An individual shift houses influenced by a combination of factors such as job relocation, change in lifestyle, and retirement. Selling such a residential house property incurs capital gains. However, the intention of selling the house property often is not to earn income but to acquire a suitable house. Thus, the Income Tax department has provided Capital Gain Exemption on the sale of such residential house property. The taxpayer on fulfilling certain conditions can claim 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 residential house property.
Capital Gain Exemption under Section 54
Exemption under Section 54 of the Income Tax Act is available on Capital Gains on the sale of one residential house property and the purchase or construction of another residential house property. The amount of Exemption under Section 54 will be lower of:
- The cost of a new residential house property, or
- The capital gains on the sale of Residential house property
Eligibility to claim Capital gain exemption
A taxpayer can claim capital gain exemption on the sale of a house property under Section 54 if they satisfy the below conditions:
- The taxpayer should be an Individual (including NRI) or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
- The asset sold must be a Long Term Capital Asset i.e. residential house (building or lands appurtenant to it).
- Income from such a house should be chargeable under the head “Income from House Property”.
- The new residential property must be either –
1. Purchased within 1 year before or 2 years after the transfer, or
2. Constructed within 3 years after the date of transfer. - The maximum exemption limit is INR 10 crores.
- Starting from Assessment Year 2020-21 (FY 2019-20), sellers can claim a capital gain exemption for purchasing two residential houses in India. However, the exemption is subject to the capital gain not exceeding Rs 2 crore. Also, it can be claimed just once in the seller’s lifetime.
All the above conditions are cumulative. So if any condition is not met, the seller cannot claim the exemption under Section 54.
Quantum of Exemption under Section 54
The amount of Exemption under Section 54F will be available as per the following criteria:
- If the cost of the new residential house ≥ Long-term Capital Gain
– entire Long-term capital gain is exempt - If the cost of the new residential house < Long-term Capital Gain
– Long-term Capital Gain to the extent of the cost of the new residential house is exempt.
Example: Jayni sold a house property in FY 2023-24 for ₹ 40 crores. She purchased the property in FY 2016-17 for ₹ 20 crores. She purchased a new house property worth ₹18 crores in another city. Jayni will be able to claim a deduction under section 54 as follows:
| Particulars | Amount(₹) |
| Sales Consideration | 40,00,00,000 |
| Less: Purchase Price Index Cost of Acquisition (20,00,00,000*348/264) | (26,36,36,364) |
| Long-Term Capital Gains | 13,63,63,636 |
| New House Property Purchase Price | 18,00,00,000 |
| Section 54 Exemption Amount | 10,00,00,000 |
In this case, Jayni will be eligible to take an exemption of a maximum of ₹10 crores as the house property is sold after April 1, 2023, and on the remaining exceeding amount of ₹3,63,63,636 taxes will be levied at 20%.
Consequences of Transfer of New House Property
The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54 of the Income Tax Act. The following situations can arise:
Situation 1:
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. The total sales value of the new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.
Situation 2:
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.
Situation 3:
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 the capital gain on the sale of house property. The taxpayer must pay income tax on capital gains at the rate of 20% with indexation.
CGAS Scheme for claiming exemption
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.
FAQs
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 be sold and the 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.
If the taxpayer purchases two adjacent flats and makes modifications and makes it one then it shall be considered as one for exemption even if the sellers are different.
Exemption u/s 54 can be claimed for Long-term capital gain on the sale of residential property. However, exemption u/s 54F can be claimed for the Long-term capital gain on the sale of capital assets other than residential house property.
what if it is a commercial property ?
as per the recent budget announced : the limit is capped to 10 crores ! am i right ?
Hi @HIREiN,
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 ?
Hi @HIREiN,
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 ?
Hi Radhesh,
As per your stated case, you are eligible to claim the total amount of LTCG of â¹5 lakhs under section 54 of the income tax act.
Hi @Rahul_Tyagi
Yes, your father will be eligible for the capital gain exemption. However, if he has taken any loan, he won’t be able to claim the interest and principle components of home loan repayment.
Hi @Shrutika_Shah,
I have already purchased a property worth 45L by taking a home loan of 30L. I have sponsored remaining 15L from my savings.
Now, if I sell shares worth 45L (25L is initial capital, 20L is profit) which are long term holdings,
The article at Can you take a Home Loan and also Claim LTCG Tax Exemption? talks about court uphelding similar scenario during a house sale (Section 54), i would like to know about 54F (share sale)
Hi @csteja
You can read more about Section 54F of Income Tax on sale of LTCA except house- Learn by Quicko
Hello @Abhinav_Agrawal
Yes, you can claim exemption on LTCG from sale of residential property under section 54 on purchase of another flat.