Brief Synopsis of Capital Gain Exemption u/s 54, 54EC & 54F

 

As we had discussed about the taxation rules on sale of immovable property in the article on Capital Gain on Immovable Property, we are here to understand the benefits that can be claimed under Section 54, Section 54EC & Section 54F to save tax on long term capital gains.

 

At the time of sale of any Long Term Capital Asset, the gain is taxed at a steep rate of flat 20%. In order to save up on those taxes, the act has given us an option of claiming exemptions from paying such Capital Gains if the tax payer reinvests the amount in certain specified forms of Investment and thereby save up on Long Term Capital Gain Tax.

 

1. Section 54: Proceeds from Sale of Old Residential House Property used to Purchase/ Construct a Residential House Property in India

 

Any Long Term Capital Gain arising either to an individual or a HUF from the sale of a residential property shall be exempt to tax to the extent such gain is invested in:

 

• The purchase of another one residential property in India within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or

 

• Construction of a residential one house property in India within a period of 3 years from the date of 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).

 

2. Amount of Exemption

 

 Exemption under section 54 will be lower of following:

 

• Amount of capital gains arising on transfer of residential house; or

 

• Amount invested in purchase/ construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)

 

3. Consequences if The New House is Transferred

 

Provided the new residential house property purchased / constructed should not be transferred within a period of 3 years from the date of transfer. If the new property is transferred within a period of 3 years from the date of transfer then the benefit granted under section 54 will be withdrawn.

 

The ultimate impact of the restriction is as follows:

 

• The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/ completion of construction.

 

• If the new house is sold before a period of 3 years from the date of its purchase/ completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

 

4. Capital Gain Account Scheme

 

To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the due date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing due date of filing the return of income the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme).

 

The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2/3 years, as the case may be.

 

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilized within the specified period for purchase/construction of the residential house, then the unutilized amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 3 years is completed.

 

Note:

 

(i) Exemption can be claimed only in respect of one residential house property purchased/ constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

 

(ii) If the transfer takes place on or after 01.04.2017, the period of holding to be qualified as Long Term Capital Asset shall be more than 24 months.

 

5. Section 54EC: Proceeds from Sale of Any Long Term Capital Asset (w.e.f. A.Y 2019-20, The Said Long Term Capital Asset Shall be Land or Building or Both) Used to Purchase Specified Bonds

 

Capital gains arising from sale of any Long Term Capital Asset (wef A.Y 2019-20, the said long term capital asset shall be land or building or both) are exempt under section 54EC if the assesse has within a period of 6 months from the date of transfer invested the gains in long term specified bonds as issued by NHAI and REC and notified by the Central Government (bond issued by Power Finance Corporation/ Indian Railway Finance Corporation) for a minimum period of 3 years (5 years if such bonds are issued on or after 01.04.2018).

In cases where the assesse converts the specified asset into cash or takes a loan or advance on the security of such specified asset within a period of 3 years (5 years if the investment is made in specified asset on or after 01.04.2018) from the date of its acquisition, the amount of capital gain exempt u/s 54EC shall be deemed to be Long Term Capital Gain of the previous year in which the Long Term Capital Asset is transferred or converted into money or on the date such loan or advance is taken.

 

Amount of Exemption:

 

Capital gain shall be exempt to the extent of amount of investment in such specified bonds up to a maximum of Rs.50 Lacs.

 

 

6. Section 54F: Proceeds from Sale of Any Capital Asset used to Purchase a One Residential Property in India

 

Any Capital Gain arising either to an Individual or a HUF from the sale of any Long Term Capital Asset shall be exempt to tax if the entire sales proceeds and not only such gain is invested in :

 

• The purchase of one residential property in India within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or

 

• Construction of a one residential house in India property within a period of 3 years from the date of transfer.

 

Provided further that nothing contained in this sub-section shall apply where—

 

(a) The assesse—

 

(i) Owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

 

(ii) Purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

 

(iii) Constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

 

(b) The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head ‘income from house property’.

 

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).

 

If the entire sale proceeds is not invested and only a part of the sale consideration is invested, then even the benefit shall also be proportionately allowed i.e.

 

Amount Claimed as Exempt = Capital Gain * Amount Invested ÷ Net Sale Consideration

 

7. Consequences if the New House is Transferred/Purchases or Construct Another House

 

(i) Where the assesse purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, other than the new asset,

 

(ii) Where the new asset is transferred within a period of three years from the date of its purchase/ its construction

 

In the above two cases, the amount of capital gain arising from the transfer of the original asset which was not charged to tax shall be deemed to be income chargeable as long-term capital gain of the previous year in which such residential house is purchased or constructed/ transferred.

 

8. Capital Gain Account Scheme

 

To claim exemption under section 54F, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the assesse is not in a position to purchase or construct another house, then the benefit of exemption can be availed by depositing on or before the due date of furnishing return the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme).

 

The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time limit of 2 years or 3 years, as the case may be.

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