Section 54 of the Income Tax Act provides exemption towards ‘Long Term Capital Gain’ arising on sale of residential property. Under the current article, we would try to thoroughly understand the exemption available under section 54 of the Income Tax Act along with relevant frequently asked questions.

Understanding the basis of ‘Capital Assets’ and ‘Capital Gain’ 

The term ‘capital asset’ is defined under section 2 (14) of the Income Tax Act, 1961 which includes property of any kind (movable or immovable, tangible or intangible etc.) held by an assessee. Such property may be connected with the business or profession or may not be connected with the business or profession of the assessee.

Based on the holding period of the ‘capital asset’, the same is divided into ‘Long Term Capital Asset’ or ‘Short Term Capital Asset’. Likewise, the gain arising on the sale of the capital assets are termed as ‘Long Term Capital Gain’ or ‘Short Term Capital Gain’.

Who can target claiming the benefit of exemption under section 54?

Only the individual or HUF who has sold residential property and bought another residential property can avail the benefit of exemption under section 54 the Income Tax Act provided all the required conditions are satisfied.

Conditions for availing the exemption under section 54

Following are the list of conditions which are mandatory to be satisfied in order to claim an exemption under section 54 –

  • The exemption benefit under section 54 is available only to an individual or a Hindu Undivided Family (HUF).
  • The capital asset transferred should be a ‘Residential House Property’. Further, income from such a residential house property should be chargeable under the head ‘Income from House Property’.
  • The capital asset transferred should be a ‘Long term capital asset’.
  • The seller of ‘Residential House Property’ should have either –
    • Purchased one residential house in India within a period of one year before or two years after the date of transfer; or
    • Constructed one residential house in India within a period of three years from the date of transfer.

As per the recent amendment, the benefit of exemption under section 54 is also available in case of re-purchase or construction of two residential house property only and only if the amount of ‘Long Term Capital Gain’ doesn’t exceed INR 2 Crores.

Amount of exemption available under section 54 of the Income Tax Act –

In case all the conditions laid down under section 54 are satisfied, the amount of exemption available would be lower of the following –

  • Investment made towards purchase or construction of the residential house property; or
  • Long term capital gain arising on transfer of the residential house property.

Withdrawal of exemption benefit –

As seen above, an exemption under section 54 is available in case the assessee re-invested the capital gain in purchasing or constructing a new residential house. However, the assessee must hold the newly purchased or constructed house for a period of three years.

In case the assessee sells the newly purchased or constructed house before the period of completion of three years from the date of purchase or date of completion of construction, then the exemption benefit availed under section 54 would be withdrawn. The effect of the same is explained here under –

Situation Treatment Example
In case the new house property is less than the capital gain calculated on the sale of the original house. Cost of acquisition of the new house would be considered as NIL Mr. X, in 2017, sold his house with a capital gain of INR 10 Lakhs. He invested INR 5 Lakhs for purchasing a new house and claimed the same as an exemption under section 54.
Capital gain on sale of house INR 10 Lakhs
(-) Exemption under 54 INR 5  Lakhs
Taxable capital gain INR 5 Lakhs
Mr. X sold the new house in 2019 for INR 15 Lakhs.
Sale consideration INR 15 Lakhs
Cost of acquisition NIL
Taxable Capital Gain INR 15 Lakhs
In case the new house property is more than the capital gain calculated on the sale of the original house. Cost of acquisition

(-) Amount of capital gain exempted

Mr. X, in 2017, sold his house with a capital gain of INR 10 Lakhs. He invested INR 15 Lakhs for purchasing a new house and claimed INR 10 Lakhs as an exemption under section 54.
Capital gain on sale of house INR 10 Lakhs
(-) Exemption under 54 INR 10 Lakhs
Taxable capital gain NIL
Mr. X sold the new house in 2019 for INR 25 Lakhs.
Sale consideration INR 25 Lakhs
Cost of acquisition (15 Lakhs – 10 Lakhs) INR   5 Lakhs
Taxable Capital Gain INR 20 Lakhs

Capital Gains Deposit Account Scheme –

When the capital gain arising on transfer of the residential house is not utilized for purchase / construction of a new house till the date of return filing, then, in order to claim the exemption, the unutilized amount is required to be transferred to ‘Capital Gains Deposit Account Scheme’.

The new residential house can be purchased / constructed by utilizing the amount deposited in the ‘Capital Gain Deposit Account Scheme’ within the prescribed time. However, in case the amount deposited is not utilized within the prescribed time, then, the unutilized amount will be treated as income of the previous year in which the period of 2 year / 3 years expires.

Frequently Asked Questions (FAQ) on Section 54

Q 1. How do I claim an exemption under section 54?

Ans: The exemption under section 54 of the Income Tax Act can be claimed in case of long term capital gain arising on sale of residential house property. In order to claim the exemption, the assessee is required to re-invested the amount towards purchasing or constructing new residential house property.

Q 2. What is section 54 of the Income Tax Act?

Ans: Section 54 provides exemption towards capital gain arising on sale of residential house property if the amount is used for purchase or construction of a new residential house. The exemption is available only to an individual or HUF.

Q 3. Can section 54 and 54F simultaneously?

Ans: No benefit under both section 54 and section 54F is not available simultaneously. The assessee can either avail exemption benefit under section 54 or under section 54F.

Read Also:-

1 Exemption under section 54GB of Income Tax Act 1961
2 Section 54GA Exemption under Income Tax Act, 1961
3 Capital gain exemption under section 54G of Income Tax Act, 1961
4 Section 54F Capital Gain Tax Exemption
5 Section 54EE Tax Exemption on long term capital gain
6 Section 54EC Exemption available on investment in certain specified bonds
7 Section 54D Exemption from capital gain on compulsory acquisition of land or buildings forming part of industrial undertaking
8 Exemption from capital gain on transfer of agricultural land – Section 54B
9 Exemption available under section 54 of Income Tax Act

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2 Comments

  1. R k aggarwal says:

    It is learnt that the capital gain amount can be deposited in capital gain account till July 31 of the year of gain to take tax relief. If the date of filing tax return get extended upto September 30, does it mean that investment in to capital gain account can be made till September end.

  2. A.Kumar says:

    For under construction flat , I want to know whether ( 1) Date of Registration of the agreement of the Flat OR ( 2) On completion of construction ,date of Handing over the Flat to the purchaser will be considered as acquisition by the purchaser?

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