Exemption from capital gain on sale of property used for residence

  1. Who can claim benefit of Section 54?
  • Benefit is available to an Individual or a Hindu undivided family (HUF),
  • Firms, LLP’s and companies cannot claim benefits of this section.
  1. What are the conditions to avail the benefit of exemption under Section 54?
  • The asset sold, means Buildings or Lands appurtenant thereto, and a residential house, the income of which is chargeable under the head “Income from house property”
  • The seller should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, ie. the seller will have to construct the residential house within 3 years from the date of sale/transfer. In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional compensation)

The above conditions need to be fulfilled cumulatively. If you don’t meet out even one condition, then you cannot avail the benefits under Section 54

  1. Exemption Amount: Exemption under section 54 will be lower of following :
  • Amount of capital gains arising on transfer of residential house;                                                                                                                                              or
  • Investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.
  1. Consequences under section 54 if the new house is transferred

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn and the amount exempted earlier shall be chargeable to tax under section 45.

Important points to be remember for claiming exemption under Section 54

  • Exemption is available only on investing Long Term Capital Gain not the entire Sale Proceeds
  • You can club capital gain from multiple properties to buy one property
  • Long term capital gain is exempted if you purchase property in India. Hence Residential Property purchased outside India will not be eligible to avail benefit of Section 54
  • Losses from other head cannot be set off from Long term capital gain

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