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:
- The Cost of new Residential House Property
- 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 10th January 2021.
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:
- 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 (Sold after 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.
- A new Residential House should be in India.
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:
- The Cost of New Residential House Property OR
- 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:
|Less: Index Cost of Acquisition (30,00,000*289/220)||(39,40,909)|
|Long Term Capital Gains||20,59,091|
|New House Property Purchase Price||45,00,000|
|Section 54 Exemption Amount||20,59,091|
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:
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Consequences: The exemption u/s 54 is withdrawn.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.
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.
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 Tax on sale of house property. And capital gains will be taxed at 20%.
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 Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.
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.
Yes, NRI can claim exemption u/s 54 of the Income Tax Act. Provided the house property sold and purchased is situated in India.
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.