In the intricate tapestry of income taxation, Sections 54, 54B, and 54F of the Income Tax Act serve as pivotal chapters, offering taxpayers avenues to mitigate capital gains tax liabilities. In this article we are going to discuss 3 sections, Section 54, 54B and 54F, all these provide exemption from capital gain to Individuals and HUFs.
To qualify for benefits under Section 54, the capital gain must originate from the sale of a long-term residential property, with its income falling under the category of "Income from house property." Additionally, the taxpayer is required to purchase before one year before or two years after the sale another residential property in India or constructing a new residential house within three years post the sale.
Tax Treatment of Capital Gains:
Amount of Exemption shall be lower of:
Cost of New Asset or,
Although if new asset is transferred within 3 years of date of purchase or construction then, cost of acquisition shall be reduced by exempted capital gain. For example, if assessee claims exemption under this section, by purchasing a residential property within specified period, and then transfer such property within 3 years of date of acquisition, so while computing capital gain at the time of transfer, cost of acquisition shall be considered as nil.
Option for Two Residential Houses:
For taxpayers with capital gains not exceeding two crore rupees, there exists an option to invest in or construct two residential houses in India. The second proviso emphasizes the term "two residential houses" for such cases. But this option can be exercised only once in a lifetime.
In the case of CIT v. Syed Ali Adil (2012)  135 TAXLOK.COM (IT) 248 (AP) Andhra Pradesh High Court held that where the assessee has acquired two adjacent flats and effected modifications to make them a single flat, it was immaterial that flat was acquired from two different sellers and separate sale deeds. Hence both flats shall be deemed single house property for the purpose of exemption u/s 54.
In case, residential property acquired or constructed after sale of capital asset, assessee is required to deposit such amount made in a specified bank or institution under a government-approved scheme before due date of filing of return.
The deposited amount should be utilized for the purchase or construction of the new property within the specified time frame. Failure to do so results in the unutilized amount being treated as income in the year when the two/three year period from the original asset`s sale expires.
The latest amendment introduces a significant change in cases where the cost of the new asset exceeds ten crore rupees. In such scenarios, the amount exceeding ten crore rupees is no longer taken into account for calculating exemption of Section 54. In such scenarios, only the amount up to Rs.10 crores for acquisition new residential house property is considered for tax calculations.
For example, If the cost of the new residential property is fifteen crore rupees, only the first ten crore rupees will be considered for calculating exemptions under Section 54. The amendments will come into effect for the financial year starting April 1, 2024.
To benefit from Section 54B, the capital gain must arise from the transfer of agricultural land used by the assessee, or their parent, or an HUF for agricultural purposes in the two years preceding the transfer. Within two years after the transfer, the assessee must purchase another piece of land for agricultural use. This exemption is available only to Individual and HUFs.
Capital Gain Amount
Although if new asset is transferred within 3 years of date of purchase or construction then, cost of acquisition shall be reduced by exempted capital gain. For example, if assessee claims exemption under this section, by purchasing a land for agricultural use within specified period, and then transfer such land within 3 years of date of acquisition, so while computing capital gain at the time of transfer, cost of acquisition shall be considered as nil.
To claim exemption under this section, assessee is required to deposit such amount made in a specified bank or institution under a government-approved scheme before due date of filing of return.
The deposited amount should be utilized for the purchase of the new land within the specified time frame. Failure to do so results in the unutilized amount being treated as income in the year when the two/three year period from the original asset`s sale expires.
In the matter involving Gurunam Singh  113 TAXLOK.COM (IT) 003 (P&H), the court established that if the taxpayer acquires a residential house in the spouse`s name, having personally disbursed the entire purchase amount and essentially designating the spouse as the property owner, such an arrangement should not alter the essence of the transaction. In fact, the court expressed support for such agreements, emphasizing their role in empowering women. The court also noted that the government has introduced several initiatives endorsing shared ownership with spouses. Additionally, it was underscored that in the case at hand, the taxpayer should be regarded as the de facto owner of the property.
To avail benefits under Section 54F, the capital gains must arise from the transfer of a long-term capital asset, other that residential property. The assessee must, within one year before or two years after the transfer, purchase or construct a residential house in India. This exemption is available only to Individual and HUFs.
If the cost of the new asset equals or exceeds the net consideration of the original asset, the entire capital gain is exempt from taxation under Section 45. However, if the cost is less, a proportionate part of the capital gain is exempt, calculated based on the ratio of the new asset`s cost to the net consideration.
Simply, if cost of new asset acquired is less than net consideration of asset transferred, in that case, exemption will be calculated in the following manner:
Cost of New House * Capital Gains/Net Consideration
Other Conditions to avail this exemption:
On the date of transfer of original asset, assessee should not own more than one residential house.
Assessee should not purchase any other house (other than the house on basis of which exemption is claimed) within 2 years or construct within 3 years after date of transfer.
If above conditions are not satisfied, then exempt Capital Gain shall become taxable in the year in which above condition are violated.
The deposited amount should be utilized for the purchase of the new residential property within the specified time frame. Failure to do so results in the unutilized amount being treated as income in the year when the two/three year period from the original asset`s sale expires.
Related Case Law: Commissioner of Income Tax Vs Shri Kamal Wahal, Delhi HC (2013)  136 TAXLOK.COM (IT) 097 (DELHI)
The appeal raises the question of whether the Tribunal was correct in allowing a deduction of Rs. 51,25,100 under Section 54F of the Income Tax Act 1961. The appellant inherited a 50% share in a residential house in Delhi in 2003, and the Tribunal noted that Section 54F, encouraging investment in residential houses, should be liberally interpreted.
The appellant purchased the property solely in his wife`s name, using funds entirely from the sale proceeds with no contribution from his wife.
Applying purposive construction and considering Section 54F`s objective, the court answered the question of law in the affirmative, favoring the appellant and dismissing the appeal.
In the realm of capital gains taxation, Sections 54, 54B, and 54F emerge as indispensable tools for taxpayers seeking to optimize their financial positions. These sections not only provide exemptions but also lay down specific conditions that taxpayers must adhere to for unlocking these benefits.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
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