Note on Section 54 of the Income Tax Act

Section 54 of the Income Tax Act applicable only to the Individual/HUF’s who transferred a long-term capital asset, other than a Residential house. to Claim section 54 exemption The assessee should not own more than one Residential house on the date of transfer to claim this exemption.

Conditions to be fulfilled to claim capital gains exemption under section 54

• The assessee should –Purchase one residential house situated in India within a period of 1 year before or 2 years after the date of transfer; or
• Construct one residential house in India within 3 years from the date of transfer.
• If such investment is not made before the date of filing of return of Income, then the net sale consideration has to be deposited in the Capital gain account and the amount so deposited shall deemed to be the cost of new asset.
• The assessee should not –
• Purchase any other residential house within a period of 2 years or
• Construct any other residential house within a period of 3 years from the date of transfer of the original asset.

Quantum of section 54 exemption

• If cost of new residential house is more than or equal to the net sale consideration of original asset, entire capital gains is exempt.
• If cost of new residential house is less than Net sale consideration of original asset, only proportionate capital gains is exempt i.e. (LTCG * Amount invested in new house / Net sale consideration).

Consequences if the new house is transferred within 3 years from the date of its purchase :

• If the new asset is transferred before the expiry of 3 years from the date of its purchase or construction, as the case may be, then capital gains arises on transfer of the new house and the capital gains exempted earlier under section 54F would be taxable as long-term capital gains.