Exemption from Capital Gains – Profit on Sale of Property Used for Residence
Nature of Transfer covered under Section 54
The Section 54 provides for an exemption from the tax where you have transferred a residential house.
Who can claim the benefit of the exemption?
The benefit of section 54 is available where the residential house is sold by an individual or Hindu Undivided Family (HUF).
What should be the period of holding of the property sold?
The property sold should be a Long-Term property within the meaning of the Income Tax Act.
What is the criterion for and amount of tax that can be exempted?
The criterion for exemption is reinvestment of capital gains from the sale proceeds of the residential house sold.
The amount of exemption shall be as follows:
|Scenarios||Amount of Exemption||Cost of New Asset if sold within Lock-in Period*|
|Capital Gains < Amount Reinvested||Full amount of Capital Gains shall be exempt||Cost shall be reduced by the amount of capital gains for which exemption was claimed earlier.|
|Capital Gains > Amount Reinvested||Difference between Capital Gains and amount reinvested shall be taxable under head Income from Capital Gains||Cost of the new asset shall be NIL|
*Lock-in period for New Property Purchased or constructed: The said property cannot be transferred for a period of 3 years after acquisition or construction.
What are the conditions for claiming this exemption?
You will be eligible for exemption only when; the new house property is:
- Purchased one year before the transfer, or
- Purchased within 2 years after the transfer, or
- Constructed within 3 years after the transfer.
Concept of Capital Gains Account Scheme
In case you could not purchase any house or constructed any residential building up to the date of filing the Income tax return under section 139 (1). You still have the option to get away with the capital gains by depositing the amount of capital gains in a specified account with the banks named as ‘Capital Gains Account Scheme’.
The purpose of keeping the money in this account is to ensure that double benefit should not be given to any person i.e. exemption as well as liberty to use money as per choice. The amount deposited in this account can only be used for the purpose of purchase of house property or do the construct. This money is to be utilized within a period of 3 years from the date of transfer of original asset. In case, there is any unutilized amount is there, the same shall be taxable as Capital Gains in the previous Year when the time of 3 years expires.
Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in what so ever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.