Exemption from Capital gains Tax: Purchase of House Property

Following sections provide 100% exemption on Capital gains through purchase or construction of New House Property:

Section 54: It provides exemption to capital gains arising from transfer of a residential house property (being building or land appurtenant thereto), the income of which is chargeable under the head Income from house property.

Section 54F: It provides exemption to capital gains arising from transfer of a long-term capital asset other than a residential house property (for instance, it may be a plot of land, commercial house property, gold, shares etc but not a residential house property).

Section 54

Who can claim exemption?

Individual/HUF

Which asset is eligible for exemption? Long-term residential house property.

Which Asset is to be acquired?

Residential House Property in India.

What is the time limit to acquire the new asset?

For Purchase: within 1 year before transfer or within 2 years after date of transfer

For Construction: within 3 years from date of transfer.

How much is exempt?

Investment in new asset or capital gain, whichever is lower.

Is it possible to revoke exemption in subsequent year?

Yes if, new asset is transferred within 3 years of its acquisition.

It will become taxable as short term capital gain. For computing capital gain on transfer of new asset, cost of acquisition = (original cost of acquisition – exemption availed u/s 54)

Section 54F

Who can claim exemption?

Individual/HUF

Which asset is eligible for exemption? Long-term capital asset (other than residential house property) provided on the date of transfer, taxpayer does not own >1 residential house property (except the new asset stated below)

Which Asset is to be acquired?

Residential House Property in India.

What is the time limit to acquire the new asset?

For Purchase: within 1 year before transfer or within 2 years after date of transfer

For Construction: within 3 years from date of transfer.

How much is exempt?

Investment in new asset / Net sale consideration x capital gain (exemption not to exceed capital gain).

Is it possible to revoke exemption in subsequent year?

Yes,

If new asset is transferred within 3 years of its acquisition, or

another residential house property is purchased within 2 years from transfer of original asset, or

another residential house property is constructed within 3 years from transfer of original asset.

It will become taxable as long term capital gain and amount of exemption availed earlier will be taxable in the year in which the assessee commits default.

POINTS TO BE REMEMBERED:

1. If the new asset is not acquired up to the due date of submission of return of income, then the taxpayer will have to deposit the money in Capital Gain Deposit Account Scheme with a nationalized bank.

2. Exemption will be given on the basis of actual investment and the amount deposited in the deposit a/c.

3. The taxpayer can acquire the new asset by withdrawing from the deposit a/c.

4. But the new asset should be acquired within the time limit prescribed.

5. If the deposit a/c is not fully utilised for acquiring the new asset, the unutilized/proportionate amount (as applicable) will be chargeable to tax in the previous year in which the time limit for making investment in the new asset expires.