Section 54 of the Income Tax Act

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Hiral Vakil

Capital Gains Exemption
Income Heads
Income Tax
Section 54

Exemption under section 54 of the Income Tax Act is available on Capital Gains on sale of one house property and purchase/construction of another house property. The amount of Exemption under Section 54 will be lower of:

  1. The Cost of new Residential House Property,
  2. The Capital Gains on the sale of a property.

A 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. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

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Who can Claim an Exemption Under Section 54 of the Income Tax Act?

A taxpayer can claim exemption u/s 54 if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (Sold after 24 months).
  3. The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.
Tip
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.

What is the Amount of Exemption Available Under Section 54 of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54 will be least of the following:

  1. The Cost of New Residential House Property OR
  2. Capital Gains arising on the sale of a property.

Example: Ravi sold a house property in FY 2019-20 for Rs. 60,00,000. The property was purchased by him in FY 2013-14 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim deduction under section 54 as follows:

ParticularsAmount
Sales Consideration60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220)(39,40,909)
Long Term Capital Gains20,59,091
New House Property Purchase Price45,00,000
Section 54 Exemption Amount20,59,091
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54 of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 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.

Situation 2:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on house property sold. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the CGAS is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

Similar exemption u/s 54B is available when agricultural land is sold and purchased.
Know all about how to claim exemption u/s 54B and save taxes on Capital Gain earned.
Read More
Similar exemption u/s 54B is available when agricultural land is sold and purchased.
Know all about how to claim exemption u/s 54B and save taxes on Capital Gain earned.
Read More

FAQs

Can I claim exemption if I buy new property in the name of my spouse?

No. In order to claim exemption u/s 54, the property purchased has to be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.

Can NRI claim exemption u/s 54 on House Property purchased?

Yes, NRI can claim exemption u/s 54 of the Income Tax Act. Provided the house property sold and purchased is situated in India.

Is exemption allowed if the builder of a property fails to hand it over within 3 years?

Yes. The exemption is still allowed to the taxpayer u/s 54. Even when the builder of a property fails to hand it over to him.

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