Section 54 of the Income Tax Act
Section 54 of Income Tax Act
Section 54 of the Income Tax Act provides the seller of a residential property with relief from capital gains tax, if the proceeds from the sale are used to acquire another residential property. Owners of residential property in many cases sell their property only to purchase another property due to various reasons like moving from jobs, retirement, etc., In such a case, a property is sold by a taxpayer not for gains from the proceeds, but for other reasons. Hence, when a taxpayer sells a residential property and purchases another property, he or she is exempt from capital gains under Section 54 of the Income Tax Act.
Eligibility under Section 54 of the Income Tax Act
The following conditions must be satisfied by the taxpayer to claim benefits under Section 54 of the Income Tax Act:
- Taxpayer is an individual or HUF. Exemption under Section 54 is not available for companies or LLPs.
- The asset transferred should be a long-term capital asset, being a residential house property.
- Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
A taxpayer can claim benefit under Section 54 of the Income Tax Act for one residential house property purchased or constructed in India only. If a taxpayer is involved in more than 1 such transaction during his/her lifetime, the benefit will be available for one of the transaction only. Finally, a taxpayer cannot sell a home in India and buy a home abroad, while claiming benefit under Section 54. The home purchased or constructed must be in India only.
Long Term vs Short Term Capital Gains
Short-term capital asset is an asset which is held not more than 36 month or less. Any gain from selling a short-term capital asset, is termed as short-term capital gain. Long-term capital asset is an asset which is held more than 36 months. Any gain from selling a long-term capital asset, is termed as long-term capital gain. To claim benefit under Section 54, one of the important criteria is that the residential property be a long-term capital assets. Hence, to claim capital gains exemption, the property must have been held by the taxpayer for a period of more than 3 years from date of purchase.
Transfer of Property After Claiming Benefit under Section 54
Further, if a taxpayer claims benefit under Section 54 of the Income Tax Act and purchases or constructs a new house, he/she must hold that property for a minimum period of three year. If the taxpayer sells the property before the end of three years, then the benefit granted under Section 54 will be withdrawn and the taxpayer would have to pay the capital gains due on the previous transaction.
Amount of Exemption
The amount of capital gains exemption under Section 54 of the Income Tax Act will be the lower of:
- Amount of capital gains arising on transfer of residential house.
- Investments made in purchase or construction of a new residential house property.
Capital Gains Deposit Account Scheme
Under Section 54 of the Income Tax Act, a taxpayer having long-term capital gains from sale of a residential property can avoid the same by purchasing or constructing a residential property 1 year before or 2 year after (in case of purchase of property) or before 3 years (in case of construction of property).
In some cases, the proceeds from the sale of the residential property would not have been invested by the taxpayer at the time of filing of income tax return. In such cases, the capital gains benefit under Section 54 can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank. The new house can later be purchased or constructed by withdrawing the deposits from the account within a time frame of 2-3 years. If the deposits are not utilized within the stipulated period for the purpose of purchase or construction, the amount deposited will be taxable in the hands of the assessee.