Capital Gains Exemption under section 54 of the Income Tax Act,1961

Introduction

The Income Tax Act,1961 classifies capital assets into two types: short-term capital asset and long-term capital asset. Section 54 of the Income Tax Act, 1961 provides an exemption in the case of Long term capital gain (LTCG) on the transfer of residential house property if certain conditions are satisfied by the assessee. It is important to note that section 54 deals only with Long term capital gain (LTCG), any short term capital gain arising from the transfer of short term residential house property shall be taxable in the hands of the assessee. 

Provisions regarding the transfer of residential house property claiming benefit under Section 54

If new residential house property is sold within 3 years from the date of acquisition or construction, then the exemption claimed in the previous period under section 54 shall be taxable in the year of sale of the new house property.

Exemption available under Section 54

The maximum amount of exemption under Section 54 for the long-term capital gains will be the lower of:

  1. Capital gains resulting from the transfer of residential house property.
  2. Amount of Long term capital gain (LTCG) Invested in the purchase or construction of a new residential house property.

Hence, the balance amount of Long term capital gains(LTCG) will be taxable in the hands of Assessee.

Conditions to claim an exemption under Section 54

When an individual or a Hindu Undivided Family(HUF) transfers a residential house property and purchases/constructs another residential house property, he will be eligible to avail exemption under Section 54. 

Conditions are given under section 54 to avail exemption includes:

  • The asset has been transferred by an individual or a Hindu Undivided Family(HUF). Partnership firms, Limited Liability Partnership(LLP), and companies are not allowed to take the benefits of section 54.
  • The asset transferred should be a long-term capital asset and hence there is a long term capital gain (LTCG).
  • The asset transferred must be a residential house property, the income of which is taxable under the head “Income from House Property”.
  • The assessee is required to buy 1 residential house property in India within 1 year before or 2 years after the date on which the transfer took place, or constructed 1 residential house property, within a period of 3 years after the date on which the transfer took place
  • The new residential house property must be situated in India. An assessee cannot buy or purchase a residential house in any country other than India and claim the exemption.

If all the conditions are satisfied, then the assessee can avail the benefit of the exemption under Section 54. 

What is the Capital Gains Account Scheme, 1988?

If the residential house property is transferred in the Previous Year, and the seller intends to but is yet to purchase the new residential 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 Long term capital gain(LTCG) in the Capital Gains Account Scheme(CGAS) in any public sector bank before the filing income tax return(ITR). However, if the amount of capital gain deposited in the Capital Gains Account Scheme(CGAS) is not utilized by the assessee within a period of 3 years from the date of transfer of the residential house property, then the amount shall be treated as income of the previous year in which 3 years expire.

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