Exemption of Capital Gains from the Transfer of Residential House Property [Section 54]

  1. The Provisions of Section 54 towards Exemption of Capital Gains are given below : –
  2. Scheme of Deposit in Capital Gains Accounts Scheme, 1988 :
  3. A few points which are relevant for availing Exemption under Section 54 are given below-

1. The Provisions of Section 54 towards Exemption of Capital Gains are given below –

1. Who can claim exemption :

An individual or a Hindu undivided family

2. Which specific asset is eligible for exemption :

If a residential house property (long-term) is transferred

3. Which asset the taxpayer should acquire to get the benefit of exemption :

Exemption is available if one residential house is purchased or con structed in India

4. What is time-limit for acquiring the new asset :

Purchase – Residential house can be purchased within 1 year before transfer or within 2 years after transfer

Construction – Residential house can be constructed within 3 years from transfer.

In the case of compulsory acquisition, these time-limits shall be determined from the date of receipt of compensation (original or additional)

5. How much is Exempt (Quantum of Deduction):

Amount of long-term capital gain; or Amount invested in the purchase or construction of the residential house , whichever is less.

6. Is it possible to revoke the exemption in a subsequent year :

If the new asset is transferred within 3 years of its acquisition, exemp tion will be taken back. For calculating capital gain on transfer of new asset, cost of acquisition will be calculated (as original cost of acquisition – exemption availed under section 54).

2. Scheme of Deposit in Capital Gains Accounts Scheme, 1988:

Although under section 54, the assessee is given 2 years to purchase the house property or 3 years for construction of the house property, but the capital gain on the transfer of the original house property is taxable in the previous year in which the transfer took place. The return of income of that previous year is to be submitted in the relevant assessment year on or before the specified date. Hence the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the return otherwise the capital gain would become taxable.

To avoid the above situation, the Income-tax Act has specified an alternative in the form of a deposit under the Capital Gains Accounts Scheme.

The amount of capital gain, which is not utilised by the assessee for the purchase or construction of the new house before the date of furnishing of the return of income, should be deposited by him under the Capital Gains Accounts Scheme, before the due date of furnishing the return. The proof of such a deposit shall be attached with the return.

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 the cost of the new house and shall be eligible for exemption.

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

In this case, the amount not so utilised shall be charged as capital gains of the previous year in which the period of 3 years from the date of transfer of the original asset expires and it will be long-term capital gain of that previous year. In that case, the assessee shall be eligible to withdraw the amount from the scheme.

(B) Consequences where the new house purchased and/or constructed is transferred within a period of 3 years of its purchase or construction:

In this case, for the purpose of computing capital gain on such transfer, cost of acquisition of the new house property shall be reduced by the amount of capital gain exempt under this Section i.e. Section 54 earlier, and such capital gain will always be a short-term capital gain.

3. A few points which are relevant for availing Exemption under Section 54 are given below –

  1. Construction of the residential house should be completed within 3 years from the date of transfer. Date of commencement of construction is irrelevant. Construction may be commenced even before the transfer of house. Case of allotment of flat under the self-financing scheme of DDA (or similar scheme of co-operative societies or other institutions) is treated as construction of house for this purpose.
  2. Investment in residential house would not only include cost of purchase of house but also cost incurred for making house habitable.
  3. Holding of legal title is not necessary. If the taxpayer pays full consideration or substantial portion of it (in terms of the purchase agreement) within the period given above, the exemption under section 54 is available. This rule is applicable even if possession is handed over after the stipulated period or the sale deed is registered later on.
  4. Purchase of tenancy right in a building, does not amount to purchase of a house property and exemption under section 54 is not available.
  5. A taxpayer may sell two house properties and he may purchase one house property for the purpose of availing the exemption.

Example :

Mr. Clean owns a residential house which was purchased by him in 1995 for Rs.2,40,000. The fair market value of the house as on 1.4.2001 was Rs.7,00,000. This house is sold by him on 16.7.2017 for a consideration of Rs.30,00,000. The brokerage and other expenses on the transfer were Rs.40,000. The due date of furnishing the return of income is 31.7.2017. Compute the capital gain for the assessment year 2018-19 in the following situations:

  1. he invests Rs.7,00,000 for purchase of a new house on 14.5.2018.
  2. he purchased a piece of land for construction of a house on 21.10.2017 for Rs.4,60,000 and deposited Rs.5,30,000 in the Capital Gains Accounts Scheme on 15.7.2018 and a further sum of Rs.1,50,000 on 31.7.2019.
  3. he invested Rs.7,15,000 on construction of an additional floor at a residential house already owned by him. The investment is made during the period 1.10.2017 to 31.12.2017.
  4. he invested Rs.7,40,000 in Capital Gains Accounts Scheme on 29.7.2018 and Rs.2,00,000 on 1.8.2018. He purchased a house property on 5.8.2018 for Rs.7,25,000 by withdrawing this amount from the Scheme. No further investments were made by him.

Solutions :

The exemption under Section 54 from long-term capital gain under various situations will be as under:

  1. The exemption will be Rs.7,00,000. Hence, Taxable Capital gain will be Rs.3,56,000.
  2. The exemption will be Rs.4,60,000 + Rs.5,30,000 = Rs.9,90,000. Hence, taxable capital gain will be Rs.66,000. No deduction of Rs.1,50,000 as it is deposited on 31.7.2017.
  3. The exemption will be Rs.7,15,000. Hence, taxable capital gains will be Rs.3,41,000.
  4. Exemption for assessment year 2018-19 will be Rs.7,40,000, i.e., the amount deposited in the Capital Gains Accounts Scheme before the due date of furnishing the return specified under section 139(1) or the amount of capital gain, whichever is less. Hence, taxable capital gain for assessment year 2018-19 will be Rs.3,16,000. However, as a sum of Rs.7,25,000 only has been utilised for purchase of the house, the balance amount of Rs.15,000 remaining unutilised for which exemption was claimed under section 54 shall be the taxable capital gain of the assessment year 2021-22 (previous year 2020-21).

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