UNSYNCRONIZED INCOME TAX PROVISIONS
When an individual sells a residential property and buys another residential property, he will be eligible for exemption under Section 54. Conditions to avail the benefit of exemption under Section 54 include:
- The taxpayer (i.e. seller) needs to be an individual or HUF. Thus, firms, LLP’s and companies cannot utilize the benefits of this section.
- Asset needs to be classified as a long-term capital asset.
- The asset sold is a Residential House. Income from such a house should be chargeable as Income from House Property
- The seller should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, ie. the seller will have to construct the residential house within 3 years from the date of sale/transfer. 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 compensation)
- The new residential house should be in India. The seller cannot buy or purchase a residential house abroad and claim the exemption.
The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller cannot avail the benefit of the exemption under Section 54.
What is the amount of Exemption available under Section 54 of the Income tax act?
The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
- Capital gains arising on transfer of residential house.
- Investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.
As per provisions of section 54F of the Income Tax Act, 1961, exemption of capital gain is available in case of transfer of long term capital assets against investment in residential house. The salient features for availing exemption under section 54F are detailed hereunder –
- The exemption under section 54F is available only to individual and HUF;
- Capital gain has arisen on account of transfer of any long term capital assets other than residential house;
- Net consideration arisen on account of transfer of long term capital assets has been invested as follows –
Net consideration has been re-invested in purchase of one residential house:
- within a period of 1 year before the date of transfer or
- within a period of 2 years after the date of transfer; or
- Net consideration has been re-invested in construction of one residential house in India within a period of 3 years from the date of transfer.
Amount of Deduction
In case full amount of net consideration is invested in purchase / construction of residential house, then, the full amount of long term capital gain would be exempted under section 54F.
Section 54 v/s Section 54F
Earning income automatically casts a responsibility on the taxpayers to discharge income tax on such income and so is the case with capital gains too. However, the income tax laws allow taxpayers to claim certain exemptions against capital gains, which will help reduce their tax outgo. Two such very crucial exemptions one can claim are under Sections 54 and 54F.
As discussed above the exemption under Section 54 is available on long-term Capital Gain on sale of a House Property.
Exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.
Differences between these two Sections
|Section 54||Section 54F|
|To claim full exemption the entire capital gains have to be invested.||To claim full exemption the entire sale receipts have to be invested.|
|In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains.||In case entire sale receipts are not invested, the exemption is allowed proportionately. [Exemption = Cost the new house x Capital Gains/Sale Receipts]|
|You should not own more than one residential house at the time of sale of the original asset.|
|This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from the sale of the new property will be taxed as short-term capital gains.||This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR
if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.