Section 54 provides for exemptions in respect of long term capital arising on transfer of certain capital assets. However, in order to claim these exemption the assessee is required to invest either net consideration or capital gain in certain specified assets. Besides this, an assessee is required to fulfill certain conditions specified in relevant sections granting the exemption. These exemptions are covered u/s 54, 54B, 54D, 54EC, 85F, 54G and 54GA and are as follows :
1. Capital gain on transfer of long-term residential house property (Section 54)
When on the transfer of a house property or land appurtenant thereto being taxable under the head ‘income from house property’ owned by an Individual and H. U.F. there occurs some capital gain and such capital gain is reinvested in
(a) Purchase of another residential house within one year before or two years after the sale of the house, or
(b) Construction of new residential house within three years after the sale of the house. The amount of capital gain so invested shall be exempted from tax.
Transfer Of Newly Acquired House Property Within 3 Years
A residential house property purchased or constructed by re-invested capital gain cannot be transferred within 3 years of its purchase or construction.
If the house so acquired by reinvesting capital gain is sold within a period of three years from the date of its purchase or construction, the previously exempted capital gain will be taxable along with the capital gain on the sale of such house, if any, in the current previous year. In the event of loss on sale of new house, it shall be adjusted out of old exempted capital gain [Section 54].
With regard to pre-investment of long term capital gain for the purchase or construction of a residential house, following points should be noted—
(i) Construction of a new house must be completed within 3 years from the date of transfer of the house. Construction may have started before the sale of the house but completion is required to be made within 3 years of sale.
(ii) Exemption is allowed even if a part of the capital gain is invested to buy an old house and the remaining part is invested to renovate it or to expand it by constructed new rooms or adding another floor.
(iii) This exemption is allowed even if assessee purchases or constructs one or more than one house or he may sell two houses and invests the amount of long term capital gain to buy or construct only one house.
(iv) In case a residential house property is compulsarily acquired by government, the time limits prescribed for purchase or construction of a residential house shall apply from the date of receipt of compensation.
Amount deposited in capital gain deposit account scheme
In case the amount of capital gain is not re-invested for the purchase or construction of the new house upto the last date of filing of return of income u/s 139 then it should be deposited in the capital gain deposit account scheme with a specified bank authorised by the central government in accordance with the scheme. Any amount already utilized by the assessee for the purchase or construction of the new house together with the amount so deposited shall be deemed to be the cost of new house.
The amount deposited in the deposit account scheme must be utilized to purchase or construct the new house within 3 years from the date of transfer of the old house.
If the amount deposited in this scheme is not utilised wholly or partly for the purchase or construction of the new house within specified period, then
(i) The amount not so utilised shall be charged u/s 45 as the income of the previous year in which period of 3 years from the date of the transfer of the original asset expires, and
(ii) The assessee shall be entitled to withdraw such amount in accordance with the scheme.