Section 54-Capital Gain Exemption on Sale/Transfer of Residential House Property

Section 54-Capital Gain Exemption on Sale/Transfer of Residential House Property- When a house property is sold at a price above the cost of acquisition, it is called capital gain or if a property is sold at a price less than its acquisition cost, i.e. capital loss. If any capital gain arises on sale of house property, then the seller will be liable to pay income-tax on capital gain.Capital Gain may be Long Term or Short Term.

Section 54 gives relief to a taxpayer for long term assets, if he sells his residential house and from the sale proceeds he acquires another residential house.

Sale Consideration - Indexed Cost of Acquisition – Indexed cost of Improvement

For Example-

Cost of Inflation Index is as under-

2013-14                220

2014-15                240

2015-16                254

2016-17                264

2017-18                272

Answer-

Mr. X sold his house on 15.07.2017 or purchase on 25.03.2013 i.e. Long term capital gain, so cost will be Indexed as under-

(A) Cost of Acquisition-

Cost Price / Index for the year of purchase X Index for the year of sale

Rs. 26,50,000 / 220 x 272 = 32,76,364

(B) Cost of Improvement-

Cost of Improvement / Index for the year of improvement X Index for the year of sale

Rs. 3,00,000 / 220 x 272 = 3,70,909

Total Cost (C) {A+B} Rs. 32,76,364 + 3,70,909 = 36,47,273

Sale Consideration (D): Rs. 50,00,000

Long term Capital Gain (D-C)- Rs. 50,00,000 – Rs. 32,76,364 – Rs. 3,70,909 = Rs. 13,52,727

• This exemption is available for Individual or HUF only. Thus Firms, LLP and Companies are not eligible to claim exemption under this section.
• The assets transferred should be long term capital assets, being a residential house property.
• The Residential house should be purchased in India, not outside India.
• The assessee should acquire only one residental house property within a period of 1 year before or 2 years after the date of transfer of old house or within a period of 3 years if residential property is constructed.
• If you have not decided to buy a residential house, but do not want to lock the money in the bonds, the money should be deposited in Capital Gain Account Scheme.

Section 54 gives relief to taxpayers, who sold his house property after 3 years of purchase. If he arises any profit on sale of property, can claim exemption under section 54 on the following basis-

1. If the entire amount of capital gain is invested, you can claim the full exemption benefit.
2. If the entire amount of capital gain is not invested, you can claim the exemption of invested amount and the balance is taxable under long term capital gain.

Investment in new residential house property or amount of capital gain, whichever is lower.

The exemption under section 54 will be reversed if the said property (against which the exemption has taken) is sold within 3 years from the date of purchase and it will be taxed under short term capital gain.

Example1-

Answer-

Long term capital gain as above-    Rs. 13,52,727

Less: Exemption u/s 54 -               Rs. 13,52,727

Taxable long term capital gain :          Nil

(Amount Invested Rs. 15,00,000 which is greater than the amount of long term capital gain, so the taxable amount is Nil, the said assets should not be sold before the 3 years from the date of purchase otherwise exemption under section 54 will be reversed and it is taxable as short term capital gain.

Example2-

Answer-

Long term capital gain as above-     Rs. 13,52,727

Less: Exemption u/s 54               Rs. 10,00,000

Taxable long term capital gain        Rs. 3,52,727

(Amount Invested Rs. 10,00,000 which is below the amount of long term capital gain, so the taxable amount is Rs. 3,52,727/-)

Example3-

Answer-

Long term capital gain as above-      Rs. 13,52,727

Less: Exemption u/s 54-                 Rs. 0

Taxable long term capital gain;         Rs. 13,52,727

(Mr. X has not Invested any amount in purchase of new residential property till January 2021. So, the entire amount of capital gain is taxable in the financial year 2020-21.

Example4-

Answer-

Earlier availed Long term capital gain:       Rs. 13,52,727

Sale Consideration (A);                            Rs. 18,00,000

Less: Cost of acquisition* (B)                   Rs. 1,47,273

(Purchase price Rs. 15,00,000 - Exemption u/s 54 availed Rs. 13,52,727 = 1,47,273)

Short term capital gain (A-B)                  Rs. 16,52,727

(Mr. X has sold the property within 3 years from the date of purchase. So the short term capital gain arises of Rs. 16,52,727 due to reversal of capital gain earlier availed under section 54 in the financial year 2020-21.)

Taxable as short term capital gain. For computing capital gain on transfer of new asset, cost of acquisition = (original cost of acquisition – exemption availed u/s 54)

If the asset is sold in the Previous Year, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.

The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.

However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).