SECTION 54 EXEMPTION FOR CAPITAL GAINS ARISING ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY

Introduction

A person wanted to shift his residence due to certain reason, hence, he sold his old house and from the sale proceeds he purchased another house. In this case the objective of the seller was not to earn income by sale of old house but to acquire another suitable house. If in this case the seller was liable to pay income-tax on capital gains arising on sale of old house, then it would be a hardship on him. Section 54 gives relief from such a hardship. Section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. The detailed provisions in this regard are discussed in this part.

Basic conditions

Following conditions should be satisfied to claim the benefit of section 54.

♦ The benefit of section 54 is available only to an individual or HUF.

♦ 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).

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.

With effect from Assessment Year 2021-22, the Finance Act, 2020 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long- term capital gains does not exceed Rs. 2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.

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 (discussed later)].

Consequences if the new house is transferred

Exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on misutilisation of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house.

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, 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.

Computation of capital gains for the financial year 2021-22

(*) Exemption under section 54 will be lower of following

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

♦ Investment in new residential house property

Considering the above provisions, the exemption in this case will be lower of the following amount :

Amount of capital gain, i.e., Rs. 8,40,000.

Amount of investment in new house, i.e,. Rs. 10,00,000 Thus, exemption will be Rs. 8,40,000.

Computation of capital gains for the financial year 2022-23

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then the new residential house property is transferred within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn. The computation in this case will be as follows :

(*) 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 exemption under section 54 will be deducted from the cost of acquisition of the new house. Applying this provision, the cost of acquisition of new house will be computed as follows:

Computation of capital gains for the financial year 2021-22

(*) Exemption under section 54 will be lower of following :

♦ Amount of capital gains arising on transfer of residential house, or

♦ Investment in new residential house property

Considering the above provisions, the exemption in this case will be lower of the following amount :

♦ Amount of capital gain, i.e., Rs. 8,40,000.

♦ Amount of investment in new house, i.e., Rs. 5,00,000

Thus, exemption will be Rs. 5,00,000.

Computation of capital gains for the financial year 2022-23

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then the new residential house property is transferred within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn. The computation in this case will be as follows :

(*) 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 exemption under section 54 will be deducted from the cost of acquisition of the new house. Applying this provision, the cost of acquisition of new house will be computed as follows:

Capital Gain Deposit 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 date of filing the return of income, the capital gain arising on transfer of the house is not utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised 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.

Non-utilisation of amount deposited in Capital Gain Deposit Account Scheme

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised 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 2 years/3 years gets over.