Long-term capital gains arising from transfer of a residential house and land appurtenant thereto may be claimed as exempt u/s 54 by individuals and HUFs, subject to the following conditions:

(1) The amount of capital gain is invested in another residential house or property. This investment must take place within one year before or within two years after the date of transfer in case of purchase of new residential house and 3 years after that date in case of its construction;

Exemption in respect of the entire amount of capital gain is allowed in cases where the investment in new house or flat is equal to or exceeds the amount of capital gain. Otherwise the gains in excess of the amount invested are brought to tax.

(2 )  The new residential house property so purchased or constructed should not be transferred within a period of three years from the date of purchase or construction otherwise the amount of capital gains exempted earlier will be chargeable to tax in the year of sale of the new house property.

To attain this, it has been provided that the amount of exemption u/s 54 shall be reduced from the cost of acquisition of the new house, while calculating short-term capital gain on the transfer of the new asset.

(3)Where the amount of capital gain required to be invested in the new residential house is not so invested before the due date of furnishing the return of income for the relevant assessment year, it shall be deposited by him on or before the due date of furnishing the return of income, in the Deposit Account in any branch (except rural branch) of a public sector bank in accordance with the Capital Gains Accounts Scheme, 1988.

However, in case, the person claiming exemption u/s 54 by depositing the amount in capital gain account, dies without investing in a new residential house. No tax will be payable in the hand of the deceased or his legal heirs in respect of the unutilised amount.

Amount of Exemption

If Amount of Capital Gain is less than the cost of the new house property – Entire amount of capital gains is exempt from tax.

If Amount of Capital Gain is greater than the cost of the new house property – The difference between the amount of capital gains and the cost of the new house is chargeable to tax as capital gains.