Section 54, 54EC and 54F: Exemption from Capital Gain Tax in 2022

 

Capital Gains Exemption is available under the Income Tax Act. The amount can be reinvested in either buying/constructing a Residential House, or in Capital Gain Bonds.

The seller can choose to either claim exemption or to pay 20% Long-Term Capital Gains Tax. (Refer to Calculation of Long-Term Capital Gains Tax).

This article will explain in detail how to claim the following exemptions when you sell a long-term asset. an asset that has been held for longer than two years.

1. Section 54: Residential Property: An Old Asset, Residential Property: New Asset
2. Capital Gains Account Scheme
3. Section 54EC: An Old Asset: Any Asset, Specified Bonds: A New Asset
4. Section 54F: An Old Asset: Any Asset, A New Asset: Residential House
5. A detailed e-book with examples on Levy of Capital Gains tax and Exemptions

Section 54: Residential Property: An Old Asset, Residential Property: New Asset

Section 54 - Long-term capital gains resulting from the sale of a residential property (either self-occupied or on rented) shall not be exempted unless such capital gains are invested in the

1. You can purchase another residential property within one year or two years of the transfer of the Property.
2. Construction of residential house property within 3 years of the date of transfer/sale

The new Residential House Property must be kept in the same location as the original purchase or construction for a minimum of three years. The capital gain on the transfer of the new property will be lessened if the property is sold before the 3 year period. This transfer will result in a capital gain that is short-term capital gain.

Quantum of deduction under Section 54

Capital Gains are exempted if they are used to purchase or construct another house.

1. The entire capital gain will be exempt if the Capital Gains amount exceeds or equals the cost of the new home.
2. Capital Gain greater than the cost for the new house will be exempted

No. No.

1. 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]. No matter how many houses the person has, the Capital Gains Exemption is not allowed. 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.
2. The exception to the above rule is cases in which the capital gains amount 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. This exemption for purchasing 2 residential homes can only be claimed once. The exemption cannot be claimed again for any year after it has been claimed. All other years, you must only invest in the construction/purchase of 1 residential home. [Introduced via Finance Act 2019].

For exemption under Section 54, the number. It does not matter if the house is already owned by him. The exemption can be claimed by the person by reinvesting capital gains on sale of a house in another residential property.

Capital Gains Account Scheme

The Section 54 provides that the assessee has 2 years to buy the property and 3 years to construct the property. However, capital gains from the sale of the original property are taxable in the year it was sold. The income tax return for that year must be filed in the appropriate assessment year by the due date. 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.

The Income Tax Act provides an alternative to the Capital Gains Account Scheme deposit.

The Assessee should deposit the Amount of Capital Gain that is not used for the purchase or construction a new house prior to the date of furnishing the Income Tax Return. This must be done before the due dates for furnishing the return. The deposit details, i.e. The Date of Deposit and the amount deposit must be included in the Income tax Return to claim 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.

If the assessee deposits money in the Capital Gains Account Scheme, but doesn't use it for the purchase of or construction of a residential home within the time specified, the Capital Gains shall be charged to the year in which the 3 year period ends with the sale of the Original Asset. It will be long-term capital gain in that financial Year.

Allotment Flats

The Self-Financing Scheme will treat the allotment of a flat as construction. Circular No. 471, dated 15-10-1986. The same applies to the allotment or construction of a flat by a cooperative society of which the member is the asseessee. Circular No. 672, dated 16/12/1983. In these cases, the assessee may also claim exemption for capital gains, even if the construction is not completed within a prescribed time limit [Shashiverma v CIT(1997) 224 ITR106 (MP)].

The Delhi High Court applied the same analogy to the situation where the assessee made substantial payments within the specified time limit and acquired substantial domain over property even though the builder failed in his obligation to hand over possession within the agreed period [CITv R.L. Sood (2000), 108 Taxman 227(Del).

Judicial Decisions

1. House Property does not necessarily refer to a fully independent house. It also includes residential units, such as flats within a multi-storey complex. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
2. If a property is owned by more people than one, and one or more co-owners releases their respective shares or interests in the property to one of the coowners, it will be considered that the property was purchased by the release. This release fulfills Section54's condition as to purchase. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
3. In the event that a person dies within the stipulated 2/3 year period under section 54B, 54D and 54F, the unutilized deposit amount in Capital Gains Account Saving Scheme cannot be taxed by the decedent. The legal heirs are not allowed to tax this amount as the unutilized portion of the deposit is not income and is not part of the estate. (Circular No. 743, dated 06/05/1996)

Section 54EC: An Old Asset: Any Asset, a New Asset: Specified bonds

Section 54EC exempts gains arising from the transfer any long-term capital asset if the assessee, within 6 months of the due date for such transfer, has invested the capital gain into long-term specified bonds as notified to the Govt. Minimum 3 years.

If the long-term specified asset is converted into or transferred into money within 3 years of its acquisition, then the capital gains exempted u/s54EC shall be considered long term capital gain for the year prior to the transfer or conversion into money.

If the Assessee takes a loan on the security for such long-term specified asset, he will be deemed to have made such asset into money at the date of the loan or advance.

These binds are typically issued by REC or NHAI. The Interest Rate offered is approximately. 5.25%. Interest earned will also be subject to tax, as it is not exempt from tax. These bonds are Capital Gain Bonds, not Tax-Free Bonds. After the lock-in period, the principal invested is exempt from tax but the interest remains taxable.

Budget 2018 Amendment: Section 54EC will no longer be available for residential or non-residential sales of land or buildings. It was previously available for all assets, but it will now only be available for Land or Building. These bonds must be held for at least 5 years starting in Financial Year 2018-19.

Section 54EC: Quantum of deduction

1. Capital Gains are exempted if they are invested in long-term specified assets (subject a maximum limit Rs. 50 Lakhs) within 6 months from the date of such transfer.
2. Budget 2014 also included an amendment to Section 54EC. This amendment was effective from FY 14-15, i.e. From AY 15-16, an assessee can only invest in the long-term specified asset out of capital gains that result from the transfer or sale of one or more assets. The investment must not exceed Rs. 50 Lakhs.