EXEMPTIONS FOR CAPITAL GAINS ARISING ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY
[Section 54 of Income-tax Act, 1961]
Under Income-tax Act, 1961, there are certain exemptions given to different class of assesses from Capital Gain provided certain investment is done. One of such exemptions are given under section 54 of Income-tax Act which is discussed in below lines:
Condition to avail Benefits under Section 54
Who Can avail Benefits under Section 54 | Individual or Hindu Undivided Family (HUF)* |
Assets Transferred | Residential House Property (“Old House”) |
Type of Capital Assets transferred (Depending upon period of holding of capital assets) | Long Term Capital Assets **(If period of holding is more than 36 months) |
When the New Residential House Property should be acquired or be Constructed | i) For Acquisition of New house Property*** Within a period of one year before or two years after the date of transfer of old house, OR ii) For Construction of New House Property*** within a period of three years from the date of transfer of the old house |
How many years the New House should be held | For 3 years from the date of purchase/ from the date of completion of construction of New House |
Amendment with effect from assessment year 2020-2021,
1) There is amendment in section 54 of the Act and benefits of section 54 shall be available in respect of investment made in two residential house properties if the long term capital gain in not more than two crores. However, this option of investment in two residential house properties shall be available for only one time during his lifetime.
2) **Period of holding for becoming Long term Capital assets is reduced from 36 months to 24 months
*** The assessee shall have option to invest the unutilized investment to claim exemption U/s 54 of the Act in Capital Gain Saving Scheme on or before due date for filing of Income Tax Return which shall be utilised on or before expiry of 2 or 3 years depending upon type of investment he has opted for.
Sr. No. | Situations | Amount Exempted |
1 | (amount of capital gain on Old House) < (amount of investment in New Land) | Amount of Capital Gain |
2 | (amount of capital gain on Old House) > (amount of investment in New Land) | Amount of long term capital gain as reduced by amount of investment in new House |
CONSEQUENCES IF THE NEW HOUSE TRANSFERRED BEFORE STIPULATED TIME PERIOD
If the new House is sold before 3 years from the date of purchase, then cost of acquisition of new house at the time of sale of new Land shall be as follows:
Situations | Cost of acquisition |
Where amount spent on purchase of New House equal to or greater than amount of Capital Gain (LTCG) on Old House | Amount spent on purchase of New House as reduced by amount of Capital gain exemption on sale of Old House |
Where amount spent on purchase of New Land less than amount of Capital Gain on Old Land | NIL |
EXAMPLE
To understand this, we calculated capital gain taxability in the assessment year 2020-2021 and 2021-2022 in below facts
Year | Amount | |
01.08.2012 | Cost of Purchase of residential House (House 1) | 500000 |
10.04.2019 | Sale consideration of House 1 | 1200000 |
Long Term Capital Gain | 350000 | |
01.08.2019 | Purchase of new residential House (House 2) | 450000 |
31.07.2020 | Sale consideration for House 2 | 500000 |
CAPITAL GAIN TAXABILITY
In the assessment year 2020-21
Period of Holding | More than 24 months |
Type of Capital gain | Long Term Capital Gain |
Sale Consideration of House 1 | 1200000 |
Less: Indexed Cost of Acquisition of House 1 (say) | 850000 |
Long Term Capital Gain | 350000 |
Less: Exemption Under section 54 (lower of Investment in house 2 or capital gain) | 350000 |
Taxable LTCG in Assessment year 2020-2021 | Nil |
Period of Holding | Less than 24 months |
Type of Capital gain | Short Term Capital Gain |
Sale Consideration of House 2 | 500000 |
Less: Cost of Acquisition of House 2 as reduced by Capital gain exemption as claimed under section 54 for house 1 (Cost of acquisition of House 2: 450000 Less: Exemption claimed U/s 54 claimed earlier 350000) | 100000 |
Short Term Capital Gain | 400000 |
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