Exemption for Residential House Property

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Sec.54 – Exemption for ResidentialHouse Property

Eligible Assessee: Subject to the provision of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long term capital asset, being building or land appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property”, and the assessee has within a period of 1 year before or 2 years after the date on which transfer took place purchased,or has within a period of 3 years after that date constructed, one residential house in India, then,instead of the capital gain being charged to income tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provision of this section, that is to say,-

  • If the amount of the capital gain is greater than the cost of the residential house so purchased or constructed(hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the of the previous; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or                                                     
  • If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of capital gain.                                                                           
  • What is Capital Gains Account scheme?
    If the asset is sold in the PY, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.
    The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.
    However,if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).

Other Points:

  • Anew residential house property must be purchased or constructed to claim the exemption
  • The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
  • Alternately,the new residential house property must be constructed within 3 years of the sale of the property/asset
  • If you are not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
  • Only ONE house property can be purchased or constructed.

By- Rohan Kalda (CA Final)

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