Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds.
The seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains Tax. (Refer: Computation of Long Term Capital Gain Tax)
This article explains in detail the following exemptions which can be claimed on the sale of a Long Term Asset i.e. on sale of an asset which was held for more than 2 years.
- Section 54: Old Asset: Residential Property, New Asset: Residential Property
- Capital Gains Account Scheme
- Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds
- Section 54F: Old Asset: Any Asset, New Asset: Residential House
- Detailed e-book on Levy of Capital Gains Tax and Exemptions with Examples
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 Rented) shall be exempt to the extent such capital gains is invested in the
- Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or
- Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property
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.
- If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt
- 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
No. of Houses which can be purchased for claiming Section 54 Exemption
- The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. Irrespective of the no. of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house – then capital gains exemption can be claimed.
- As an exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only. [Introduced vide Finance Act 2019].
To re-iterate, for claiming exemption under Section 54 – the no. of houses already owned by the person is immaterial. He can still claim exemption by reinvesting the Capital Gains on Sale of House in another Residential House.
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 ITR Filing. The details of deposit i.e. the Date of Deposit and the amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. 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 is completed from the date of sale of the Original Asset and it will be long term capital gain of that financial year.
- Recommended Read: All about Capital Gains Account Scheme
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.L. Sood (2000) 108 Taxman 227 (Del)].
- 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)].
- 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)]
- 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 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 approx. 5.25%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free. These are Capital Gain Bonds and not Tax-Free Bonds. The Principal invested becomes tax free after the lock-in period but the interest continues to remain taxable.
Budget 2018 Amendment: With effect from Financial Year 2018-19, the benefit of Section 54EC would only be available on sale of Land or Building (whether Residential or Non-Residential). Earlier it was available for all assets but now it would only be applicable for Land or Building. Moreover, from Financial Year 2018-19 onwards, these bonds would be required to be held for minimum 5 years.
Quantum of Deduction under Section 54EC
- 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.
- 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.
You may also refer this article which talks in detail about the Capital Gains Bonds, their interest rates and other applicable provisions – Capital Gains Bonds of NHAI & REC.
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
- Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
- 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
Exemption under Section 54F not available in following cases
The above exemption would not be available if any of the below mentioned conditions is satisfied:-
- 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. (Note: The restriction on No. of houses already owned is only applicable if the assessee is claiming exemption under Section 54F. As explained above, there is no such restriction if the assessee is claiming exemption under Section 54)
- The assessee purchases any residential house, other than the new asset, within a period of 1 year of the transfer of the old asset.
- The assessee constructs any residential house, other than the new asset, within a period of 3 years after the date of the old asset.
Budget 2014 has also introduced an amendment to Section 54F to be effective from FY 2014-14 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.
Exemption under Section 54F would not be allowed if investment is made in 2 houses. The option to invest in 2 houses is available once in lifetime in Section 54 but is not available in Section 54F.
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.
e-Book on Capital Gain Tax on sale of Property
As the sale price of each property transaction is huge, the tax applicable also turns out to be huge. And therefore, proper care needs to be exercised while computing the Capital Gains and then using the Exemptions to reduce the Tax Liability.
To help people compute the Tax Liability and the Exemptions in the correct manner, we have authored a simple yet detailed e-book which explains with more than 40 Examples, the manner in which Capital Gains Tax would be levied on sale of Property. All latest case laws have also been explained in this e-book which can be purchased from this link.
The e-book is updated with all latest up to date amendments and the main topics covered in this e-book are:-
- Computation of Capital Gains
- Tax on Sale of Inherited Property
- Tax on Sale of Under-Construction Property
- Sale of Property below Circle Rate/ Stamp Valuation Rate
- How to reduce Tax by claiming Capital Gains Exemptions
- TDS on sale of Property
- 40+ Comprehensive Examples
More than 10,000 copies of this e-book have already been sold and you can also purchase the same for Rs. 147 from this link – Purchase e-Book on Capital Gains Tax