Exemption of capital gain on sale of residential house property, under section 54 of income tax act

When any individual or HUF sells the residential house property and such a house property long is term capital asset,
then capital gain arises on sales of house property is exempt under section 54 of income tax act. FAQ for the exemption is as below:

How to calculate capital gain on sales of residential house property?

Sales consideration or Value adopted by State Government for the purpose of stamp duty whichever is higher

Less: Expenditure incurred wholly or exclusively in connection with sales of property

Less: Index cost of acquisition

Less: Index cost of improvement if any Equal to Capital Gain before the exemption under section 54

Who can claim exemption?

Only Individual or Hindu Undivided Family can claim exemption under this section. Partnership firm, trust, etc. cannot claim exemption under this section.

Which is asset is qualified for exemption?

Gain arising on sale of any residential house property, i.e. building or land attached thereto whose income is taxable
under the head “Income form house property” is exemptible under this section. Exemption is available even if the house property is let out or self occupied. However, house property should be held by the more than 36 months (long term) then only exemption is allowed.

If only land attached to house property is sold and house is not sold then exemption under this section is not allowed.

Which asset is required to purchase for exemption?

The taxpayer will have to purchase a residential house property or construct a new residential house property. The house property purchase may be new or old house property.

What is the time limit for purchasing or construction of house property?

The house property should be purchased one year before or two years after the date of transfer of the house property.  The construction of new house property should be completed within a period of three years from the date of transfer. The date of commencement of construction is not relevant here; constriction may commence before the transfer of the house property.

Can taxpayer purchase more than one house property?

Yes. The exemption is not limited on acquisition of one house property. Taxpayer may purchase or construct more than one house property.

Can taxpayer purchase or construct house property outside India?

Yes. House may be in India or Outside India.

Is the same fund of capital gain required invest?

The link between capital gain and investment is not necessary. For example, if the taxpayer uses his personal saving for purchasing or constructing of house property and uses the capital gain amount for personal expenditure, still he can claim exemption.

Can taxpayer get full exemption?

 The amount of exemption is lower of the amount of capital gain on residential house property or amount invested in purchasing or constructing residential house property.  Full exemption from tax is available when whole capital gain amount is invested in purchasing or constructing of residential house property.

Is purchased / constructed house can be sold any time?

No. The house property purchased or constructed for claiming the exemption under section 54 cannot sell within a period of three years from the date of acquisition or complication of construction. If house property is sold within period of three years, exemption claimed earlier will taxable in the year of transfer.

Is it necessary to use the amount of capital gain before filing the income tax return?

If amount is not used before filing the income tax return, then such amount can be deposited in the capital gain deposit account scheme. The amount deposited can use for purchasing or constructing the house property within stipulated period. If the amount deposited is not use within a stipulated period then unutilized amount will be treated as long term capital gain in the year in which stipulated period expiries.

So taxpayer can plan properly for claiming the exemption under section 54 before the sale of residential house property. Generally taxpayer forgets the depositing the amount in the “capital gain deposit account scheme”, even though he satisfy all other conditions he misses the chance of getting the benefit of exemption under this section.

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