Section 54 of income tax act

Section 54 of income tax act prescribes exemption of capital gain from sale/transfer of residential house property.

Content

1.What is section 54 of income tax act?

2.Who can claim exemption under section 54 of income tax act?

3.What are the conditions to be satisfied to claim exemption under section 54 of income tax act?

4. What is the amount of exemption available under section 54 ?

5.What if the new house is transferred or sale within 3 years of purchase?

6.What is Capital Gain Deposit Scheme Account Scheme u/s 54 ?

1.What is section 54 of income tax act?

If you sale property and intention/objective is not to earn income but to buy another house. For instance he may shifted from one city to another or switching of job. Further,if taxpayer is liable to pay tax on this capital gain income than it would not be fair to him.

Therefore income tax department prescribed list of capital gain exemption on sale of specific capital asset by an assessee.Therefore, taxpayer can claim capital gain exemption by satisfying certain condition.

Hence,section 54 of income tax act provides an exemption of capital gain arising from transfer/sale of residential house property. Exemption means a tax relief to an assessee who sells house property and buy another residential house property.

As we all know capital gain means transfer or sale of immovable property like house ,land or building etc.

2.Who can claim exemption under section 54 of income tax act?

An assessee can claim capital gain exemption on sale of property under section 54 . However, only following assessee can claim exemption under this section:

• Individual or

• HUF

3.What are the conditions to be satisfied to claim exemption under section 54 ?

To claim exemption under section 54 of income tax act following conditions should be satisfied:

• An assessee must be an Individual or HUF . The benefit of this section cannot be claimed by Company, Firm or LLP.

• The house property is a residential house whose income is taxable under the head “Income from house property” and transferred/sale by an individual or a HUF.

• Asset (i.e.house property) transferred/sold must be long term capital asset (i.e. it must be held for a period of more than 24 months before sale or transfer).

• To avail exemption under section 54 ,the assessee will have to purchase or construct a residential house. For this purpose house can be purchased within a period of 1 year before transfer (or within 2 years after the date of transfer). Alternatively, house can be constructed within 3 years from date of transfer.

• The new house property which is purchased or constructed within time limit specified above should be situated in India.

• The house property so purchased/constructed has not been sold within a period of 3 years from date of purchase/construction.

4. What is the amount of exemption available under section 54 of income tax act?

Amount of exemption available under section 54 of income tax act is as under:

• If amount of capital gain is less than the cost of the new house property the entire amount of capital gain is exempt from tax.

• On other hand, if the amount of the capital gain is greater is greater than cost of new house property. The difference between the amount of capital gains & the cost of new house is chargeable to tax as capital gain.

AMENDMENT FROM ASSESSMENT YEAR 2024-25

Where the cost of new asset is exceeds Rs. 10 crore. The amount exceeding Rs. 10 crore shall not be taken into account for the purpose of exemption u/s 54 of income tax act from assessment year 2024-25.

5.What if the new house is transferred or sale within 3 years of purchase?

If the new house property is transferred, within period of 3 years from date of its purchase or construction , the amount of capital gain arising therefrom, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of new house property.

To attain this , it has been provided that if the new house is transferred/sold within 3 years from date of its acquisition or date of completion of construction . The amount of exemption u/s 54 shall be reduced from the cost of acquisition of new house, while calculating short-term capital gain on transfer of new asset.

In brief, lock period is 3 years is applicable when an assessee claims exemption u/s 54 of income tax act.

Lets understand this through summarised table

Situation	Consequences
If new residential house property sold/transferred within 3 years from the date of purchase or construction and	Exemption u/s 54 is withdrawn. And
* Cost of new house property purchased is less than capital gains	Cost of acquisition will be Nil. And total sale value of new house property will be chargeable to tax as capital gain.
* Cost of new house property purchased is more than capital gains	Assessee will be able to claim the cost of acquisition while calculating capital gains. But cost of acquisition will be reduced by exemption u/s 54 claimed earlier.(i.e. Purchase price – exemption u/s 54).
If new residential house property sold/transferred after 3 years from the date of purchase or construction.	Exemption u/s 54 is not withdrawn. An assessee will be able to claim indexed cost of acquisition while calculating capital gain on transfer or sale of house property.

6.What is Capital Gain Deposit Scheme Account Scheme(CGAS) u/s 54 ?

If the amount of capital gain is not utilised by assessee for purchase/construction of new residential house before due date of filing the ROI . It shall be deposited by him on or before the due date of filing ROI in the deposit account in any public sector bank/IDBI Bank in accordance with the CGAS.

An assessee can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

If amount deposited in Capital Gains Accounts Scheme is not utilised within the time limit of 3 years. Then it shall be taxable as income of the last year.

Refer:https://taxandfinanceguide.com/what-is-capital-gain/ and https://taxandfinanceguide.com/long-term-capital-gain-tax/