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SECTION 54 EXEMPTION FOR CAPITAL GAINS
ARISING ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY
Section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house.
Mr. A wanted to shift his residence due to certain reason, hence, he sold his old house and from the sale proceeds he purchased another house. In this case the objective of Mr. A was not to earn income by sale of old house but to acquire another suitable house. If in this case Mr. A was liable to pay income-tax on capital gains arising on sale of old house, then it would be a hardship on him. Section 54 gives relief from such a hardship.
Conditions should be satisfied to claim the benefit of section 54
- The benefit of section 54 is available only to an individual or HUF.
- The asset transferred should be a long-term capital asset, being a residential house property.
- Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. 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).
Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.
With effect from Assessment Year 2021-22, the Finance Act, 2020 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long- term capital gains does not exceed Rs. 2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.
Further, with effect from Assessment Year 2024-25 the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new asset exceeds Rs. 10 crores, the excess amount shall be ignored for computing the exemption under Section 54.
ILLUSTRATION
Mr. Amit purchased a residential house in April, 2016 and sold the same in April 2023 for Rs. 16,80,000. Capital gain arising on sale of the house amounted to Rs. 2,00,000. Can he claim benefit of section 54 by purchasing/constructing another residential house from the capital gain of Rs. 2,00,000?
ILLUSTRATION
Mr. Amit purchased a residential house in April, 2016 and sold the same in April 2023 for Rs. 16,80,000. Capital gain arising on sale of the house amounted to Rs. 2,00,000. Can he claim benefit of section 54 by purchasing/constructing another residential house from the capital gain of Rs. 2,00,000?
ANSWER
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, ‘being long-term residential house property. This benefit is available only to an individual or HUF. In this case, all the conditions as provided in section 54 are satisfied and hence, Mr. Amit can claim the benefit of section 54 by purchasing/constructing a residential house within the time-limit as provided under section 54.
Amount of exemption
Exemption under section 54 will be lower of following-
-
Amount of capital gains arising on transfer of residential house or
-
Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme).
ILLUSTRATION
Mr. Anurag purchased a residential house in April, 2017 and sold the same on 25th April, 2023 for Rs. 16,80,000. Capital gain arising on sale of house amounted to Rs. 2,00,000. Out of the sale proceeds of old house, he purchased another residential house for Rs. 1,60,000. This house was purchased in May, 2023. What will be the amount of exemption under section 54 which can be claimed by Mr. Anurag?
ANSWER
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. Exemption under section 54 will be lower of the following:
- Amount of capital gains arising on transfer of residential house or
- Amount invested in purchase/construction of new residential house property
Considering the above provisions, the exemption in this case will be lower of the following amount :
- Amount of capital gain, i.e., Rs. 2,00,000.
- Amount of investment in new house, i.e., Rs. 1,60,000
Thus, exemption will be Rs. 1,60,000. Taxable capital gain will come to Rs. 40,000 (Rs. 2,00,000 less exemption under section 54 of Rs. 1,60,000).
Consequences if the new house is transferred
Exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on misutilisation of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house.
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. The ultimate impact of the restriction is as follows:
-
The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.
-
If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.
ILLUSTRATION
Mr. Kartik sold his old house in April, 2022 for Rs. 50,40,000. Long-term capital gain arising on transfer of old house amounted to Rs. 16,80,000. In December, 2022 he purchased another residential house worth Rs. 20,00,000. The new house was however, sold in April, 2023 for Rs. 24,00,000 (stamp duty value of the new house was Rs. 20,00,000). What will be amount of taxable capital gains in the hands of Mr. Kartik for the financial years 2022-23 and 2023-24?
ANSWER
Computation of capital gains for the financial year 2022-23
| Particulars | Rs. |
| Long-term capital gain arising on transfer of old house | 16,80,000 |
| Less: Exemption under section 54 (Note) | 16,80,000 |
| Taxable long-term capital gains | Nil |
Note: Exemption under section 54 will be lower of following :
- Amount of capital gains arising on transfer of residential house; or
- Investment in new residential house property
Considering the above provisions, the exemption in this case will be lower of the following amount :
- Amount of capital gain, i.e., Rs. 16,80,000.
- Amount of investment in new house, i.e,. Rs. 20,00,000
Thus, exemption will be Rs. 16,80,000.
Computation of capital gains for the financial year 2023-24
If a taxpayer purchases/constructs a house and claims exemption under section 54 and then the new residential house property is transferred 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. The computation in this case will be as follows :
| Particulars | Rs. |
| Full value of consideration (i.e., Sales value) | 24,00,000 |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, etc.). |
Nil |
| Net sale consideration | 24,00,000 |
| Less: Cost of acquisition of the house (Note) | 3,20,000 |
| Taxable short- term capital gains on sale of new house | 20,80,000 |
Note : If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exemption under section 54 will be deducted from the cost of acquisition of the new house. Applying this provision, the cost of acquisition of new house will be computed as follows:
| Particulars | Rs. |
| Actual cost of acquisition of new house | 20,00,000 |
| Less: Exemption claimed earlier under section 54 | 16,80,000 |
| Cost of new house to be used while computing capital gain | 3,20,000 |
Capital Gain Deposit Account Scheme
To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank,
in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme). The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or 3 years, as the case may be.
However, with effect from Assessment Year 2024-25 if the capital gains deposited in the Capital Gains Scheme Account exceed Rs. 10 crores, the excess amount shall not be taken into account while computing capital gain exemption.
ILLUSTRATION
Mr. Manoj is a salaried employee. He had purchased a residential house in April, 2017 and sold the same on 25th April, 2023 for Rs. 16,80,000. Capital gain arising on sale of house amounted to Rs. 4,00,000. He wants to claim exemption under section 54 by purchasing another residential house. By what time he should purchase or construct another residential house?
Mr. Manoj is a salaried employee. He had purchased a residential house in April, 2017 and sold the same on 25th April, 2023 for Rs. 16,80,000. Capital gain arising on sale of house amounted to Rs. 4,00,000. He wants to claim exemption under section 54 by purchasing another residential house. By what time he should purchase or construct another residential house?
ANSWER
To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house. In this case, the old house is transferred on 25th April, 2023, hence, he has to purchase another house within a period of 2 years from 25th April, 2023; alternatively he can construct another house within a period of 3 years from 25th April, 2023.
To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house. In this case, the old house is transferred on 25th April, 2023, hence, he has to purchase another house within a period of 2 years from 25th April, 2023; alternatively he can construct another house within a period of 3 years from 25th April, 2023.
The old house is transferred in the year 2023-24 and the due date of filing the return of income of the year 2023-24 is 31st July, 2024. If Mr. Manoj cannot purchase/construct another house by 31st July, 2024, then he has to deposit Rs. 4,00,000 in Capital Gains Account Scheme. By depositing Rs. 4,00,000 in the Capital Gains Account Scheme he can claim exemption of Rs. 4,00,000 under section 54.
However, merely depositing the sum in the Capital Gains Account Scheme would not be sufficient; after deposit in the scheme he has to utilise this fund to purchase/construct the house within the specified period of 2 years/3 years, as the case may be.
Non-utilisation of amount deposited in Capital Gain Deposit Account Scheme
If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long- term capital gains of the year in which the specified period of 2 years/3 years gets over.
ILLUSTRATION
Mr. Ram is a salaried employee. He had purchased a residential house in April, 2016 and sold the same on 25th April, 2023 for Rs. 50,40,000. Capital gain arising on sale of house amounted to Rs. 10,00,000. He could not purchase/construct another house by 31st July, 2024, however, in July, 2024 he deposited Rs. 10,00,000 in Capital Gains Account Scheme. He did not purchase any residential house nor constructed any house till 24th April, 2026. Will he be entitled to claim any exemption under section 54? If yes, will the exemption granted be revoked subsequently?
ANSWER
To claim exemption under section 54, the taxpayer should purchase a residential house within a period of one year before or two years after the date of transfer of old house or can construct a house within a period of three years from the date of transfer. In this case, the old house was transferred on 25th April, 2023, hence, he has to purchase another house within a period of 2 years from 25th April, 2023. Alternatively, he can construct another house within a period of 3 years from 25th April, 2023.
The old house was transferred in the year 2023-24 and the due date of filing the return of income of the year 2023-24 is 31st July, 2024. If Mr. Ram cannot purchase/construct another house by 31st July 2024, then he has to deposit Rs. 10,00,000 in Capital Gains Account Scheme. By depositing Rs. 10,00,000 in the Capital Gains Account Scheme he can claim exemption of Rs. 10,00,000 under section 54.
In this case, he has deposited Rs. 10,00,000 in the Capital Gains Account Scheme and, hence, he can claim exemption of Rs. 10,00,000 under section 54. In other words, exemption under section 54 for the year 2023- 24 will come to Rs. 10,00,000.
He has to utilise the funds deposited in the scheme to purchase/construct the house within the specified period of 2 years/3 years. If he does not purchase/construct the house within a period of 2 years/3 years, then the amount (for which exemption is claimed) will be taxed as income by way of long-term capital gains of the year in which the specified period gets over.
In this case the period of 2 years gets over on 24th April, 2025 and the period of 3 years gets over on 24th April, 2026. Mr. Ram has not purchased any house till 24th April, 2025 nor constructed any house till 24th April, 2026, hence, the exemption of Rs. 10,00,000 allowed in the year 2023-24 will be revoked and will be taxed as income by way of long- term capital gains for the financial year 2026-27.
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