Exemption For Capital Gains Stem On Transfer Of Residential House Property

Posted on Posted in Home Loan, Income Tax, Loan

In case if you want to purchase a new house by selling off your present house irrespective of the gain you get by selling, you can get away from the tax.  Yes!  If your motive is to sell the house just to buy a suitable house, then as per Section 54 you can get relief from the tax.  We have covered all the particulars about the exemptions of tax on transfer of residential house.

Conditions to claim section 54

In order to claim section 54, individual need to satisfy the following conditions in first place.

  • The benefit of section 54 is facilitated only to an individual/HUF.
  • The property transferred must be a long-term capital asset, being a residential house property.
  • Before one year or after two years of selling old house, the individual must and should purchase another residential house.

The section 54 exemption is applicable only for those who purchase one house.  The exemption does not prevail for the purchase that was made outside of the country.

Amount of Exemption

Exemption under section 54 will be either the amount of capital gains arising on transfer of residential house or amount invested in purchase/construction of new residential house property.

Example

For instance, an individual X has purchased a residential house in May, 2010 and sold it in May, 2015 for Rs 8, 40, 000.  The capital gain on sale of the house is Rs. 1, 00, 000.  Can X claim benefit of section 54 by purchasing another residential house from the capital gain of Rs. 1, 00, 000?

Yes! X can claim the benefit of section 54 provided the capital gain is invested on long-term residential house property and the benefit is only available for individual or HUF.  Considering the above case, the amount of capital gain is Rs. 1, 00, 000 and the amount of investment in new house is Rs.1, 20, 000.  Therefore, the exemption will be Rs. 1, 00, 000.

exemption-from-long-term-capital-gains-tax

What happens to exemption when the new house is sold again?

For suppose X has sold his new house couple of months later for a capital gain of 1. 2 lakh.  As the profit is not much, is he subjected to pay capital gain tax?

In such cases, as per section 54, a restriction has been placed on the capital gains tax.  The government inhibits the sale of new residential property for next 3 years.  If in case, the person sells the house, he/she is subjected to return the exempted capital gains tax that was sanctioned before.

  • The restriction rules of section 54 are like this:
  • The restriction will be levied if the new house is sold before 3 years of time period after claiming exemption under section 54 from the date of purchase/completion of construction.
  • If the above point is satisfied, then the claimed capital gains exemption would be deducted from the cost of new property.

Example

X sold his old house in May 2015 for Rs. 20, 20, 000.  The long-term capital gain stemming on transfer of old house estimated to Rs. 6,50,000. In December’ 2014 he bought another residential house for Rs. 10,00,000. The new house was again sold in December’ 2015 for Rs. 12,00,000 . What will be the amount of taxable capital gains for X for the financial years 2014-15 and 2015-16?

Capital gains for the financial year 2014-15

Exemption under section 54 will be 6,50,000 as X has purchased another property of Rs 10,00,000, The exemption would be lower of capital gain and cost of new property. As the capital gain is less, the exemption would Be Rs 6,50,000.  So, the total capital gains of X would be exempted in financial year 2014-15.

Capital gains for the financial year 2015-16

If an individual buys/constructs a house and claims exemption under section 54, but then transfers the house within a period of 3 years from the date of its purchase/completion of construction, then the exemption will be withdrawn. So, the benefit of capital gains tax exemption of Rs 6,50,000 would be cut back from the cost of the new house i.e., 10,00,000.

The adjusted Cost of acquisition of the new house for capital gains tax calculation in FY 2015-16

Capital gain exemption of any property

As per section 54F, the individual can claim exemption from the capital gains even if the sold asset is not a residential asset given the new asset is residential asset.

The exemption under Section 54F

The exemption is for the entire amount of capital gains.  Individual can invest the capital gain amount in the capital gains account till it is utilized for buying or constructing house.  The capital gain should be deposited into the account before claiming income tax return.

Conditions of Section 54F

  • The exemption is available only if the new property is a residential house.
  • The exemption is available if the individual do not have any residential property on his own before purchasing the new house.
  • The purchase of new residential house should be done within one year before or 2 years after.
  • The construction of residential house should be completed within 3 years.
  • The residential house should be in India.
  • In case, if the tax payer sells the new house within three years of its purchase or construction, the capital gains exemption would be withdrawn just like with section 54.

Exemption under section 54F

If entire gain is invested in the residential property, there will be exemption of total gain.

If full capital gain is not invested, exemption shall be given as per the rules. The exempted amount would be calculated as per the below formula.

Capital Gain  X   Amount Invested

Net Sale Consideration

Illustration

X had two shops in Pune.  He did not own a house.  He sold a shop in May 2015 for Rs. 1, 00, 00, 000 and purchased the shop for 50, 00, 000 in January 2012.  With the remaining money from the shop sold, he bought a house for Rs. 70, 00, 000.  What is the capital gain exempted?

X had got a profit of 50 lakh from the sale, which falls under tax, but he invested the amount in a house, so he can avail capital gains tax exemption under section 54F.  As per the above formula, the exempted capital gains would be

50,00,000 X 70,00,000

1,00,00,000

= 35,00,000

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