Section 54 of Income Tax Act, 1961: Exemption of Capital gains arising from transfer of Residential House Property
If any person holds residential house property and that person wants to sell its property then seller have to pay income tax on capital gains arising on sale of house property. To save from this tax seller can spend the amount earn on transfer of property in another residential house property.
This section gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house.
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Conditions to avail benefit under section 54
1. Available only to individual or HUF.
2. Asset must be residential house property.
3. Asset must be long term capital asset. Any immovable property must be considered long term if the holding period is not less than 24 months.
4. This benefit is available only if that new house is purchased within 1 years before the date of sale or 2 years after the date of sale. Or should be constructed within a period of 3 years from the date of sale.
5. This can be avail for one house property.
6. House should be purchased within India.
Amount of exemption under section 54
Exemption under section 54 will be lower of following:
1. Amount of capital gains arising on transfer of residential house
or
2. Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme).
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. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if 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.
From FY 2020-2021 if your long term capital gain from sale of residential house property is below Rs. 2 crores you can invest in two houses and can claim exemption for both the houses. But both the houses should be residential and within India. This option can be exercise once in a lifetime.
Further, with effect from Assessment Year 2024-25 the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new asset exceeds Rs. 10 crores, the excess amount shall be ignored for computing the exemption under Section 54.
It means that from FY 2023-2024 if after selling your old residential house you purchase any other residential house and its cost is above Rs. 10 Crores then you can take maximum exemption of Rs. 10 Crores only and on excess amount you have to pay tax.
For example –
1. If you sell your old house and have capital gain of Rs. 12 Crores and invest Rs. 11 Crores in new house then you will get exemption of Rs. 10 Crores U/S sec 54 of income tax act.
2. If you sell your old house and have capital gain of Rs. 12 Crores and invest Rs 8 Crores in new house then you will get exemption of Rs. 8 Crores U/S sec 54 of income tax act.
If any person sell the house and can not utilized the amount in the new house till the date of filing the return of income of that financial year then that person have to deposit the unutilized amount in the 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 amount to be deposited before return filing date of the FY in which house is sold.
However, with effect from Assessment Year 2024-25 if the capital gains deposited in the Capital Gains Scheme Account exceed Rs. 10 crores, the excess amount shall not be taken into account while computing capital gain exemption.
From FY 2023-2024 exemption will not be more than Rs. 10 Crores even you deposit more amount in this scheme.
Non-utilisation 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 utilised within the specified period for purchase/construction of the residential house, then the unutilised 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.
If the amount withdrawn from the scheme is used for any other purpose then it will be charged to tax as income by way of long-term capital gain of the year of withdrawal.
For ex- If an individual sold the house on 29th Sep 2022 then that person have to purchase the new house with 2 years from this date i.e. 29th Sep 2024 oor constructed new house within 3 years from this date i.e. 29th Sep 2025. If not utilized fully then unutilized amount will be taxable when time lapses i.e. in AY 2026-2027.
Suppose in FY 2024-2025 he withdraws the amount and purchased a car from this amount then the amount on which exemption is availed will be tax in the FY 2024-2025 i.e. the year in which it is withdrawn.
Consequences if the new house is transferred
Exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on mis utilization of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house. 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.
If an individual/HUF purchases new residential house and claim exemption U/S 54 and then sold the new house within three years of its purchases or construction then while computing the capital gains of the new house, its cost of acquisition will be reduced by the exemption which was availed earlier U/S 54.
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