Exemption from capital gains on sale/transfer of residential house property – Section 54

At the time of sale of any long term capital asset, the gains are usually huge and are taxed @ 20%. The resultant figure to be paid as tax comes out to be a very large amount, liable to be paid as ‘Long Term Capital Gain Tax’. However, as every common thing has certain exemptions attached to them, the government of India has made some provisions for claiming some exemptions regarding common capital gains. In this article we will focus on the exemption and provisions relating to sale or transfer of house property. Short Term od Long Term Transfer? Whether a “Capital Asset” is long term or short term is attracted depending upon the period of holding of the asset i.e. for how long has the owner held the asset. Taxation of capital gains on short term and long term assets vary to a great extent. Such gains can form a significant portion of one’s Total Income resulting in significant tax outflow. Applicability of Section 54 The Income Tax Act has restricted the applicability of this section only to Individuals or Hindu Undivided Family (HUF) In other words, the advantage of this section cannot be taken by Companies, Partnership Firm, Association of Persons (AOP), Cooperative Societies, Trusts and Body of Individuals (BOI). Moreover, the assessee must satisfy certain primary conditions for availing the benefit of this section. Conditions to be fulfilled The exemption under this section will be available to the assesse only if the following conditions are satisfied – The first condition is- The assessee has purchased a new residential house property either within one year before or two years after the date of transfer of the old house,

• or, has constructed a residential house within 3 years after the date of transfer.

The second condition is that- The new house should not be sold/transferred upto 3 years from the date of acquisition. AMOUNT OF EXEMPTION The amount of exemption depends upon the cost of the new house purchased by the assesse- 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 As the criteria for claiming the exemption is not a onetime thing but needs to be fulfilled for the next 3 years, hence the exemption can be withdrawn any time in the next three years due to non- compliance. The conditions and consequences for withdrawal are given below- 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- Cost of new house shall be reduced by the amount of Capital Gain on old land exempted earlier. The Capital Gain on transfer of new house within three years of purchase is a short term Capital Gain. Capital Gains Deposit Scheme A very valid question that arises at this point is that the amount which is spent over construction may be spread over the period of 2 or 3 years respectively as per the time allowed for investment in this section is also 3 years. However the due date for filing the return of Income under Section 139(1) is 31^st July (and 30^th September, as the case may be) of the Assessment Year itself. So there is quite a possibility that the assessee would not have invested the entire amount for construction of the house by the due to of filing his/her return. Hence, the section stipulates that where the full amount cannot be invested by the assessee by the due date of filing the return of income, the assessee can deposit the unutilized amount under the Capital Gains Deposit Scheme on or before the due date of filing the return of income. The asset can be later purchase or constructed within the stipulated time by withdrawing the money from the aforesaid scheme. FOR GREATER CLARITY LET US UNDERSTAND WITH THE HELP OF A COMPREHENSIVE EXAMPLE. Suppose Mr. Rahul has a residential house in Mumbai which he has acquired on 1^st September 1999 for Rs 5 Laces. He sells the same on 1^st July 2011 for Rs 50 Laces. Also, he decided to purchase another residential flat in Delhi in January 2013 for around Rs 35 Laces. Accordingly he deposits the entire amount of Rs 35 Laces in the capital gains account scheme. Hence his Long Term Capital Gains Tax shall be calculated as:

Hence, by utilizing the benefit of Section 54  Mr. Rahul will pay LTCG tax @ 20% on Rs 4,41,003 which will amount to Rs 88,201 only. Now, suppose, in January 2013, the house actually purchased by Mr Rahul costs only Rs 32 Lacs against the estimate or Rs 35 Lacs. Also, the balance of Rs 3 Lacs remains unutilized till the expiry of 3 years from the date of transfer (i.e. 1^st July 2014). In this case the unutilized amount of Rs 3 Lacs shall be treated as LONG TERM CAPITAL GAINS for the Financial Year 2014-2015 and will be taxed at the rate prevailing at that time.   Thanks for reading for this article. Please feel free to write to us, We want to hear it all!Suggestions? Complaints? Feedback? Requests?  at [info@taxmantra.com] or call us at +91 88208208 11. We would be more than happy to assist you.