CA Rohit R Sharma

CA Rohit R SharmaHello Everyone,

As we had discussed about the taxation rules on sale of immovable property, in the article on Capital Gain on Immovable Property we are here to understand the benefits that can be claimed under section 54, Section 54EC & Section 54F to save tax on long term capital gains.

At the time of sale of any Long term Capital Asset, the gain is taxed at a steep rate of flat 20%. In order to save up on those taxes, the act has given us an option of claiming exemptions from paying such Capital Gains if the tax payer reinvests the amount in certain specified forms of Investment and thereby save up on Long Term Capital Gain Tax.

Exemption from Capital Gain Tax under Section 54 54EC and 54F

Section 54: Proceeds from Sale of Old Residential House Property used to Purchase/construct one Residential House Property in India.

Any Long term Capital Gain arising either to an Individual or a HUF from the sale of a Residential Property shall be exempt to tax to the extent such Gain is invested in:

  • The Purchase of another one residential property in India  within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or
  • Construction of a Residential one House Property in India within a period of 3 years from the date of transfer.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

Amount of Exemption:

Exemption under section 54 will be lower of following:

  • Amount of capital gains arising on transfer of residential house; or
  • Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)

Consequences if the New House is Transferred:

Provided the new residential House Property purchased / constructed should not be transferred within a period of 3 years from the date of transfer. If the new property is transferred within a period of 3 years from the date of transfer then the benefit granted under section 54 will be withdrawn. The ultimate impact of the restriction is as follows:

  • The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.
  • If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new

Capital Gain Account Scheme:

To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the due date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing due date of filing the return of income the unutilised amount in 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 new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2/3 years, as the case may be.

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 3 years is completed.

Note:

(i) Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

(ii) If the transfer takes place on or after 01.04.2017, the period of holding to be qualified as Long Term Capital Asset shall be more than 24 months.

Section 54EC: Proceeds from Sale of Any Long Term Capital Asset (wef A.Y 2019-20, the said long term capital asset shall be land or building or both) used to Purchase a Specified Bonds.

Capital Gains arising from sale of any Long Term Capital Asset (wef A.Y 2019-20, the said long term capital asset shall be land or building or both) are exempt under section 54EC if the assesse has within a period of 6 months from the date of transfer invested the gains in Long Term specified bonds as issued by NHAI and REC and notified by the Central Govt (bond issued by power finance corp/Indian Railway Finace Corp). for a minimum period of 3 years (5 years if such bonds are issued on or after 01.04.2018)

In cases where the assesse converts the specified asset into cash, or takes a loan or advance on the security of such specified asset within a period of 3 years (5 years if the investment is made in specified asset on or after 01.04.2018) from the date of its acquisition, the amount of Capital Gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.

Amount of Exemption:

Capital gain shall be exempt to the extent of amount of investment in such specified bonds upto a maximum of Rs.50 Lcas

Section 54F: Proceeds from Sale of Any Capital Asset used to Purchase a one Residential Property In India.

Any Capital Gain arising either to an Individual or a HUF from the sale of any Long Term Capital Asset shall be exempt to tax if the entire sales proceeds and not only such Gain is invested in :

  • The Purchase of one residential propertyin India  within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or
  • Construction of a one Residential Housein India Property within a period of 3 years from the date of transfer.

Provided further that nothing contained in this sub-section shall apply where—

(a) the assessee,—

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.

In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

If the entire sale proceeds is not invested and only a part of the sale consideration is invested, then even the benefit shall also be proportionately allowed i.e

Amount claimed as Exempt = Capital Gain * Amount Invested ÷ Net Sale Consideration.

Consequences if the New House is Transferred/Purchases or construct another house:

(i) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house,other than the new asset,

(ii) Where the new asset is transferred within a period of three years from the date of its purchase/its construction

In the above two cases, the amount of capital gain arising from the transfer of the original asset which was not charged to tax shall be deemed to be income chargeable as long-term capital gain of the previous year in which such residential house is purchased or constructed/transferred.

Capital Gain Account Scheme:

To claim exemption under section 54F, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing on or before the due date of furnishing return the unutilised amount in 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 new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or3 years, as the case may be.

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54F 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 3 years is completed

The Author is a Chartered Accountant and can be reached at rrco1905@yahoo.com or 9920930544.

(Republished With Amendments)

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Tags : section 54 (147) section 54EC (87) Section 54F (178)

10 responses to “Brief Synopsis of Capital Gain Exemption u/s 54, 54EC & 54F”

  1. Sudheer says:

    I bought a Apartment recently jointly with my wife. Have taken a joint home loan for that. I am staying in new apartment bought for self use. I have another house in my sole name ( Inherited land from father on which house construction done by me 10 years back) which is let out and rent I am declaring in my ITR. My query is I have a plot of mine bought 12 yrs back. If I sell that can I utilize Capital Gains entirely to repay my Home loan to reduce Home loan. Now as it’s not my only home I read that benefits of Sec 54 not applicable. In that case can I gift my site to my wife and then she uses proceeds to prepay loan. This is what my CA advises. I am aware it can be done only within 1 year of buying new house. Please guide

  2. ajay says:

    I have a capital gain from sale of plot. I have 2 other house property in my name. I purchased another house property in same financial year. Is this purchase of residential house property qualify for capital gain deduction Sec 54

  3. VIVEK SINGHAL says:

    Hello,
    I have a commercial property which I wants it to sell, but before that I am intending to purchase one residential property.
    U/Sec.54(F), I will get the exemption under the required conditions as per I.T law.
    I WANT TO KNOW THAT WHAT WILL BE THE IMPACT IF, I MAKE A SALE AGREEMENT FOR MY ABOVE SAID COMMERCIAL PROPERTY AND TAKEN AN ADVANCE BEFORE PURCHASING THE ABOVE SAID RESIDENTIAL PROPERTY, AND UTILIZE THE ADVANCES SO RECEIVED BY ME IN PURCHASING THAT RESIDENTIAL PROPERTY.

    THANKING YOU,

  4. VIVEK SINGHAL says:

    Hello,
    I have a commercial property which I wants it to sell, but before that I am intending to purchase one residential property.
    U/Sec.54(F), I will get the exemption under the required conditions as per I.T law.
    I WANT TO KNOW THAT WHAT WILL BE THE IMPACT IF, I MAKE A SALE AGREEMENT FOR MY ABOVE SAID COMMERCIAL PROPERTY AND TAKEN AN ADVANCE BEFORE PURCHASING THE ABOVE SAID RESIDENTIAL PROPERTY, AND UTILIZE THE ADVANCES SO RECEIVED BY ME IN PURCHASING THAT RESIDENTIAL PROPERTY.

    THANKING YOU,

  5. Madhu says:

    What happens if the you paid up for new residential property through a builder, and he fails to hand over the flat within two years?

  6. durga.maganti says:

    how can an individual will be saved from levying capital gains u/s 54f provided that he purcased two house properties?

  7. anand says:

    how can a corporate ( Private limited Company) save on long term capital gains tax on sale of immovable property including land and building. we have been taking advantage of depreciation of the building.

    Thanks

  8. Tapan Choudhury says:

    Dear tax guru ur information was realy good. I I had purchased a chawl for. 10Lin1990 sold at 40L use to pay 4800 rs.maintenance per year Iam retired no income req.money for household &medical purpose kindly advice sales date Nov 18 2015ⁿ

  9. vswami says:

    Hello
    May you study and clarify the doubt (correct me if me wrong)
    indicated below:

    You say that, –

    “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 IS COMPLETED.” –

    However, as per reading of the text with me, the Proviso to sec 54, – so
    also the correspondingly applicable Proviso to sec 54F (4) – which is not seen to have been covered by you- is noted to provide differently.

    In this context, also my comments posted itatonline on the recently
    reported Bom HC judgment deciding the point of issue under sec 54F (4) adverse to taxpayer are of relevance.

  10. Dileep Karthikeyan says:

    What is the exemption available if the amount of capital gain arising out of the sale of 1st residential property (OR entire sales proceeds) is used to repay the housing loan availed for acquiring 2nd residential property?

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