Modified Exemption Under Section 54

Due to the new method of calculating the taxable long-term capital gains, there will be a change in the amount to be invested for getting complete exemption from income tax under Section 54.


Section 54 provides that in case of a long-term capital gain relating to a residential house, the entire long-term capital gain can be tax-free if the amount of the long-term capital gains is invested in the purchase or construction of another residential house within a period of 1, 2 and 3 years, as the case may be. In such a case, it is not the full amount of the actual gain but the taxable capital gain as calculated after giving effect to the deduction for the Cost Inflation Index under Section 48 which is to be invested.

For example, in Illustration No. 7.1, though the original acquisition price was ` 3 Lakh and the market price on 1-4-1981 was ` 10 Lakh the “Indexed Cost of Acquisition” being ` 78,50,000 (for AY 2012-2013), the long-term capital gain alone needs to be invested in the acquisition of a house or flat for the purpose of getting complete exemption under Section 54.


Thus, it is not the amount of difference between the sale price and cost price or the market price as on 1-4-1981 but the taxable long-term capital gain after giving effect to the Cost Inflation Index which alone is required to be invested under Section 54. However, if there is a sale of capital asset not being a residential house and the assessee wants an exemption under Section 54F by investing in a residential house, then the entire sale consideration will have to be invested.
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Rule-1 : Spread Your Income Among Your Family Members under Income Tax Act.
Rule-2 : Take Full Advantage Of All Tax Exemptions under Income Tax Act.
Rule-3 : Take Full Advantage Of Tax Deductions under Income Tax Act.
Rule-4 : Exempted Incomes under Income Tax Act.
Rule-5 : Don’t Overdo It — Keep Tax Planning Simple under Income Tax Act.
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