exemption u/s 54

Query 1] Mr. A proposes to sell his independent house and buy two flats- one in his own name and the other in joint name with Mr. B. There is no problem if the sale and purchase considerations are equal. But if in such transactions, the sales proceeds (X) are more than the investment in the flats (Y), please let me have your advices on the following:

  1. What expenses would be eligible to be classified as investments to constitute the value of Y and what expenses are deductible from X?
  2. What would be the options with Mr. A as regards payment of Capital gains tax?
  3. In case, Mr. A decides to pay Tax on Capital Gains in the Financial Year in which the income accrues. Which I am told would be @ 10% on (X minus Y), what treatment will be given to the amount (Z = X minus Y) in subsequent Financial Years if the Investments are maKe in Bank Deposits? Whether the same is attract Capital Gains Tax or the Investments would be treated as normal Bank Deposits and would attract Tax at the normal rate?
  4. If Mr. A distributes the amount (Z) as “Gift” to his children, what shall be the Tax Liability in the hands of Mr. A and the Beneficiaries, i.e. his children?

Mr. A is a pensioner age 85 years and falls in the ‘Super Senior Citizen’s category’ and does not file Income Tax Returns. Please guide me. [Dilip]


First of all it may be note that Mr. A want to sell one property and wish to invest the sale proceeds for purchase of two properties. (Out of which one is proposed in individual name & the other one in joint name).

I would like to elaborate upon one more important issue, which though not asked, is emerging from your query about exemption u/s 54.

As per provisions of the section 54 of the IT Act-1961, the Long-Term Capital Gain (LTCG) arising to an individual / HUF assessee, from the sale of a residential house shall be exempt if the amount of LTCG is invest within a stipulate time for purchase of a ” residential house. Whether exemption will be available on investment of capital gain for purchase of more than one house property is question with no final verdict.

The issue is still a vexed one and divergent views have been expressed by the Judiciary on the issue depending upon the facts & circumstance of each & every individual case. Confusion prevails as to the interpretation of alphabet “a” used in section 54.

The word “a” has been interpret either way in the judicial pronouncements:
a] The Mumbai bench of the IT Appellate Tribunal in the case of Mrs. Gulshan banoo R. Mukhi vs Joint CIT ((2003) 78 TTJ 768 (Mumbai) held in favor of the department interpreting the term `a residential house’ as meaning one property. Recently, Punjab & Haryana High Court in the case of Pawan Arya Vs. CIT (2011) 37 CTR (P & H) 210 has held that exemption u/s 54 is available in respect of one house property only.

b] The Bangalore High Court in CIT Vs. D. Anand Basappa [2009] 180 Taxmann 4 (Kar) has affirmed the view of the Tribunal & has upheld that the exemption can be claimed in respect of the investment made in more than one house. Similar view are express in
i]  ITO Vs. P.C. Ramakrishna (2007) 108 ITD 251 (Chennai),
ii]  Prem Prakash Bhutani Vs. CIT (2007) 110 TTJ (Delhi) 440, &
iii] CIT Vs. Rukminiamma (2011) 196 Taxman 187 (Kar).

As of now, there is no Supreme Court Ruling on the issue. To be on a safer side, better interpret the word “a” as one house property only. Alternatively, still if Mr. A has a compulsion of purchasing more than one flat as mention in the query, the same should be purchase advisably in a single or adjacent building in such a way that the properties are capable of being use as a single unit.
With the above basic background about investment & exemption u/s 54, opinion about other parts of your queries are as under:

  1. The amount of investment in a residential house property eligible for exemption from LTCG would normally consists of Purchase Price, Stamp Duty, Registration Expenses, Brokerage paid on purchase, Legal expenses etc. Further the amount of deduction admissible from sale consideration is given in point No. 3(a) hereunder.
  2. If Mr. A doesn’t wish to avail an exemption u/s 54 from LTCG by investing. It for purchase of a residential house property, then he has to pay tax @ 20% u/s 112 of the Income Tax Act-1961. The tax would be payable on the amount of LTCG less unused basic exemption limit. As Mr. A is a very senior citizen (80 years & above), he is entitled for a bit higher basic exemption limit as compared to other assessee (i.e., Rs. 5 Lacs).
  3. The tax rate of LTCG on sale of any property (other than share) is 20% & not 10% as mentioned in the query. The tax is payable not on the difference between the sale price & investment/ exemption availed, as mentioned in the query. The computation is quite different than what you are presuming and the same is elaborate here under for the mass benefit:
    a] Computing LTCG:
    LTCG is required to be calculated by deducting from the sale consideration:
    i] Indexed Cost of Acquisition
    ii] Indexed Cost of Improvement
    iii] Expenses in connection with transfer (like legal expenses, brokerage paid etc).
    For above, Sale consideration is require to be take as higher of:
    i] the sale price as mentioned in the sale deed or
    ii] Value adopted by the Registrar for the purpose of levy of stamp duty
    b] Computing Tax on LTCG:
    LTCG computed above could further be reduced by
    i) the amount of exemption u/s 54 admissible as a result of investment for purchase/ construction of a residential house property
    ii) the amount of unused basic exemption limit. (Unused basic exemption limit is basic exemption limit less other taxable income of the assessee).
  4. The amount invest in bank FDR after payment of tax or availment of exemption u/s 54 is treat as normal FDR only. The interest therefrom would be taxable at regular rate.
  5. The assessee is free to use the amount left after exemption & payment of tax as per his own will. The gift given to his children / specified relative is tax neutral i.e., neither taxable in the hands of donor nor in the hands of donee.

Query 2]

One of my friends has gifted to his wife ground floor of his residential building (constructed at a cost of Rs. 20,000/- in 1970) about 5 years back and the same was transfer in municipal records also. She now wants to give on rent to some girls as paying guests after adding many facilities such as 8 each-tables, steel almirahs,  palangs with complete beds, Gas, TV with DTH, Fans, Exhaust, Coolers, Water purifiers, Beautiful curtains & Lights  etc etc at a cost of about Rs. 2 Lacs from her own capital. She files her tax return every year.

Tell me whether rent received by her will be taxable in the hands of the wife or husband or partly both? If both, then in what proportion it will be taxable?  [Shankerlal Fatnani-]


  1. Where an asset is transfer by an individual to his spouse directly or indirectly. Otherwise than for an adequate consideration or in connection with an agreement to live apart. Any income from such asset is deem to be the income of the transfer or by virtue of section 64(1) (iv) of the Income Tax Act-1961.
  2. In normal course, the rental income from the property transfer to wife without consideration is to be clubb with the income of the husband u/s 64(1)(iv). However, in the given case, the income is not merely from letting out of the property but also from providing other amenities like bed/gas/TV etc, the investment for which is do by the wife only.
  3. If the rent receive could be separated in two parts i.e., towards property & towards amenities, then the clubbing provision in the hands of husband would be only in respect of rent of property and the charges/rent for providing amenities would be taxable in the hands of wife as “Income from Other Source”. Wife could claim depreciation on the assets so purchased for providing the amenities.
  4. If the segregation of rent in two parts is not to do . At the time of providing the premises to the user. The same is do subsequently by the assessee on some logical basis like investment in amenities vis. A vis property cost/valuation of let out portion of the property or could be in some other logical basis.
  5. In respect of “Paying guest services” which is being similar to hostel business, she can also have an option of offering the income in her hands only as “Income from Business / Profession” with due professional advice & consultations.

exemption u/s 54

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