Any long term capital gain arises to an individual or HUF from transfer of residential house property (income from which is chargeable under the head income from house property) shall be exempt to the extent of such capital gain as invested in the purchase or construction of another residential house property.
Such new residential house property should have been purchased within one year before or 2 years after the date of transfer.
In case of construction of house property, the residential house property should have been constructed within a period of 3 years after the date of such transfer.
Such residential house property transferred, purchased or constructed includes building or land appurtenant thereto.
In case, the new house property that has been constructed or purchased are again transferred within a period of 3 years from the date of its acquisition then the entire amount of capital gain as exempted earlier will be deducted from the cost of acquisition of house property while deriving capital gain tax.
Amount of capital gain exemption under section 54
If the cost of purchase or construction of residential house property is greater then the capital gain amount then the whole capital gain will be allowed as exemption.
Where the cost of purchase or construction of residential house property is less than the capital gain amount then exemption will be to the extent of the cost of new residential house.
Tabular representation of exemption provision
|Capital gain <= Cost of new residential house property||Entire amount of capital gain will be exempted|
|Capital gain > cost of new residential house property||Cost of new house will be allowed as exemption|
If the new house purchased and/or constructed is transferred within a period of 3 years from the date of its purchase or construction then capital gain as exempted earlier will be deducted from the cost of new house to compute capital gain. Such capital gain as computed will be treated as short term capital gain under income tax act.
Capital gain account scheme for section 54
Even though, the taxpayer has to invest in specified assets within the time period of 2 years or 3 years from the date of transfer of asset, it has been specified under section 54 of income tax act that the person has to deposit the utilized amount before the due date of filling income tax return in an account opened under the capital gain account scheme, 1988.
With such deposit and the amount invested in purchase/construction of new residential house, the taxpayer will be eligible for exemption. Deposited amount and the amount already utilized will be treated as cost of the new house.
Amount deposited should be managed as per the capital gain account scheme, 1988. For more details on CGAS please refer this article.
Failure to utilize the amount within a period of 3 years from the date of transfer will attract long term capital gain tax. It will be taxable in that year in which such period of 3 years get over. Taxpayer can withdraw the entire amount from the account after the period gets over.
Other relevant points for section 54 exemption
- Section 54 is also applicable to flat purchased or constructed in a multi storied building.
- In case of the concerned assessee/tax payer’s death then exemption under section 54 is also applicable to the legal representative.
- If the taxpayer has utilized the sale consideration for other purposes instead of purchasing or constructing residential house and borrowed money fro the purpose of to construct or purchase residential house then exemption benefits under section 54 will not be available.
- Section 54 is also applicable to a non resident.
- Exemption under section 54 is available to a residential house property whether it’s let out or self occupied.
- Allotment of a flat by DDA or cooperative society (to its members) will be treated as construction of house property under section 54 of income tax act.
- If the builder or DDA or cooperative society failed to deliver the flat within the time period of 3 years from the date of transfer then benefit of section 54 exemptions will not be withdrawn. This is based on certain court case laws like CIT v R.L sood (2000) 245 ITR 727 (del).
- Cost of construction or purchased will also include the cost of land