Buying a house is a dream for each one of us. There are various tax incentives offered by government towards stimulating individuals to buy house property under ‘Housing for All’ Mission. However it is of vital importance to keep an eye on calendar to time it well when we want to sell house property since there is a lot of tax jargon involved for a layman to understand which creates many unexpected tax liabilities on an individual.

1. Long Term Capital Vs Short Term

Any immovable property held for more than 2 years is treated as Long term capital asset and profit on such sale is taxed at 20% plus Cess and surcharge with indexation and if such property is held for less than 2 years then it shall be short term capital asset and shall be taxable at slab rates.

2. Must-Knows While Selling The House Property

  • If a house has been brought by taking a home loan and is sold within 5 years of the end of financial year in which it is purchased the benefits claimed under Section-80C needs to be reversed. The tax deduction claimed under Section 80C in the form of principal repayment, stamp fees and registration charges need to be reversed and the amount becomes taxable in the year of sale.
  • It is advisable to hold house property for at least a period of 2 years (24 months) if benefit of section-80C has not been claimed as it fulfills the criteria of being a long term capital asset and also indexation is taken into account which adjusts the inflation factor in purchase price and hence tax has to be paid on lower capital gain amount.
  • The owner of house property who holds it for a period of more than 2 years is eligible for claiming exemptions and reducing tax burden which otherwise is not available if asset is held for short term.
  • Individuals are also eligible to adjust brokerage charges or commission while arriving at sales consideration if the property is held for a period of more than 24 months.
  • Also expenses in relation to improvement or construction are allowed in the duration of holding such property.
  • Tax exemptions from capital gains such as Section 54,54EC are allowed only in case of long term capital assets.

3. How To Plan Taxes On Capital Gains From Property?

As mentioned earlier an individual can claim exemption from Long term capital tax payment on sale of such property if the individual uses the entire gain from such sale of property for investing in assets mentioned in section 54 and Section 54 EC.

4. Exemption under Section 54 of Income Tax Act, 1961

  • Only Individual/HUF can claim exemption under section 54
  • Asset to be sold is residential property and new asset to be acquired is residential property
  • It must be a long term capital asset.
  • Period of holding for new house is 3 years from the date of acquisition/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 house.

Conditions for claiming exemption under Section 54:

  • Purchase of another residential house property within 1 year or 2years after the transfer of property or Construction of residential house property within a period of 3 years from the date of transfer of property.
  • The house purchased has to be located in India to avail exemption under Section-54
  • Exemption can be claimed in respect of one residential house property which is purchased or 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.

With effect from AY 2020-21 the benefit of exemption has been extended to investment in 2 residential house properties. However the exemption in respect of purchase or construction of 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs2 Crores and this option is available only ONCE in a lifetime of  Assessee.

For all other Assessment years, investment should be made in construction/ purchase of only 1 residential house property located in India and exemption can be claimed under Section-54.

Where the amount of capital gain exceeds Rs 2 crores:

ONE residential house in India should be purchased within 1 year or 2years after the transfer of property or Constructed within a period of 3 years from the date of transfer of property.

Where the amount of capital gain does not exceed Rs. 2 crores:

The assesseee i.e. Individual/HUF may at his option purchase TWO residential house properties in India within the above time frame.

Example: Miss S purchased a residential house in previous year 2013-14 for Rs 3 crores and the house property is sold to Mr. M for 10 crores in the previous year 2020-21 and the capital gain is invested in two residential house properties worth Rs 3 crores each. Will S be eligible to claim exemption for both the house properties?

Solution: Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2020-21, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores. Since, the gain arising in hands of Miss S is more than Rs. 2 crores, she cannot claim the benefit of section 54 by making investment in two house properties.

Quantum of exemption: Lower of amount invested in Residential house or houses or capital gain whichever is lower. 

5. Unutilized amount- Capital gain account scheme applicable

The amount not utilized before the due date of filing ROI shall be deposited before the due date of filing ROI in the Capital gain 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.

6. Exemption under Section 54EC

 If an individual is not interested in buying any other property the taxpayer has another option to get exemption from LTCG tax by investing that money in capital gains tax exemption bonds, which are also known as 54EC bonds. Investment in these bonds allows exemption from LTCG tax payment under Section 54EC of the Income Tax Act. The maximum limit for investing in 54EC bonds is Rs 50 lakhs per financial year.

These bonds are issued by Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI) or any bond redeemable after 5 years which is notified by Central government. Both these bonds fetch 5.75% interest per annum, which is payable annually and these bonds have a lock-in period of five years. In case of transfer or conversion of such bonds or availing loan on security of such bonds before the expiry of 5 years the capital gain exempted earlier shall be taxed as long term capital gain in such year of violation.

Quantum of exemption: Capital gains or amount invested in specified bonds whichever is lower;

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  1. Sandeep Kumar Gupta says:

    What effact on deduction under sec 24(1)i in previous years if house sold with in two year of purchased
    Sandeep Kumar Gupta
    Sde bsnlt Patiala

    1. Supriya dewan says:

      Sir the deduction for interest on home loan U/s 24B is not withdrawn if you sell the house within the time frame of 5 years. However the deduction for principal amount allowed U/s 80C gets reversed.

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January 2021