?

Ans.

As per my opinion, the date of commencement of construction does not matter. Under any circumstances, the construction of house shall be completed by 31.12.2022.

The above opinion is supported by judgments from the

  • Allahabad High Court in the case of CIT vs K.Kapoor [1998] 150 CTR (All.) 128
  • Karnataka High Court in the case of CIT vs J.R.Subramanya Bhat [1987] 165 ITR 571 (Kar.)

2. An individual sold his residential house property and later purchased two adjacent flats. Will he be allowed the capital gain exemption?

Ans.

Yes, if a taxpayer invests long term capital gains in acquisition of two residential flats (situated side by side). He can avail the benefit.

Even if the said flats are purchased by two separate sale deeds and have separate electricity meters, the assessee cannot be denied the benefit of exemption.

Further, if the assesse purchases one flat on Ground Floor and one on second floor, but maintains one common kitchen only, the same has been held to qualify as one residential house.

The above opinion is supported by judgments from the

  • ACIT v. Leela P. Nanda [2006] 286 ITR (AT) 113 (Mum.)
  • CIT v. D.Ananda Basappa [2009] 309 itr 329 (Kar.)
  • ITO v. P.C. Ramakrishna (HUF) [2007] 107 TTJ (Chennai) 351

3. Can Expenses Incurred for selling the residential house property be considered while calculating the capital gain amount?

Ans.

Yes, one can deduct the expenses incurred for selling the residential house property from the net consideration received. Expenses such as advertisement, legal expenses, brokerage or commission paid to agent, can be deducted from the net consideration received for the residential house property.

4. If an individual or HUF sells multiple residential house property and later invests the capital gain amount in one residential house property, will the assessee allowed to claim the benefit under section 54?

Ans.

Yes, if an assessee sells multiple house property and invests the money to buy one residential house property, then one can claim the exemption benefit under section 54.

The above opinion is supported by judgments from the

In the above two cases, assessee had sold multiple residential house property and invested the amount received for purchase of one residential house property.

Even if the assessee sold residential house property in two different years but purchased the new residential house property within time limit, he/she cannot be denied the exemption benefit under section 54.

5. I have sold flat in 2017 and deposited balance capital gain amount in Capital Gain Account and got exemption from Capital Gains. Next two years I have neither purchased new house nor constructed new house. In third year, will the exemption be continued and can be availed if I invest in new ready to occupy house or invest in under construction property?

Ans.

As per clear reading of the section, an assessee has to either purchase a residential house property within two years, or construct a house within 3 years from the date of transfer.

In the above case since the time period of two years has already elapsed, it is advisable to invest the money in under construction property. Also the construction shall be completed within the time limit of 3 years from the date of transfer. {A related judgment is available where the construction could not be completed by the builder due to unavoidable circumstances – CIT v. Dilip Ranjrekar [2019] 260 Taxmann 317 (Kar.)}

6. Is it Necessary to have link between the capital gain and investment made?

Ans.

There is nothing in the provisions of Section 54, to establish a direct link between the amount of capital gain and the cost of new asset. For instance if the assessee utilizes the amount of capital gain to create an FD for a short duration and then he either purchases the residential house property or deposit the same in Capital Gain Deposit Scheme account before the prescribed due dates, then he is qualified to take the exemption under section 54.

In one such case the assessee utilized the capital gain amount for purchasing and selling shares in between before depositing the same in Capital gains Deposit Account scheme and subsequently utilized the same for purchasing house, he is entitled to claim the benefir under the said section. Ajit Vaswanti v. CIT [2001] 123 (Delhi)

7. Will the assessee be denied Exemption if the new house property is registered in the name of wife or son/daughter?

Ans.

There are two contradicting judgments related to the above question.

While the Honorable Delhi High court & the Honorable Karnataka High court have given the decision in favor of the assesse, whereby they have held that an Individual or assessee cannot be denied a claim of exemption on investing the capital gain amount in the name of his/her spouse or children.

Though the Honorable Bombay High Court gave a ruling in favor if the revenue and the assesse was not allowed to claim the capital gain benefit exemption.

The above opinion is supported by judgments (in favor of the individual or HUF) from the

  • CIT v. Ravinder Kumar Arora
  • CIT v. Suresh Verma [2012] 135 ITD 102 (Delhi)

The above opinion is supported by judgments (against the individual or HUF) from the

  • Prakash v ITO Ward 1(5), Nagpur

Article By. CA Dhaval Bhanushali – cadhavalb@gmail.com

Author Bio

Qualification: CA in Practice
Company: JBD & Associates
Location: Vapi, Gujarat, IN
Member Since: 19 Jul 2020 | Total Posts: 1

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2 Comments

  1. rohanmmore says:

    While computing long term capital gain on sale of house property, do we consider from booking date or registration date ? in case booked while property under construction.

  2. Rajesh Kisanrao Zingade says:

    Sold agri land in 2019 which was inherited by father to me in 2018. Land comes under city limits.If i invest by taking new property in city what will be the tax role i have to pay.

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