Long term capital gain exemption under section 54

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Sumit Deb (Querist)
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28 November 2011 I am planning to sell my own flat and then purchase a new flat soon. My parents are co-owners of the existing flat. My contribution to the cost of flat is 90% (through home loan). My father's contribution is 10% (through down payment). I am paying the full EMI. My father is a senior citizen and his income is far below the exemption threshold.

In view of the above, please let me know the following:

1. As mentioned, my parents & myself are the co-owners of existing flat. I want to make my brother co-owner (my parents & myself being other co-owners) for the new flat to be purchased. My brother will not contribute to the cost of new flat. In this scenario, does adding my brother as co-owner will create any issue/complication regarding exemption of long term capital gain?

2. Ratio of my & my father's contribution is 90:10. Hence, I think, capital gain (for me & my father) is also to be calculated on 90:10 basis. Please confirm.

Thanks,
Sumit

Sumit Deb

Sumit Deb (Querist)
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29 November 2011 Can any one please answer my queries?

Thanks,
Sumit Deb

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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03 August 2024 Certainly! Let’s address your queries regarding the long-term capital gain (LTCG) exemption under Section 54 of the Income Tax Act.

### **1. Co-Ownership and Exemption under Section 54**

**Scenario**: You want to sell your existing flat (co-owned with your parents) and purchase a new flat, where you intend to add your brother as a co-owner along with your parents.

**Implications**:

- **Eligibility for Exemption**: Section 54 allows for the exemption of LTCG on the sale of a residential property if the proceeds are used to purchase or construct a new residential property. However, there are certain conditions regarding ownership and the number of properties.

- **Adding Your Brother as a Co-Owner**:
- **No Complication if Done Correctly**: Adding your brother as a co-owner to the new flat should not create any issues regarding the exemption as long as the new flat meets the criteria specified under Section 54. The new flat should be purchased or constructed within the time limits specified under the section (within 1 year from the date of sale of the old property or 2 years from the date of sale for purchase, or within 3 years for construction).
- **Ownership Share and Exemption**: The exemption under Section 54 is typically available to the person who is the owner of the new property. If your brother is added as a co-owner, it must be ensured that the new property is indeed in your and your parents' names (with the correct share allocation) to claim the exemption.

### **2. Calculation of Capital Gain**

**Scenario**: You and your father are the co-owners of the existing flat with a contribution ratio of 90:10.

**Implications**:

- **Capital Gain Calculation**:
- **Proportional Distribution**: The LTCG from the sale of the property should be apportioned based on the ownership share. Since your contribution is 90% and your father's is 10%, the capital gains should be allocated on the same basis.
- **Exemption Claim**: Each co-owner can claim an exemption under Section 54 proportionate to their share in the new property. Hence, you can claim exemption for 90% of the capital gains, and your father can claim exemption for 10% of the capital gains.

### **Key Points to Remember**

1. **Ensure Compliance**: Make sure that the new flat is purchased or constructed within the prescribed time limits and the ownership is correctly reflected in the documents.

2. **Proportional Exemption**: Ensure that each co-owner claims exemption proportional to their share in both the sale of the old property and the purchase of the new property.

3. **Documentation**: Maintain proper documentation to support the proportion of ownership and the investment in the new property to avoid issues during tax filing.

4. **Consultation**: It may be beneficial to consult with a tax professional or financial advisor to ensure that all compliance requirements are met and to properly handle any documentation or reporting needs.

If you need further assistance or have more questions, feel free to ask!

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