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Capital gains is one of the most complicated heads of income envisaged in the Income Tax Act, 1961.

Capital gains tax directly affects the investment decisions one may have to take. There are various options available under law to avoid paying capital gains tax which arises on transfer of capital asset.

The option includes a list of exemptions covered in Section 54 to Section 54GB.

Here I have taken up Section 54 for discussion.

The crux of Section 54 is broken down into pieces for easier understanding.

Firstly the assessee needs to be an individual of an HUF, in order to be eligible to claim exemption under Section 54. This means firms, companies, AoP/BoI etc. aren’t eligible.

Secondly, there should be transfer of a long term capital asset. Such asset should be a residential house whose income is taxable under the head ‘Income from House Property.’ It could be self occupied or let out.

Thirdly, the assessee should:

a. Purchase a residential house, old or new within 1 year before, or 2 years after the date of transfer or

b. Construct a residential house, within 3 years from the date of transfer.

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).

From assessment year 2015-16, Section 54 has undergone some amendments. As per amended provisions, 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. This also means no exemption can be claimed in respect of house purchased outside India.

(Previously, there was an interpretation that ‘a residential house’ would mean ‘any  residential house’.)

What is the amount of exemption?

It is the LOWER of the following:

a. Amount of capital gains arising on transfer of residential house; or

b. Amount invested in purchase/construction of new residential house property.

Another condition stipulated in Section 54 is that the new residential house should not be transferred within 3 years.

What consequences follow if new residential house is transferred within 3 years ?

If new residential house is transferred within 3 years from the date of acquisition or completion of construction, the amount of exemption claimed earlier would be taken back. Capital gain on transfer of new residential house is calculated as follows:

Sale consideration of new residential house:   XX

Less: Cost of acquisition (original cost of of new residential house minus exemption claimed earlier u/s 54)  XX

Short term capital gain:  XX

What is the deposit scheme in respect of Section 54 exemption ?

To claim Section 54 exemption, the assessee should purchase/construct ONE residential property IN India within prescribed time limits. But the tax payer has to submit his return of Income on or before the due date of submission u/s 139. So if the sale consideration is not used to purchase/construct the property before the due date, it should be deposited in ‘Capital Gains Account Scheme’ and thereafter exemption u/s 54 can be claimed in the return. Later on, amounts can be withdrawn from this deposit and utilized to should purchase/construct the residential property.

If the amount deposited in the Capital Gains Account Scheme is not utilised within the specified period, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long term capital gains of the previous year in which the period of 3 years from date of transfer gets over.

Some relevant issues w.r.t. Section 54:

1. Purchase of two flats adjacent to each other and having a common point- can Section 54 be claimed?

The issue came up before the Andhra Pradesh High Court in CIT v. Syed Ali Adil (2013) 352 ITR 0418 wherein reference was made to CIT v. Ananda Basappa (2009) 309 ITR 329, where it was held that where flats are situated side by side and builder had effected necessary modification to make it one unit, Section 54’s benefit would be available to the assessee in respect of investment in both the flats.

Hence Section 54 can be claimed for purchase of two flats adjacent to each other and having a common point.

2. Residential house purchased exclusively in the name of assessee’s wife - can Section 54 be claimed?

The issue came up before the Delhi High Court in CIT v. Kamal Wahal (2013) 315 ITR 4, wherein the High Court concurred with the Tribunal’s view and observed that new residential house need not necessarily be purchased in assessee’s own name. It may be noted that the decision was regarding exemption u/s 54F but the same reasoning shall apply to Section 54 as well.

Hence, Section 54 can be claimed for purchase of residential house exclusively in the name of assessee’s wife.


Published by

Tony John
(Chartered Accountant)
Category Income Tax   Report

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