Sometimes the property owners (including residential property) may have to sell their house for some reason. The reason, however, is not focused on or limited to earning profit from the sale but on purchasing a new house. If individuals have to pay capital gains tax on this transaction, they may face various challenges in buying a new one. It is then Section 54 of the Income Tax Act of 1961 comes into play and reduces this hardship.
Thus, the property seller can get relief u/s 54 from the capital gains tax. This article will discuss more about the section, exemption, and deduction under section 54 of the Income Tax Act.
Capital Assets and Their Types Under Income Tax
The Income Tax Act of 1961 defines capital assets under Section 2(14) as any movable or immovable, tangible or intangible property held by the assessee for any purpose.
For determining capital gains, the assets are classified into:
Short-term capital assets
Capital assets held for 36 months or less are short-term capital assets, and the gains from the sale of such assets are called short-term capital gains.
Long-term capital assets
Capital assets held for more than 36 months are called long-term capital, and the gains from selling these assets are called long-term capital gains.
What is Section 54 of the Income Tax Act of 1961?
An individual or HUF can claim section 54 exemption if they invest the sale proceeds of a long-term capital asset (residential property) to purchase or construct another residential property.
Exemption Under Section 54
Exemption under section 54 is available only to individuals and HUF.
Below are the conditions that must be met to avail of this exemption. First, however, one must remember that all the below conditions must be satisfied to avail of this benefit.
- The asset must be classified as a long-term capital asset.
- The asset sold is a residential house; income from such a house should be classified under Income from House Property.
- The seller should purchase a residential house either two years after the sale or transfer or one year before the date of the sale or transfer.
- If the seller is constructing a house, the residential house must be constructed within 3 years from the date of sale or transfer.
- The new residential house should be in India. Buying residential houses outside India will not offer any exemption under this section.
Exemption Amount Under Section 54 of the Income Tax Act
Section 54 allows the lower of the two as an exemption amount for the taxpayer:
- Amount of long-term capital gains on transfer of residential property, or
- The investment made for constructing or purchasing new residential property
Illustration:
An individual, Mr Shah, sells his house in Chennai for ₹45,00,000. After the sale, Mr Shah purchases another residential property in Bhopal that costs ₹30,00,000. The following are the capital gains calculated for Mr Shah.
| Particulars | Amount in ₹ |
|---|---|
| Capital gain on transfer of residential property in Chennai | 45,00,000 |
| Less: Investment made in another residential property in Bhopal | 30,00,000 |
| Balance capital gain | 15,00,000 |
Since the capital gain exemption u/s 54 is lower of the two, the exemption received is ₹30,00 000 (the amount that is reinvested in another property). The balance capital gain will be taxable.
Conclusion
While buying a residential house after selling one, consider the benefits and exemptions under Section 54 of the Income Tax Act. One can also deposit the sale proceeds before the due date of filing income tax returns in the Capital Gains Account Scheme (CGAS) to save tax.
Those who want to reinvest their capital gains by buying a contemporary residential property in Mumbai can take an E-Tour of Piramal Realty’s exquisite collection of premium residences to experience luxury.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
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