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Exemption of tax on transfer of residential house (Section 54)

Section 54 –

Section 54 gives exemption from tax when taxpayer who sells his residential house acquires another residential house from capital gain of house so sold.

Conditions –

Following conditions should be satisfied to claim the benefit of section 54. (Analysis of all these conditions in detail is done below)

  • The benefit of section 54 is available only to an individual or HUF.
  • The asset transferred should be a long-term capital asset, being a residential house property.
  • Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
  • Exemption can be claimed only in respect of one residential house property purchased/constructed in India. 
  • New house cannot be sold within a period of 3 years from the date of its purchase/completion of construction.

Amount of Exemption u/s 54 –

Exemption under section 54 will be lower of following :

  • Amount of capital gains arising on transfer of residential house; or
  • Amount invested in purchase/construction of new residential house property [including the amount deposited in Capital Gains Deposit Account Scheme (discussed later)].

Example
1. Suppose amount of Capital Gain is Rs. 20 lacs and a new hose is purchased for Rs. 35 lacs then in such exemption will be lower of :

  • Amount of capital gains i.e Rs. 20 lacs 
  • Amount invested in purchase of new house i.e Rs. 35 lacs

Therefore exemption u/s 54 will be Rs. 20 Lacs.

2. Suppose another example where amount of Capital Gain is Rs. 20 lacs and a new hose is purchased for Rs. 15 lacs then in such exemption will be lower of :

  • Amount of capital gains i.e Rs. 20 lacs 
  • Amount invested in purchase of new house i.e Rs. 15 lacs

Therefore exemption u/s 54 will be Rs. 15 Lacs.

Analysis of Conditions –

  1. Benefit of section 54 is available only to an individual or HUF – 

    • Benefit u/s 54 is available only to an individual or HUF.
    • Any person other than individual or HUF cannot claim exemption u/s 54
    • Therefore Company, AOP, BOI, Partnership firm , Government, etc cannot claim exemption u/s 54.
  2. Asset transferred should be a long-term capital asset –

    • Exemption u/s 54 is available only on transfer of long term capital asset.
    • No Exemption will be available on transfer of short term capital asset.
    • To qualify as long term capital asset the period of holding should be at least 24 months.
    • If house property is sold after holding it for a period of less than 24 months then it will qualify as short term capital asset.

Example

1. Suppose Ram sold a building in 1st May 2018, which he purchased on 5th April 2016. – ram can avail exemption u/s 54 as period of holding is more than 24 months.

2. Suppose in above house is purchased on   9th December 2016 – examption u/s 54 shall not be available as period of holding is less than 24 months.

3. Asset should be a residential house property –

  • Exemption under section 54 can be claimed in respect of capital gains arising on transfer of a capital asset being a residential house
  • No Exemption u/s 54 will be available on transfer of capital asset other than residential house. (However, in this case benefit can be claimed under section 54F subject to certain conditions as defined in that provision.)
  • Therefore exemption u/s 54 shall not be available on transfer of Shop, Commercial Space, Office, Gold etc. However However, in this case benefit can be claimed under section 54F.

4. Purchase or Construction of Residential House –

To claim exemption u/s 54 an indvidual / or HUF have following three options.

  • Option 1 – Within a period of one year before the date of transfer of old house, the taxpayer should acquire another residential house.

Example:

1. Ram sold a house on 7th May 2018 and before the sale of this house he also purchased a new property on 21st January 2018. Exemption u/s 54 can be claimed as new house is purchased within one year before the date of transfer of old house.

2. Suppose in above example new house is purchased on 23rd March 2017 then exemption u/s 54 shall not be available.

  • Option 2 – Within a period of two years after the date of transfer of old house, the taxpayer should acquire another residential house.

Example:

1. Ram sold a house on 7th May 2018 and purchase a new house on 2nd May 2020. Exemption u/s 54 can be claimed as new house is purchased within two year after the date of transfer of old house.

2. Suppose in above example new house is purchased on 23rd March 2022 then exemption u/s 54 shall not be available.

  • Option 3 – Construct a residential house within a period of three years from the date of transfer of the old house.

Example:

1. Ram sold a house on 7th May 2018 and construct a new house the construction of which is completed on 2nd May 2021. Exemption u/s 54 can be claimed as new house is constructed within three year after the date of transfer of old house

2. Suppose in above example construction of new house is completed on 23rd March 2022 then exemption u/s 54 shall not be available.

Capital Gain Deposit Account Scheme –

  • To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer.
  • If till the date of filing the return of income, the capital gain arising on transfer of the house is not
    utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank
  • The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years  years, as the case may be.

Non-utilisation of amount deposited in Capital Gain Deposit Account Scheme

If the amount deposited in the Capital Gains Account Scheme in respect of which the
taxpayer has claimed exemption under section 54 is not utilised within the specified
period for purchase/construction of the residential house, then the unutilised amount (for
which exemption is claimed) will be taxed as income by way of long- term capital gains
of the year in which the specified period of 2 years/3 years gets over.

5. Exemption can be claimed only in respect of one residential house property purchased/constructed in India. 

  • Exemption can be claimed only in respect of one residential house property purchased/constructed in India.
  • If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only.
  • No exemption can be claimed in respect of house purchased outside India.

Example

1. Ram sold a house on 7th April 2018, which he purchased in year 2001. From the capital gains of house he purchased 2 houses in India- In this case exemption from capital gain will be available in respect from one house only.

2. Let us assume in above example ram purchased a building in Australia – in this case exemption from capital gain will be available.

6. New house cannot be sold within a period of 3 years from the date of its purchase/completion of construction.

  • If exemption u/s 54 is claimed then such new house cannot be sold within a period of 3 years from the date of its purchase/completion of construction.
  • If asset is transferred within a period of 3 year, then exemption given earlier will be withdrawn.

Example – Ram sold a house on 7th April 2018 and purchased a another house from on 6th May 2018 the capital gain of house so sold. – To claim exemption u/s 54 ram cannot sold that house before 6th may 2018.

Consequences on transfer of new house

If asset is transferred within a period of 3 year, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

Example – Suppose in above example ram sold new house on 9th April 2019 – then in case a case exemption claimed u/s 54 will be deducted from the cost of acquisition of new house while calculating capital gain of that house.

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