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.
Page Contents
- Understanding the basis of ‘Capital Assets’ and ‘Capital Gain’
- Who can target claiming the benefit of exemption under section 54?
- Conditions for availing the exemption under section 54
- Amount of exemption available under section 54 of the Income Tax Act –
- Withdrawal of exemption benefit –
- Capital Gains Deposit Account Scheme –
- Frequently Asked Questions (FAQ) on Section 54
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.
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Author Bio
Under which section Long Term Capital Gain from Mutual Funds are claimed for exemption?
I am a senior citizen and I want to buy a Senior Citizen Home costing Rs.30 Lakhs. I have redeemed MFs for this purpose and the Long term Capital Gains in this transaction is Rs.7 lakhs. Can I get exemption for Capital Gains for purchasing a Senior Citizen home. I own two properties purchased in 1988 and 2005.
i SOLD RESIDENTIAL PROPERTY IN JULY 2019 FOR RS. 26 LACS WHICH WAS PURCHASED IN FEB 2006 FOR RS 3 LACS ONLY.
I bought the new property dt august 2019 in my daughter name.
Can I avail the benefit u/s 54 in the above case.
An early reply would be appreciated.
I intend to sell one residential property and invest in purchase of another property.( I am a Sr.ctzn.)
1. The property to be sold is in my name alongwith my wise who is the second onwer. However she is not claiming any income thereof and I am claiming the entire amount.
2. I possess another property jointly in the name of my wife and myself, (me being the second owner).
3. The new property which i intend to acquire will be in the joint name of my son, daughter and myself in that order.
Can I avail the benefit u/s 54 in the above case.
An early reply would be appreciated.
How many times an assessee can avail exemption under section 54?
Purchased flat in 2015 for Rs 2650000 with home pan Rs 21.5 lakhand want sell in Dec 2020 for Rs 49 lakhRs 15 lakh amount of home loan is still outstanding.I want to know returning HL amount will be considered as my LTCG or will be deducted from sale consideration I mean will I get examption of out standing HL
Sir,
I intend to sell one residential plot being sole owner at Rs.54 lac AND one house where I am co-owner with my daughter at Rs.40 lac where my share will be Rs.20 lac
Can I avail the benefit of section 54 EC for purchase of bond for full exemption limit of Rs. 50 lac as well as the benefit of Section 54 for reinvesting my full share of 20 lac in purchasing another residential property ?
I purchased a plot of size 2250 sqft for Rs. 0.55 lakhs on 31.12.2001 and after 18 years I sold out ion 23.01.2020 in Rs. 13.43 Lakhs.
Can I save the my capital gain by purchasing of residential flat in year 2021.
I purchased RBI bonds of Rs. 20 Lakhs in month of July 2020. Is it beneficial to save long term capital gain.
Please suggest other options also for saving.
With regards.
Sir I have purchase a residential kothi in 1994 then we have purchase a floor in 2015.now we have sale 1994 property in december 2019.Can we avail capital gain in this case
I opened a capital gain account with SB in May 2020. Now I want to reinvest the amount by purchasing a house and constructing one more floor. Who is the competent authority Branch Mananger, SBI ZOR IT Deptt
i SOLD RESIDENTIAL PROPERTY IN NOV 2018 FOR RS. 75 LACS WHICH WAS PURCHASED IN JUNE 2004 FOR RS 6.30 LACS ONLY.
PURCHASED RESIDENTIAL PROPERTY IN NOV 2018 FOR RS 95 LACS. HENCE NO LTCG
I TOOK LOAN FOR RS 37 LACS FROM BANK UNDER 15 YEAR TERM. AVAILED HL INTT EXEMPTION IN ITR ALSO FOR AY 2019-20 AND 2020-21.NO DEDUCTION CLAIMED UNDER SEC 80C.
NOW I WANT TO SELL IT IN DEC 2020 i.e. AFTER TWO YEARS OF PURCHASE FOR RS. 1.20 CRORES. I SPENT RS 10 LACS ON REGISTERATION ETC. SPEND RS 5 LACS ON REPAIRS AND RENOVATION ..
IF I DO NOT PURCHASE ANY PROPERTY OUT OF SALE PROCEEDS OF RS 1.20 CRORES, HOW MUCH TAX I HAVE TO PAY.OR IF I GO TO PURCHASE A NEW RESIDENTIAL PROPERTY, HOW MUCH MINIMUM AMOUNT I WILL HAVE TO INVEST IN NEW PROPERTY.
I sold house property and earned capital gain,whether I will get exemption under sec54 if I bought a new flat and invested whole sales proceeds in the name of me jointly with my son or wife
Sir, i have two queries:
1. Whether capital gain exemption benefit can be availed under section 54 and/or section 54EC,54EE simultaneously ?
2. Whether the re-investment can be made in a residential house property outside india ? Example- US/UK.
– CA Sachin
Dear Sir,
As per Provision of Section 54, the condition of holding period of 3 years of new asset is not prescribed in the section 54. However it is prescribed under Section 54F. Kindly explain
if assessee’s due date of filling itr is 31 September as it is an audit return then the amount of capital gain can be deposited before 31 September or 31 July to claim the benefit under sec 54?
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.
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?