Section 54, 54EC or 54F: 2022 Capital Gain Tax Exemption

 

Capital Gains Exemptions are available under the Income Tax Act. You can reinvest the amount in Capital Gain Bonds or purchase/build a Residential House.

The seller of an asset has the choice to claim exemption from the tax or pay 20% long-term capital gains tax. (Refer Long Term Capital Gains Tax

The following article provides details on the exemptions available for the sale of Long Term Assets. when an asset has been held for more that 2 years.

1. Section 54: Old Asset: Residential property, New Asset Residential property
2. Capital Gains Account Scheme
3. Section 54EC - Old Asset: Any Asset. New Asset: Specified Bins
4. Section 54F - Old Asset: Any Asset. New Asset Residential House
5. Details and examples of the e-book Levy of Capital gains Tax and Exemptions

Section 54: Residential Property, Old Asset. Residential Property is the New Asset. Residential Property is the New Asset.

Section 54 - Any long term capital gain, whether arising to an individual, or UHF, from a sale of a residential property that is self-occupied or -rented shall be exempted, to the extent such capital losses are invested in the

1. Purchase of another Residential Property within 1 or 2 Years of the Transfer of the Property Sold and/or
2. Construction of residential home property within 3 year period from date of transfer/sale

As long as the new Residential House Property is not transferred within three years from its date of acquisition, If the new Property is not sold within three years after its acquisition, then the cost of acquisition shall be reduced by any capital gain that was exempted under section54 earlier. This transfer will always result in a short term capital increase.

Quantum of Deduction Under Section 54

Capital Gains shall not be exempt if it is used for the purchase or construction of another home,

1. If the Capital Gains amount of the new house is less or equal to the cost of the capital gain, the whole capital gain shall be exempt.
2. Capital Gain that exceeds the cost to build a new home is considered exempt.

No. Number of houses which can be purchased to claim Section 54 Exemption

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]. The number of houses owned by the person is irrelevant. 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. Except where capital gains are less than 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 can only be claimed once for the purchase of 2 residential houses. This exemption cannot be used again in the same year. Investment should only be made in 1 residential property. [Introduced through Finance Act 2019,

Reiterating, Section 54 allows for exemption if the no. Immaterial is the number of houses that are already owned by the person. He can still claim exemption by reinvesting Capital Gains on the Sale of House in a Residential House.

Capital Gains Account Scheme

Section 54 states that an assessee has two years to purchase a house or three years to construct a house. However, capital gains on the sale or transfer of an original house property are subject to tax in the year they were sold. The Income Tax Return for the year in question must be filed within the assessment year, or earlier than the deadline to file the Income Tax Return. 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 stipulates an alternative for deposit under the Capital Gains Account Scheme to avoid this situation.

The Assessee should deposit under the Capital Gains Scheme the Amount Capital Gain that he has not used to purchase or construct a new house before furnishing the Income tax Return . The details of deposit (i.e. While claiming Capital Gains Exemption, you must mention the details of deposit such as the Date of Deposit or the amount deposited in your Income Tax Return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.

If an assessee deposits the amount into the Capital Gains Account Scheme and does not use the amount for the purchase or construction a residential property within the stipulated period, it shall be charged capital gains of the year in that the period of 3 consecutive years has ended from the date of the sale of Original Asset.

Allotment for Flats

DDA will allot a flat under the Self-Financing Scheme. Construction of the house shall be considered as the result. Circular No. 471, dated 15.10.1986. In the same way, an allotment to a flat or house by a cooperative society, of whom the asseessee a member, can also be treated as construction of the home (Circular Nr. 672, dated 16.12.1983 The assessee in these cases shall also be entitled to exemption in respect capital gains, even though construction was not completed within prescribed time limits [Shashi Verma V CIT (1997) 234 ITR 106 (MP).

Delhi High Court applied the exact same analogy in which the assessee made substantial repayment within the prescribed time limit, and thus acquired substantial jurisdiction over the property. The builder failed to transfer the possession within that period [CIT. Sood, (2000) 108 taxman 227 (Del).

Judicial Decisions

1. House Property does NOT mean a completely independent house. It includes residential units as well, such flats in multi-storey apartments. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
2. A property that is owned by more then one person will be considered to have been purchased if the other or co-owners of the property release their share of the property or interest to the benefit of one of them. This release also fulfills the condition of Article 54 as regards to purchase. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
3. The deceased cannot tax the unutilized capital gains account savings scheme deposit amount if the individual dies prior to the expiration of the 2/3-year period specified under section 54, 54B.54D.54F.54G. This amount isn't taxable in the eyes of legal heirs. The unutilised portion is not considered income, but it is a small part of an estate. (Circular No. 743, dated 06/05/1996)

Section 54EC - Old Asset: Any Asset. New Assets Specified Bonds

Section 54EC provides an exemption for gains resulting from the transfer or disposition of any long term capital asset. This applies if the assessee has, within six months, invested the capital gained in long term fixed bonds that are notified by the Govt. for a minimum duration of three years.

If the long term specific asset is transferred to or converted into cash within 3 years after its acquisition, the capital loss exempted under u/s54EC amount shall be deemed long term capital gains of the previous year in the which the asset was transferred to or converted into cash.

The Assessee may take a loan or an advance to secure a long-term asset. He shall be considered to have turned the asset into cash on the date that such loan or advance was taken.

These binds can be issued by REC or NHAI. 5.25%. Tax on any Interest received is also due to be paid, since the Interest is not subject to tax. These bonds are Capital Gain Bonds but not Tax-Free Bonds. The principal invested becomes exempted of tax after the lock in period, but the interest is still taxable.

Budget 2018 Amendment. With effect from Financial Year 2018, Section 54EC will only be available for sale of Land and Building (regardless of their residential or non-residential use). It used to be available on all assets. Now it is only for Land or Building. Also, bonds will need to be held at least five years from the Financial Year 2018-19.

Section 54EC Quantum of Deduction

1. Capital Gains shall not be taxed as long as they are invested in long term assets. The maximum amount allowed is Rs. 50 Lakhs) within 6 Months after the date of such transfer.
2. Budget 2014 included an amendment in Section 54EC. In AY 15-16, the assessmentee must invest Rs. 50 lakhs in the long-term specific asset. Capital gains are derived from the transfer one or more of the original asset(s). 50 Lakhs.