Section 54EE of Income Tax Act : Capital Gains Exemption on Investment in units of Specified Fund

The income tax department introduced a new Section 54EE of Income Tax Act with effect from 1st April 2017. Section 54EE provides for exemption from Capital Gains Tax on the sale of any long-term capital asset by investing into units of specified funds. The amount of capital gain exemption under Section 54EE will be lower of:

  1. The cost of new asset i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset

Who can claim an exemption under Section 54EE of Income Tax Act?

A taxpayer can claim an exemption u/s 54EE if he/she fulfills all the below conditions:

  1. Any assessee i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54EE.
  2. The asset sold is any Long Term Capital Asset (LTCA)
  3. The taxpayer invests Capital Gains within 6 months from the date of transfer of the original asset.
  4. Taxpayer invests in units of funds notified by the Central Government on or before 1st April 2019 to finance startups.
  5. The investment amount can not be more than INR 50 lakhs during any financial year.
  6. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.

The taxpayer can claim the Capital Gains Exemption under Section 54EE while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the amount of exemption available under Section 54EE of Income Tax Act?

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

  1. The investment amount in new assets i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset
File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Example: Arjun sold commercial property in FY 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. He purchased units of specified funds INR. 45,00,000 in FY 2021-22. Arjun will be able to claim deduction under section 54EE as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
Cost of Specified Investment 45,00,000
Section 54EE Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore

What happens to exemption if taxpayer sells the 54EE specified investment?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54EE of Income Tax Act. And the following situations can arise:

Situation 1: Sale of specified investment before 3 years

When the taxpayer sells the specified investment within 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is withdrawn. The amount of exemption that the taxpayer avails will be reduced from the cost of the asset. Thus, Capital Gains will be the total sales value minus the cost of the asset.

If the taxpayer takes a loan or advance on the security of the specified investment, the asset is deemed to have been sold on the date of such loan or advance. Thus, the exemption under Section 54EE would be withdrawn if such loan or advance is taken within 3 years from the date of purchase.

Situation 2: Sale of specified investment after 3 years

When the taxpayer sells the specified investment after 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on the investment sold.

FAQs

What are Long Term Specified Assets under Section 54EE?

As per Section 54EE, long term specified asset means units issued before 1st April 2019, of a fund notified by the Central Government. If an investor selling long term capital asset, invests into these units, he can claim exemption from capital gains tax.

Which funds are notified as Long Term Specified Assets under Section 54EE?

Section 54EE was introduced in Budget 2016. The taxpayer can save tax on capital gains on investment in long term specified asset i.e. units of a fund notified by the government. However, the government did not notify any eligible investment and as a result no taxpayer could take benefit of this capital gain exemption.

Can I invest in Capital Gains Account Scheme (CGAS) and claim an exemption under Section 54EE?

No. The benefit of investing in CGAS is not available under Section 54EE. The taxpayer needs to invest in a specified investment within 6 months of the date of transfer of the long-term capital asset.

Capital Gain Exemption

Capital Gain Tax arises on the sale of a Capital Asset by the taxpayer. The Income Tax Act has laid down a list of exemptions under Capital Gains. These provisions allow a total or partial exemption from Capital Gain and minimise tax liability for individuals. However, the Capital Gains Tax Exemption amount can not exceed the total amount of Capital Gain. Following is a list of all capital gain exemption:

The individual can claim the capital gain exemption while filing ITR for the financial year. An individual taxpayer having income from capital gains should file ITR-2 on the income tax website on or before the due date of 31st July.

List of Capital Gain Exemption

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden. Here is a summary of the exemptions laid down by the Income Tax Department.

Income Tax Section Description Applicability Deduction Amount
54 Sale of Residential House Property (LTCA) by Individual/HUF Purchase or Construction of Residential House Property Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property
Constructed within 3 years from the sale of a property
54F Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF Purchase/Construction of New House Property Cost of new asset * Capital Gains / Net Consideration
Purchased 1 year before or 2 years after the sale of a property
Constructed within 3 years from the sale of a property
54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset
The investment amount can not be more than Rs. 50 lakhs
54B Sale of Agricultural Land (LTCA/STCA) by Individual/HUF Purchase of new Agricultural Land Lower of
Cost of New Agricultural Land 
OR
Capital Gains
Purchased within 2 years from the sale of land
Land sold must be used for agriculture purposes for 2 years prior to sale
54D Compulsory acquisition of land and building (LTCA) used in an industrial undertaking Purchase of land or building for shifting or re-establishing the industrial undertaking Lower of
Cost of New Asset
OR
Capital Gains
Purchase within 3 years from the date of receipt of compensation
Land/Building acquired must be used for industrial undertaking purposes for 2 years prior to transfer
54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc
An investment made within 6 months from the sale of an asset
54EE Sale of any LTCA by any taxpayer Investment in units of a notified fund to finance startups Lower of
Cost of Investment 
OR
Capital Gains
The investment amount can not be more than Rs. 50 lakhs
An investment made within 6 months from the sale of an asset
54G Sale of plant, machinery, land,  building to shift industrial undertaking from urban area to rural area Purchase of new plant, machinery, land, building to shift industrial undertaking to rural area Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets
The asset sold can be LTCA or STCA
54GA Sale of plant, machinery, land,  building to shift industrial undertaking from urban area to rural area Purchase of new plant, machinery, land, building to shift industrial undertaking to SEZ Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets
The asset sold can be LTCA or STCA
54GB Sale of residential house property or residential plot of land (LTCA)  by individual or HUF Subscription in equity shares of eligible company or startup Cost of new asset * Capital Gains / Net Consideration
Eligible company or startup should utilize the amount of subscription for purchase of new assets

 

File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

CGAS Scheme i.e. Capital Gains Account Scheme is an option for the taxpayers to temporarily park their funds before making an investment in the specified assets as per the relevant section to claim the capital gain exemption. The taxpayer who has income from capital gains and wants to reduce the capital gains tax by making a specified investment has an option to create a CGAS account. If such taxpayer is unable to utilise the sale consideration for buying the new asset before the due date of filing ITR, he/she must create a CGAS account and deposit the funds there to claim the capital gain exemption. The benefit of CGAS Scheme is available for Section 54, Section 54B, Section 54D, Section 54EE, Section 54F, Section 54G, Section 54GA, Section 54GB of Income Tax Act.

FAQs

How to claim exemption if we wish to buy the house property next year?

Taxpayer can claim exemption u/s 54, 54F depending on asset sold. An exemption can be claimed by putting the amount in Capital Gains Account Scheme (CGAS) before the due date of filing of ITR in the year of sale. And claim the same as exemption while filing ITR.

Can we claim exemptions on sale of Short Term Capital Asset(STCA)?

The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

Section 54B of Income Tax Act : Capital Gains Exemption on Sale of Agricultural Land

When a farmer shifts from one agricultural land to the other, the intention is not to earn income out of it but to acquire another suitable land. If such a farmer is liable to pay income tax on the capital gains on the sale of agricultural land, 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 54B of the Income Tax Act is available on Capital Gains on the sale of one agricultural land and purchase or construction of another agricultural land. The amount of Exemption under Section 54 will be lower of:

  1. The cost of new agricultural land
  2. The capital gains on the sale of old agricultural land

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

A taxpayer can claim exemption u/s 54B if he/she fulfills all the below conditions:

  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 agricultural land that the taxpayer sells is a Long Term Capital Asset i.e. land sold after 24 months or Short Term Capital Asset i.e. land sold within 24 months
  3. The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer.
  4. Taxpayer purchases new agricultural land within 2 years from the sale of the old agricultural land
  5. The new agricultural land should be in India
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
Tip
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.

The taxpayer can claim the Capital Gains Exemption under Section 54B while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

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

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

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

Example: Palak sold agricultural land in FY 2021-22 for Rs. 60,00,000. He had purchased in FY 2016-17 for Rs. 30,00,000. And she purchased a new agricultural land worth Rs. 45,00,000. Palak will be able to claim deduction under section 54B as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore

What Happens to Exemption in the case of sale of Agricultural Land?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54B of income tax act. And the following situations can arise:

Situation 1

When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption under Section 54B is withdrawn. And the total sales value of agricultural land will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2

When the taxpayer sells the new agricultural land within 3 years from the date of purchase and the cost of a new house purchased is more than Capital Gains.

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

Situation 3

When the taxpayer sells the new agricultural land after 3 years from the date of purchase or construction.

Consequences: The exemption u/s 54B is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Long Term Capital Gains on agricultural land sold.

File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

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 or construction of new property till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of 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 utilise 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

Can I claim an exemption if I buy new agricultural land in the name of my spouse?

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

Can NRI claim exemption u/s 54B on land purchased?

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

Is capital gain exempt in the case of compulsory acquisition of agricultural land by the government?

Yes. Capital gain arising from compulsory acquisition of agricultural land under any law and the consideration of which is approved by the central government or RBI received on or after 01/04/2004 is fully exempt from tax. It is exempt u/s 10(37) of the income tax act.

Section 54EC of Income Tax Act : Capital Gains Exemption on Sale of Land or Building

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 54EC of the Income Tax Act is available on Capital Gains on the sale of land or building or both being LTCA and purchase of bonds of NHAI or REC. The amount of Exemption under Section 54EC will be lower of:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.

Budget 2018 Update

Under Budget 2018, the finance minister proposed to amend Section 54EC of the Income Tax Act. The new provision was applicable from 1st April 2019 i.e. FY 2019-20 onwards.

Section 54EC provision upto FY 2018-19

As per the older provision, if the taxpayer sells any long term capital asset, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 3 years issued on or after 1st April 2007.

Section 54EC provision FY 2019-20 onwards

As per the amended provision, if the taxpayer sells a long term capital asset being land or building or both, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 5 years issued on or after 1st April 2018.

Who can claim an exemption under Section 54EC of Income Tax Act?

A taxpayer can claim an exemption u/s 54EC if he/she fulfills all the below conditions:

  1. Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption
  2. The asset sold is a Long Term Capital Asset (LTCA) being land or building or both. The asset is long-term in nature if the taxpayer holds it for at least 24 months before selling.
  3. The taxpayer invests Capital Gains within 6 months from the date of transfer
  4. Taxpayer invests in 54EC bonds of the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or any other bonds notified by the Central Government.
  5. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.
Tip
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.

The taxpayer can claim the Capital Gains Exemption under Section 54EC while filing ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the amount of exemption available under Section 54EC of Income Tax Act?

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

  1. The Cost of NHAI/REC Bonds
  2. The Capital Gains on the sale of land or building
File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Example: Jay sold land in FY 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2021-22. Jay will be able to claim deduction under section 54EC as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore

What happens to exemption if taxpayer sells the 54EC Bonds?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54EC of Income Tax Act. And the following situations can arise:

Situation 1:

When the taxpayer sells the bonds within 5 years from the date of purchase.

Consequences: The exemption under Section 54EC is withdrawn. The amount of exemption that the taxpayer avails will be reduced from the cost of the asset. Thus, Capital Gains will be the total sales value minus the cost of the asset.

Situation 2:

When the taxpayer sells the bonds after 5 years from the date of purchase.

Consequences: The exemption under Section 54EC is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on bonds sold.

FAQs

Can I invest in Capital Gains Account Scheme (CGAS) and claim exemption u/s 54EC?

No. The Benefit of investing in CGAS is not available under section 54EC. The taxpayer needs to invest in bonds within 6 months of the date of transfer of asset.

Can NRI Claim exemption u/s 54EC?

Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54EC is not claimed?

LTCA are taxed at special rates. Land and Building are considered movable assets and taxed at 20% with Indexation.

Section 54F of Income Tax Act : Capital Gain Exemption on sale of LTCA except house

A taxpayer can claim a capital gain exemption under Section 54F of the Income Tax Act to reduce Capital Gains Tax on the sale of a Long Term Capital Asset. Section 54F exemption is available on the sale of a long-term capital asset except for house property if the taxpayer invests the sale consideration in the purchase or construction of a residential house property. The amount of Exemption under Section 54F will be as below:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Who can claim an exemption under Section 54F of Income Tax Act?

A taxpayer can claim an exemption under Section 54F if he/she fulfills all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA) other than a house property.
  3. On the date of sale, the taxpayer does not own more than one house property.
  4. The taxpayer purchases or constructs a new residential house before 1 year or after 2 years from the sale of the long term capital asset, or
  5. In case of construction of a new house property, within 3 years from the sale of the residential house property.
  6. The new residential house should be in India.

The taxpayer can claim the capital gain exemption under Section 54F while filing ITR in that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

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

As mentioned above, the Amount of Exemption under Section 54F will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold gold in FY 2021-22 for Rs. 15,00,000. It was purchased in FY 2016-17 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2021-22. Ajay will be able to claim a deduction under Section 54F as follows:

Particulars Amount
Sales Consideration 15,00,000
Less: Index Cost of Acquisition (5,00,000*317/264) (6,00,378)
Long Term Capital Gains 8,99,622
New House Property Purchase Price 35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 8,99,622
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.

What happens to Section 54F exemption if taxpayer sells the new house property?

The lock-in period of 3 years is applicable when the taxpayer claims exemption under Section 54F of income tax act. And the following situations can arise:

Situation 1: Sale of New House before 3 years

When the taxpayer sells the new house within 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2: Sale of New House after 3 years

When the taxpayer sells the new house after 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54F is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating capital gains tax on sale of house property sold. And capital gains will be taxed at 20%.

File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

CGAS Scheme for claiming exemption under Section 54F of Income Tax Act

Under Section 54F, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of new house property till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of 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 utilise 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

What is Net Consideration u/s 54F?

Net Consideration is the full Sales value/consideration received on sale of Long Term Capital Asset reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.

Can NRI Claim exemption u/s 54F?

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

What will be the tax rate on capital gains earned if exemption u/s 54F is not claimed?

LTCA are taxed at special rates. It depends on the type of asset sold.
Movable Asset: 20% with Indexation,
Shares/Securities: 10% u/s 112A (above Rs. 1,00,000).

Section 54 of Income Tax Act : Capital Gains Exemption on Sale of House

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:

  1. The cost of new residential house property
  2. 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:

  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 i.e. house property sold after at least 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. The new residential house should be in India
  7. If the taxpayer purchases or constructs more than one house, the taxpayer can claim an exemption for one house property only
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.

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 the income tax website 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:

  1. Cost of the new residential house property OR
  2. Capital Gains arising on the sale of old residential house property (including amount deposited in (Capital Gains Account Scheme)

Example: Ravi sold a house property in FY 2021-22 for Rs. 60,00,000. He has purchased the property in FY 2016-17 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 a deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
Explore

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:

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. 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 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 capital gain on sale of house property. The taxpayer must pay income tax on capital gains at the rate of 20%.

File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

CGAS Scheme for claiming exemption under Section 54

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase or construction of new property till the due date of submission of ITR, he.she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of 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 utilise 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

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

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.

Can NRI claim exemption under Section 54 on purchase of a House Property?

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.

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

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.