When a taxpayer shifts from one residential house to the other, the intention is not to earn income out of it but to acquire a suitable house. If such a taxpayer is liable to pay income tax on the capital gains on house sale, there would be a hardship for him. Thus, the income tax department has laid down a list of Capital Gain Exemption on the sale of specified assets by the taxpayer. The taxpayer on fulfilling certain conditions can claim such exemptions to reduce their Capital Gains Tax. Exemption under Section 54 of the Income Tax Act is available on Capital Gains on the sale of one residential house property and purchase or construction of another residential house property. The amount of Exemption under Section 54 will be lower of:
- The cost of new residential house property
- The capital gains on the sale of house property
Who can claim an exemption under Section 54 of Income Tax Act?
A taxpayer can claim an capital gain exemption on sale of house property under Section 54 if he/she satisfies all the below conditions:
- The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm
- The asset sold is a Long Term Capital Asset i.e. house property sold after at least 24 months
- The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”
- A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
- In case of construction of a new House Property, within 3 years from the sale of the residential House Property
- The new residential house should be in India
- If the taxpayer purchases or constructs more than one house, the taxpayer can claim an exemption for one house property only
The taxpayer can claim the Capital Gains Exemption under Section 54 while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on or before the due date of 31st July.
What is the amount of exemption available under Section 54 of Income Tax Act?
As mentioned above, the Amount of Exemption under Section 54 will be least of the following:
- Cost of the new residential house property OR
- Capital Gains arising on the sale of old residential house property (including amount deposited in (Capital Gains Account Scheme)
In Budget 2023, FM, Nirmala Sitharaman has announced that capital gain tax exemption capped at Rs 10 crore on the sale of the first residential property under section 54.
Example: Ravi sold a house property in FY 2022-23 for Rs. 40 crores. He purchased the property in FY 2016-17 for Rs. 20 crores. And he purchased a new house property worth Rs. 18 crores in another city. Ravi will be able to claim a deduction under section 54 as follows:
|Less: Purchase Price
Index Cost of Acquisition (20,00,00,000*331/264)
|Long-Term Capital Gains||14,92,42,424|
|New House Property Purchase Price||18,00,00,000|
|Section 54 Exemption Amount||10,00,00,000|
In this case, Ravi will be eligible to take an exemption of maximum of 10 crores as the house property is sold after April 1, 2023, and on the remaining exceeding amount of Rs. 4,92,42,424, taxes will be levied at 20%.
What happens to Section 54 exemption if the taxpayer sells the new house property?
The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54 of income tax act. And the following situations can arise:
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.
Consequences: The exemption under Section 54 is withdrawn. And the total sales value of new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is more than Capital Gains.
Consequences: The exemption under Section 54 is withdrawn. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.
When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.
Consequences: The exemption under Section 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating capital gain on sale of house property. The taxpayer must pay income tax on capital gains at the rate of 20%.
CGAS Scheme for claiming exemption under Section 54
If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of new property till the due date of submission of ITR, they should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim an exemption of the amount already spent on construction or purchase of property along with the amount deposited in CGAS.
However, it is important to note that if the taxpayer is unable to utilize the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
No. In order to claim exemption u/s 54, the property that the taxpayer purchases must be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.
Yes, NRI can claim exemption under Section 54 of the Income Tax Act. However, it is mandatory that the old house property sold and new house property purchased is situated in India.
Yes. The taxpayer can claim the exemption under Section 54 even when the builder of a property fails to hand over the possession of the property.
what if it is a commercial property ?
as per the recent budget announced : the limit is capped to 10 crores ! am i right ?
The asset has to be a Residential House Property only, under section 54.
Yes, as per the budget announced in 2023, the capital gain exemption limit is capped at ₹10 crores.
Hope it helps.
so . is there any section or provision for tax saving in case of commercial property ?
Yes, under section 54F, a taxpayer can claim a capital gain exemption on the sale of a long-term capital asset to purchase or construct a new Residential House Property, if specified conditions are fulfilled.
Hence you can sell a commercial house property to purchase residential house property.
Read more about the eligibility criteria to claim an exemption under Section 54F of the Income Tax Act.
Hope it helps.
Hi. In October 2022, I sold my residential flat for Rs. 20 lakhs (originally purchased in July 2012 for Rs. 8 lakhs). Long Term Capital gains after indexation works out to Rs. 5 lakhs (rounded off).
I am currently purchasing a residential flat under construction. I have come to understand that in order to claim exemption under 54, construction has to be completed within 3 years of flat sale.
Till date, I have made part payment of Rs. 21 lakhs (out of 50 lakhs total cost) towards new flat under construction. Since the amount spent towards new flat (under construction) exceeds the sale proceeds of my previous flat, is it sufficient to claim full exemption under 54 ?
As per your stated case, you are eligible to claim the total amount of LTCG of ₹5 lakhs under section 54 of the income tax act.
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