At the time of sale of any Long Term Capital Asset, the Gains are usually very large and are taxed @ 20%. The resultant Figure to be paid as tax usually comes out to be a very large amount liable to be paid as Long Term Capital Gain Tax.

In this article , we would stress on all about exemption from capital gains on sale or transfer of residential house property.  However the Government of India has  given the option of claiming exemption from paying this Capital Gains Tax if the Assessee invests in certain specified forms of Investments and can thereby save Long Term Capital Gain Tax as explained below.:- 

CONDITIONS TO BE FULFILLED

1)   The assessee has purchased residential house property within one year before or two years after the date of transfer, or has constructed a residential house within 3 years after the date of transfer.

2)   The new house should not be transferred upto 3 years from the date of acquisition.

 AMOUNT OF EXEMPTION

1)   If the cost of new house is equal to or more than Capital Gain on transfer of old house, the entire capital Gain is exempted.

2)   If the cost of the new house is less than the Capital Gain on transfer of the old house, the difference between Capital Gain and the cost of the new house is taxable u/s 45.

WITHDRAWAL OF EXEMPTION

1)   If the new house is transferred within three years from the date of its purchase, then for the purpose of Computing Capital Gain on transfer of new house.

2)   Cost of new house shall be reduced by the amount of Capital Gain on old land exempted earlier.

3)   The Capital Gain on transfer of new house within three years of purchase is a short term Capital Gain.

EXAMPLE WITH A CASE STUDY

Mr. A sold a house on 01.12.2011.

Mr. A should purchase a new residential house between 01.12.2010 to 30.11.2013 or construct a new residential house by 30.11.2014.

Full Value of Consideration		70 Lacs
Less : Expenses on Transfer	5Lacs
Indexed Cost Of Acquisition	20Lacs
Indexed Cost Of Improvement	15 Lacs	40 Lacs
Long Term Captal Gain		30Lacs
Less: Exemption u/s 54		30Lacs
Taxable Long Term Capital Gain		NIL

New House Purchased on 01.06.2012

Restriction on Sale of new house. It cannot be transferred upto 31.05.2015

Say new House sold on 01.01.2015 (P.Y. 2014-15)

FVC OF NEW HOUSE		90Lacs
Less : Expenses on Transfer	Nil
Coast Of Aquisiton	45Lacs
Less : Exemption Taken	(30) Lacs	15Lacs
Short Term Capital Gain		75Lacs

Through this unique mechanism government converts LTCG to STCG and penalizes the assessee.

IF THE NEW HOUSE TRANSFERRED BY WAY OF GIFT

As the new house has been transferred before 31.05.2015 the condition of Section 54 is breached. However gift is an exempt transfer, therefore no capital gain would be calculated on transfer of new house. Consequently the mechanism prescribed by Sec 54 to reduce the cost by the amount of exemption earlier allowed will not operate. Hence even though the condition has been breached the exemption earlier granted cannot be brought back to tax.

IF THE HOUSE IS LOST BY FLOOD OR FIRE on 01.01.2014

Section 54 provides that if the new house is transferred before 3 years that is 31.05.2015, than while calculating capital gain on transfer of new house the exemption earlier granted should be deducted from cost.

In this case although capital gain would arise, it would arise on new house u/s 45 (1A). Capital Gain under 45(1A) does not arise on transfer of capital asset but on receipt of insurance compensation, therefore in this case as well the cost cannot be deducted from the exemption earlier granted even though the condition of section 54 is breached as 54 requires reduction of cost only when capital gain on new house is on transfer and not on receipt.

OTHER INTERESTING THINGS

1)      The House for which exemption is being claimed can be outside India.

2)      Commencement of construction not relevant, completion is relevant and to be within time prescribed.

3)      Assessee may claim u/s 54 by purchasing a property through loan.

IMPORTANT CASES

1)      In the case of B.B.Sarkar v CIT, the assessee sold his residential property and purchased another and constructed an additional floor on house purchased. Held that the assessee was entitled to exemption u/s 54 both in respect of the purchase and the construction.

2)      In CIT v P.V.Narasimhan, the assessee demolished the 1^st Floor of his existing dwelling house and constructed a new floor in its place within the stipulated period. Held, that the assessee was entitled to exemption u/s 54.

3)      Section 54 lays emphasis on the use of property mainly for the purpose of residence. If an assessee has retained more than one house  or portion of his own residence and not for any other purpose, the Capital Gain arising on transfer of each of such house would qualify for exemption u/s 54.

4)      In the case of CIT v J.R.Subramanya Bhat held, construction must be within the stipulated period. The construction of the new house may commence prior to the date of sale of the old house.

5)      In CIT v Shahzada Begum held, possession of the property within the stipulated period is sufficient for claiming exemption u/s 54, through registration of the transfer deed may be delayed.

6)      In CIT v T.N Aravinda Reddy held, conversion of joint ownership into sole ownership through deeds executed by other owners, amounts to purchase of property for the purpose os section 54.

7)      In the case of CIT v V.Natarajan, the assessee haad sold a house property at Bangalore and had purchased a house property in the name of his wife. The house property income from the new property was assessed to tax in the hands of the assessee. The assessee claimed exemption u/s 54 in respect of the investment in the house property in the name of his wife. The Madras High Court held that the assessee sold a property and purchased another property in the name of his wife, which is assessed in the hands of the assessee, the assessee is entitled to exemption u/s 54.

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