EXEMPTION U/S 54 OF INCOME TAX
Under Section 54 of the Income Tax Act, an Individual or HUF selling a residential plot can avail tax exemptions from Capital Gains if the capital gains are invested in purchase or construction of residential property.
Taxpayers such as partnership firms, LLP’s, companies or any other association or body cannot claim tax exemption under Section 54.
Conditions for claiming exemption under Section 54
A. |
Assessee |
Only Individual or HUF can claim exemption under this section. |
B. |
Transferred Asset |
Asset sold/ transferred during the previous year must be Residential house property being Land and Building appurtenant there to. |
C. |
Type of Capital Gain |
Asset must be classified as long-term capital asset, and the gain arising must be long-term capital gain. |
D. |
Asset to be Acquired |
New asset acquired must be only one Residential house property.
NOTE: If long term capital gain is upto Rs. 2 Crores the assessee can acquire two residential house properties in prescribed time limit. The benefit of two-house properties is available only once in lifetime. |
E. |
Time limit for Purchase or reconstruction |
Purchase: The residential property shall be purchase 1 year before or 2 years after the date of transfer; and
Construction: The construction of new house must be completed within 3 years from the date of transfer. |
F. |
Deposit Scheme |
Capital Gain Account Scheme (Note 1). |
G. |
Amount of exemption |
(whichever is lower)
Note: If cost of new asset exceeds Rs. 10 crores, then the amount exceeding Rs. 10 crores shall not be taken into account for the purpose of exemption (w.e.f. A.Y 24-25). |
H. |
Lockin Period |
If New Asset is transferred within 3 years from date of purchase or construction the exemption claimed earlier shall be withdrawn & Cost of Acquisition of new asset reduced by exempted capital gain while calculating capital gain on new asset. |
I. |
Case Laws Syed Ali Adil(2013)(A.P.) |
Where the assessee has acquired 2 adjacent flats and he had affected modification to make them single flat by opening the door between them, it was immaterial that the flat was acquired from two different seller and two separate sale deeds were created. Hence, both flats shall be deemed single house property for the purpose of exemption u/s 54. |
|
Kamal Wahal (2013) |
Having regard to the rule of purposive construction and the object of enactment of Section 54. Exemption u/s 54 cannot be denied solely on the ground that the new residential house is purchase by the assessee exclusively in the name of his wife. |
|
T.N. Aravinda Reddy (SC) |
Where a property is owned by more than one person and the co-owner release his share or interest in the property in favour of one of the co-owners, it can be said that the property has been purchased by the assessee. Such release also fulfils the condition of Section 54 as to purchase so far as assessee is concerned. |
NOTE 1: CAPITAL GAIN ACCOUNT SCHEME
|
Amount: If investment u/s 54 is not made before the date of filing of return, then the amount of capital gain has to be deposited under Capital Gain Account Scheme. The amount so deposited shall be deemed to cost of new asset. |
|
Time Limit: Such deposit in Capital Gain Account Scheme should be made before due date or actual date of filing the return, whichever is earlier. |
|
Unutilized Amount: If the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized amount shall be charged as Capital Gain of the P.Y in which the specified period expires. |
NOTE: CBDT clarifies that in the event of death of an individual before the stipulated period, the unutilized amount is not chargeable to tax in the hands of legal heir of deceased individual. |
Example: Hari Ltd acquired a residential house property in Delhi on 15th April 2022 for Rs. 8,75,000. On 3rd June 2023, he has sold his house to Mr. Suri for Rs. 42,00,000. On 4th April 2023, he had purchased a residential house in Delhi for Rs. 8,00,000 where he was staying with his family on rent. Hari Purchased another house in Chennai on 14th October 2023 from Mr. X and Indian Resident by Paying Rs. 5,00,000 and the purchase was registered with the appropriate authority.
Determine the taxable Capital Gain arising from above transactions in hands of Mr. Hari for A.Y 2024-25.
Computation of taxable capital gain of Mr. Hari for the A.Y 2024-25
Particulars |
Amount (in Rs.) |
Sale consideration of house property |
42,00,000 |
Less: Indexed cost of acquisition (Note.) |
29,00,000 |
Long term Capital Gain |
13,00,000 |
Less: Exemption u/s 54 for investing in house at Delhi Less: Exemption u/s 54 for investing in house at Chennai |
8,00,000 5,00,000 |
Taxable Long Term Capital Gain |
Nil |
NOTE 1: Computation of Indexed Cost of Acquisition
Cost of Acquisition |
- |
8,75,000 |
Cost Inflation Index for 2002-03 |
105 |
|
Cost Inflation Index for 2023-24 |
348 |
|
Indexed Cost of Acquisition (8,75,000 x 348/105) |
|
29,00,000 |
NOTE 2: As per Section 54 since, the amount of Capital Gain does not exceed Rs. 2 crores, Mr. Hari can claim exemption thereunder in respect of investment made in two residential houses situated in India.
NOTE 3: As per Section 54, residential house should be purchased within 1 year before or 2 years after the date of transfer or constructed within a period of 3 years after the date of transfer. As Mr. Hari fulfils all the conditions of the Section 54 he can claim deduction u/s 54.