Capital Gains on sale of residential house [Section 54]
Income by way of capital gains arising to an individual and a Hindu undivided family from
the transfer of a capital asset would be exempt subject, however, to the following
conditions:
(1) The capital asset must be a building or buildings or lands appurtenant thereto and be
used as a residential house.
(2) It must be in the nature of a long-term capital asset.
(3) The income (actual or deemed) derived from the property must be chargeable to tax
as “income from house property” under section 23.
(4) The assessee must have either constructed within a period of at least three years
after the date of transfer or within one year before or two years after that date purchased
a house property for residential purposes. It may be noted that it is not required that the
new house should be used by the assessee for his own residence.
If all the above conditions are satisfied, then the capital gains will not be charged to tax as
the income of the previous year in which the transfer took place; instead the capital gains
shall be dealt with as under:
(1) If the amount of the capital gains is greater than the cost of the new asset, the
difference between the amount of the capital gains and the cost of the new asset shall be
charged as the income of the previous year. Thus, if the amount of capital gain exceeds
the amount reinvested only the difference would be chargeable to tax as capital gains.
But, if the house property so purchased or constructed is sold within three years from the
date of its purchase or completion of construction, as the case may be, the actual cost of
the asset to the assessee shall be taken as nil and consequently the whole amount
received on the second transfer shall be taxable as capital gains.
(2) If, on the other hand, the capital gain is equal to or less than the cost of the new
asset no capital gain would arise to the assessee; but the cost of the property, if sold
within the period of three years, shall be the actual cost less the amount of capital gain
which was not taxed previously.
Where the amount of capital gains for the purposes of section 54 is appropriated towards
purchase of a plot and also towards construction of a residential house thereon, the
aggregate cost should be considered for determining the quantum of deduction under
section 54, provided that the acquisition of plot and also the construction thereon, are
completed within the period specified in these sections - Circular No.667, dated 18.10.93.
Where any such house property satisfying the conditions laid down in section 54 is
compulsorily acquired under the law and additional compensation is awarded by any
Court, Tribunal or other authority, the capital gain attributable to such additional
compensation would be exempted from tax if such additional compensation is utilised by
the assessee for the purpose of purchase or construction of a house property for
residence within the specified time. The specified period for making the qualifying
investment for purposes of exemption in relation to the capital gain attributable to the
additional compensation will, in such cases, be determined with reference to the date of
receipt of the additional compensation by the tax-payer. Sub-section (2) of section 54
provides for this treatment. In such cases, if the regular assessment for the relevant year
in which the capital asset was compulsorily acquired had already been completed before
the qualifying investment attributable to additional compensation is made by the
assessee, the Assessing Officer can amend the relevant assessment order.
When the transfer is by way of compulsory acquisition and the compensation awarded by
the Government is subsequently enhanced by Court, the assessee can get exemption if
he invests such additional compensation for purchase of a residential house.
Deposit in Capital Gains Accounts Scheme 1988 : The amount of capital gain which is
not appropriated by the assessee towards the purchase or construction of new asset
before the date of furnishing the return of income under section 139 shall be deposited by
him, before furnishing such return, in an account in any such bank in accordance with the
Capital Gains Account Scheme, 1988 and such return shall be accompanied by proof of
such deposit. The amount already utilised by the assessee for the purchase or
construction of the new asset together with the amount so deposited shall be deemed to
be the cost of the new asset.
If the amount so deposited is not utilised wholly or partly for the purchase or construction
of the new asset, the amount not so utilised shall be charged as capital gain under section
45 in the previous year in which the period of three years from the date of the transfer of
the original asset expires. The assessee shall be entitled to withdraw such amount in
accordance with the scheme.
It may be noted that amendments have been made on similar lines in sections 54B, 54D,
54F and 54G also facilitating investment by way of deposit in the Capital Gains Account
Scheme, 1988, pending utilisation of the capital gains (under Sections 54B and 54D) and
the net consideration (under Section 54F) for the purposes of acquiring the specified
assets. This scheme would obviate the need for rectification of assessment of the earlier
years.
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