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Exemption under section 54

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)

25 April 2015

Greetings,

Whether it is necessary to utilize the amount from sales proceed in purchase of new residential property in order to claim exemption under section 54 of the Income Tax Act...???

According to my knowledge, there is no such requirement...!!! However, correct me if i am wrong and provide your valuable reply.

Thanks in advance...!!!

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19 Replies

CA HAYEDAR SHAIKH (Practice ) (622 Points)
Replied 25 April 2015

Dear Parth,

In order to claim the exemption under section 54, the taxpayer will have to invest the capital gains either for the purchase of another residential house property (old or new) within a period of one year before or two years after the date of transfer or in the construction of another residential house property within a period of three years after the date of transfer.

1 Like

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 25 April 2015

Dear Hayedar,

I completely agree with your answer....

But my query is whether the fund realized from sale of property is to be actually use for the purchase of new residential property...??? Let me elaborate...

I have purchased new residential property in the month of January 2015 for the consideration of Rs 25 lakhs for which i have make the whole payment by availing housing loan. Further, I have transfer my flat in the month of April 2015 amounting Rs 32.5 Lakhs. Further after cost of Indexation, my capital gain arrives at Rs 13 Lakhs (approx).

So my question is whether i am eligible for exemption under section 54...??? All other conditions for availing exemption under section 54 is satisfied...

Hope you get the query...

Sonakshi Mangla (Employee) (310 Points)
Replied 25 April 2015

have you transferred the same house in April which you had purchased in jan or both are different?

CA HAYEDAR SHAIKH (Practice ) (622 Points)
Replied 25 April 2015

Dear Sir,

Yes,

Whatever fund you will realised from sale of house property, you need to invest in purchase of new house property or construction of house property to claim exemtion.

Also you can invest in NHAI Bonds or REC Bonds to claim exemption upto Rs. 50 lakh u/s. 54EC , or you can deposit the same in CGAS.

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 25 April 2015

Dear Hayedar,

So shall i suppose that your conclusion is if i do not invest the amount of sales consideration into purchase of new residential property then the whole capital gain will be taxable and the benefit of section 54 can not be enjoyed...!!! It doesnt matter that i have purchased new residential property by way of housing loan...!!!

Please clarify me...!!!

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 25 April 2015

Sonakshi...!!!

Both property are different...!!!

Sonakshi Mangla (Employee) (310 Points)
Replied 27 April 2015

if we go by the wordings of section 54, there it has been mentioned that you just need to buy the house property.. it doesnt matter that whether the same has been purchased through loan or through own money.. as far as my opinion goes.. i think that you are eligible for claiming the deduction.

1 Like

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 27 April 2015

Dear Parth, for claiming exemption u/s 54 you only need to invest the Capital Gains(Sale Consideration-COA) into a new residential property and not the sale proceeds.

So in your case your taxable capital gains would be 32.5-13=19lacs that you need to invest to claim tax exemption. from the 32 lacs if there's any amount remaining after investing, then you need not worry as there's no tax that would be levied. this money would be tax free.

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 27 April 2015

Dear Giridhar,

I am sorry but I did not get your explanation.

Can you explain it more clearly...!!!

Thanks

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 27 April 2015

Dear Sonakshi...

So you're of the view that i will be eligible for the exemption no matter where do i spend the amount of sales consideration which i will receive...!!!

Correct me if i am wrong...

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 27 April 2015

Dear Parth.

Please note that section 54 speaks of Capital Gains and not of sale proceeds. We are required to invest the Capital Gains that arise from sale of the residential property. This Capital Gains is part of the sale proceeds for whihc you have raised your query initially that do we require to invest the sale proceeds. So We are required to invest the Capital Gains and not the sale proceeds.

Capital Gains would be your Total Sale Consideration Received- Expense in connection with Transfer- Indexed Cost of Acquisition.

The balance above would be your Capital Gains that you need to invest. Hope this is now clear to you.

CA Parth Rajendra Almaula (Chartered Accountant) (85 Points)
Replied 28 April 2015

Dear Giridhar,

I totally understand your explanation. So the ultimate conclusion according to you is that in order to avail the exemption under section 54, I have to invest the amount of capital gain into the new residential property from the amount of Rs 32.5 Lakhs which i am going to receive this month.

And in case if the amount is not invested then the capital gain will be taxable.

Please correct me if I misinterpreted your conclusion.

Thanks

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 28 April 2015

Yes dear Parth. You are absolutely right.

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 28 April 2015

Your question of investing the sale proceeds would be applicable only in case if you are making investment u/s 54F where u sell any capital asset and invest in residential property.

In this case we are required to invest the net consideration (i.e sale proceeds-Expenses on transfer) received in order to avail tax exemption from capital gains. If only part of the net consideration is being invested then the capital gains exemption would abate in the ratio the net consdieration is being invested.

Refer the provisions of section 54F below

https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx