Section 54, 54EC, 54F: Exemption from Long Term Capital Gains Tax

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At the time of sale of any Long Term Capital Asset, the Gains are usually very large and are taxed @ 20%. The Resultant Figure to be paid as Tax usually comes out to be a very large amount liable to be paid as Long Term Capital Gain Tax.

However, the Govt. of India has given the option of claiming exemption from paying this Capital Gains Tax if the taxpayer reinvests the amount in certain specified forms of Investment and can thereby save Long Term Capital Gain Tax as explained below.

Section 54: Old Asset: Residential Property, New Asset: Residential Property

Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rent) shall be exempt to the extent such capital gains is invested in the

  1. Purchase of another Residential Property within 1 year before or 2 years after the due date of transfer of the Property sold and/or
  2. Construction of Residential house Property within a period of 3 years from the date of acquisition

Provided that the new  Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition

If the new property is sold within a period of 3 years from the date of its acquisition, then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier. The capital gain arising from this transfer will always be a short term capital gain.

Quantum of Deduction under Section 54

Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.

  1. If the entire amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt
  2. If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption

Relevant Points regarding Section 54

  1. Budget 2014 has introduced an amendment to Section 54 and from Financial Year 2014-15 i.e. Assessment Year 2015-16, exemption under Section 54 is available if the amount is re-invested in 1 Residential House situated in India.
  2. The exemption under Section 54 would also be available if the amount is invested in an under construction residential house. However, Service Tax is levied on purchase of under construction property.

Capital Gains Account Scheme

Although as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.

To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme.

The Amount of Capital Gain which is not utilised by the Assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. The proof of such a deposit shall be attached with the Income Tax Return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption

In case, the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which the period of 3 years from the date of sale of the Original Asset and it will be long term capital gain of that financial year.

Allotment of Flats

Allotment of a flat by DDA under the Self-Financing Scheme shall be treated as construction of the house (Circular No. 471, dated 15-10-1986). Similarly, allotment of a flat or a house by a co-operative society, of which the asseessee is the member, is also treated as construction of the house (Circular No. 672, dated 16-12-1983). Further in these cases, the assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit [Shashi Verma v CIT (1997) 224 ITR 106 (MP)]

Delhi High Court has applied the same analogy where the assessee made substantial payment within the prescribed time limit and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period [CIT v R.C. Sood (2000) 108 Taxman 227 (Del)]

Judicial Decisions

  1. House Property does not mean a complete Independent House. It includes residential units also, like flats in a multi-storeyed complex. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
  2. Where a Property is owned by more than one person and the other co-owner or co-owners release his or their share respective share or interest in the property in favour of one of the co-owners, it will be deemed that the property has been purchased by the release. Such release also fulfils the condition of Section 54 as to purchase. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
  3. The unutilised deposit amount in the Capital Gains Account Saving Scheme in the case of an individual who dies before the expiry of the 2/3 years stipulated period under section 54, 54B, 54D, 54F and 54G, cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate. (Circular No. 743, dated 06-05-1996)

Section 54 Section 54, 54EC, 54F: Exemption from Long Term Capital Gains Tax

Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds

Gains arising from the transfer of any long term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. for a minimum period of 3 years.

In case where the long term specified asset is transferred or converted into money at any time within a period of 3 years 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 specified asset is transferred or converted into money

If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken

These specified binds are usually issued by REC and NHAI and the Interest Rate offered is 6%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free

Quantum of Deduction under Section 54EC

  1. Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within a period of 6 Months from the date of such transfer.
  2. Budget 2014 has also introduced an amendment to Section 54EC and from FY 14-15 i.e. AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.

Section 54F: Old Asset: Any Asset, New Asset: Residential House

Any Gain arising to an individual or HUF from the sale of any Long Term Asset other than Residential Property shall be exempt in full, if the entire net sales consideration is invested in

  1. Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
  2. Construction of 1 Residential House within 3 years after the date of such transfer

In case the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.

Amount Exempt = Capital Gain  X   Amount Invested

                                                                 Net Sale Consideration

The above exemption shall be available only when the assessee does not own more than 1 Residential House Property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under section 54F.

Budget 2014 has also introduced an amendment to Section 54F to be effective from FY 2014-14 i.e. AY 15-16 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.

The Assessee also has the option of depositing this amount in Capital Gains Account Scheme as explained in Section 54 above, before the due date of furnishing the Income Tax Return.

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