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[Section 54F] : Exemption of Capital Gain on Transfer Of Long-Term Capital Assets in case of Investment In Residential House

In case an individual and HUF transfer any long-term capital asset (other than the residential house the income of which is taxable under the head ‘Income from house property’) and constructs a residential house within 3 years after the sale or purchases another residential house within one year before or two years after the sale, so much of capital gain shall be exempted as is in proportion of amount invested to net consideration.

Exemption u/s 54-F shall be allowed if following conditions are fulfilled.

  1. The assessee is only an individual or a H.U.F.

  2. The assessee does not own more than one residential house on the date of transfer of the above mentioned assets.

  3. The assessee transfers above mentioned asset or assets (other than a residential building) and there is a long term capital gain.

  4. The assessee invests the net sale consideration of above mentioned assets to construct a residential house within 3 year of the sale of the asset or purchases an already built house within one year before or two years after the sale of the above mentioned asset.

  5. The assessee is required not to purchase another residential house with in a period of one year after or constructs within a period of 3 year after the date of transfer of the above mentioned asset/assets.

  6. The assessee does not own more than one residential house on the date of transfer of the original asset, exclusive of the one purchased for claiming exemption under this section i.e., section 54F;

Amount of Exemption :

  1. In case assessee invests the full amount of net consideration in the purchase or construction of a residential house, then full amount of long term capital gain shall be Exempted.

  2. But if the assessee invests only a part of the net consideration then only a proportionate part of Capital gains shall be exempted i.e. so much capital gain shall be exempted as it is in proportion of amount invested to net consideration.

                                                                                   
In case assessee invests full net consideration of 10,00,000 (or even invests more than net sale consideration), then the full amount of capital gain of 6,00,000 shall be exempted but in case he invests only 80% of net consideration, then only 80% of capital gain shall be exempted and the balance will be taxable.

IMPORTANT NOTES :

  1. Exemption is available under section 54F in respect of capital gains arising on transfer of any asset other than a residential house. Capital gain on sale of plots are also eligible for exemption.

  2. As per the circular of CBDT, the cost of the land is an integral part of the cost of the residential house, whether purchased or constructed. (Circular No. 667, dated 18.10.1993).

  3. The construction of the new house may start before the date of transfer, but it should be completed after the date of transfer of the original asset. [CIT v J.R. Subramanya Bhat (1987) 165 ITR 571 (Karn)].

  4. Net consideration means the full value of the consideration as a result of the transfer of the capital asset minus any expenditure incurred wholly or exclusively in connection with such transfer.

 

Circumstances When Exemption Granted Under Section 54F May Be Withdrawn –

In the following cases, exemption granted under section 54F can be withdrawn—

  1. if the individual sells or transfers the new house within 3 years of its purchase or construction; or
  2. if the individual purchases, within a period of 2 years of the transfer of original asset, or constructs within a period of 3 years of transfer of such asset, a residential house2 other than the new house.
In the aforesaid two cases, the amount of capital gains arising from the transfer of the original asset, which was not charged to tax, will be deemed to be the income by way of long-term capital gains of the year in which new house is transferred or another residential house2 (other than the new house) is purchased or constructed, as the case may be.

 

Amount Deposited In Capital Gain Deposit Account Scheme, 1988

If the amount of net consideration is not re-invested to purchase or construct a residential house upto the last date of filing of return of income u/s 139, then the same amount should be deposited in the Capital Gain Deposit Account Scheme with a specified bank before the due date of the Furnishing of the Return of Income. The proof of deposit is required to be attached with the return of income of that year.

 

In this case, the amount already utilised by the assessee for the purchase/construction of the new house, along with the amount, so deposited, shall be deemed to be the cost of the new house and shall be eligible for exemption.

The amount deposited under this Scheme must be utilized to purchase a construct a residential house within the specified period. If amount deposited is not utilized wholly or partly for the purchase or construction of a residential house within stipulated period, then the amount which remains unutilized shall be treated as capital gain of the previous year in which the period of 3 years from the date of the transfer of the original asset expires.

The assessee shall be entitled to withdraw the unutilized amount in accordance with the scheme aforesaid.

For exemption : u/s 54F only one house is allowed to be purchased/constructed. Where the assessee has purchased the house before the due date of return, he can still deposit the amount under capital gain scheme which can be for addition made to that house only.

 

Claim of exemption Under Section 54F if more than one Asset is Sold :

The assessee can claim exemption u/s 54F in such a manner, which is most beneficial to him. In this context he has two options:

  1. he may calculate the exemption u/s 54F for each asset separately and then compare the most beneficial alternative ; or

  2. he may calculate the exemption in following manner and then choose the beneficial alternative.

    1. Calculate capital gain for each asset separately.

    2. Calculate percentage of LTCG to net consideration.

    3. Allow exemption u/s 54F out of LTCG of that asset whose percentage is highest.

    4. If amount invested in house is more than net consideration of one asset, the balance investment is to be taken up out of that asset whose percentage is next highest and so on.

Consequences where the amount deposited in the Capital Gains Accounts Scheme is not utilised, wholly or partially, for the purchase or the construction of a residential house within the specified period:

The exemption u/s 54F allowed earlier, proportionate to the amount not so utilised shall be charged as long-term capital gains of the previous year in which the period of 3 years from the date of transfer of the original asset expires (and not 3 years from the date of deposit in the account). In this case, the assessee shall be eligible to withdraw the amount from the scheme.

The amount which will be taxed as long-term capital gain can be calculated as per the following simplified procedure:

Step 1: Calculate exemption already claimed u/s 54F in the year of transfer as under:

Step 2 : Calculate the exemption which would actually be allowed based upon the actual amount spent within the specified period.

Step 3 : Calculate the difference between the amount calculated in step 1 and step 2. This will be taxable as long-term capital gain of the previous year in which the period of 3 years expires.

 

  1. The unutilised deposit amount in the Capital Gains Accounts Scheme, 1988 in the case of an individual who dies before the expiry of the two/three years stipulated period under section 54, 54B, 54D, 54F and 54G cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them. [Circular No. 743, dated 6.5.1996].

  2. In the case of transfer by way of compulsory acquisition by the government, the period of one year before or 2 years or 3 years for acquiring the new asset shall commence from the date of receipt of the compensation and not from the date of acquisition. Similarly, deposit under the Capital Gains Accounts Scheme may be made in the previous year in which the compensation is received or till the due date of filing of the return of income of the previous year in which the compensation is received. [Refer section 54H, para 7.26]

 

Consequences where the new house is transferred within a period of 3 years of its purchase or construction:

In this case, there will be following 2 capital gains:

  1. Capital gain/loss on transfer of new house which will always be short-term capital gain/loss;

  2. Capital gain exempt earlier under this Section i.e. 54F shall be treated as long-term capital gain of the previous year in which the new asset is transferred.

Consequences where the assessee purchases, within a period of two years of the transfer of the original asset, or constructs, within a period of 3 years of transfer of such an asset, a residential house other than the new house bought/constructed, whose income is chargeable under the head Income from House Property:

In this case, the capital gain exempt u/s 54F earlier shall be treated as long-term capital gain of the previous year in which the second house is bought/ constructed.

Example :

Mr. Sanjay purchased jewellery worth Rs. 2,80,000 during the year 2004-05. During the year 2010-11, he further purchased jewellery worth Rs. 3,90,000. All the jewellery was sold by him on 15.5.2017. The jewellery purchased in 2004-05 was sold for Rs. 7,90,000 and that purchased in 2010- 11 was also sold for Rs. 7,90,000. He purchased a plot of land for Rs. 3,55,000 on 4.1.2018 for construction of residential house. On 15.6.2018, he deposited Rs. 5,00,000 in the Capital Gains Accounts Scheme and further sum of Rs. 2,00,000 as on 15.11.2018. He owns only one residential house as on 15.5.2017. Compute the capital gains for the assessment year 2018-19.

As there are 2 separate transactions of sale of jewellery, to get maximum benefit under section 54F, the exemption should be computed as under:—

 

To claim the maximum benefit, we should first compute LTCG/NCP in percentage i.e. (LTCG/ NCP X 100) then the exemption should be claimed first where the percentage is highest, the balance exemption should be claimed in the descending order.

 

 
 
 
 
 
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