Section 54 of the Income Tax act- Capital Gain Exemption 

What is Section 54 under the Income Tax Act, 1961?

When an individual sells a  Long Term hold Residential property then the Capital Gain arises on the such House property is prima facie is eligible for charged to be Taxed. However, from Chargeability of Tax can be escaped if appropriately and With pre-planned condition fulfills that make the story of sec 54. 

Section 54 - Income tax

So Sec 54 is about exemption or benefit for claiming the exemption on the Long Term Capital Gain Arises on Long Term Capital Gain subject to fulfillment of certain conditions.

Conditions under Section 54:-

For availing the benefit under section 54, one has to fulfill the condition prescribed under section 54 that are below mentioned:-

  • The taxpayer (seller) needs to be an individual or HUF
  • The asset must be classified as a long-term capital asset.
  • The asset sold is a Residential House. Income should be classified under house property head, not any other head. 
  • The seller should purchase a residential house either 1 year before the date of sale or the other option is  2 years after the date of sale/transfer. 
  • In case the seller is constructing a house, then the seller will have to construct the residential house within 3 years from the date of sale/transfer.
  •  In the case of Acquisition by the Government either (central /state Government), a period of acquisition or construction will be from the date of receipt of compensation from the Government against the Compulsorily acquired property. (whether original or additional compensation)
  • The new residential house should be in India. It is not applicable to the property are of residential nature located outside India

Note:-These conditions are cumulative and have to be fulfilled simultaneously otherwise one can not claim it.

How many Benefits U/S 54:-

Amount of exemption under this section will be lower of the following:-

Capital Gain on sold  Residential Property

Or

New Purchased Residential Property

Post Claiming Section 54 conditions:-

It means that after claiming benefit under section 54,  the Taxpayer has to fulfill certain Conditions called Post Claiming Condition.

So let’s look upon these conditions they are:-

  • No selling of Newly purchase Residential property till 3 years from the date of purchase or construction
  • Deposit in the Capital Gains Account Scheme till the Last due date of Return filing of Relevant Assessment year.

Income Tax Return filing

Key points to remember:-

  • It may be the situation where the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. However,  For the remaining amount, you can reinvest the money under Section 54EC(REC Bonds) within 6 months. 
  • Prima facie,  property must only be acquired in the name of the seller and not on anybody else’s name. However as per certain case law under the Income Tax Act, it was held that Intention must be fulfilled that is Capital Gain amount must be properly utilized required by the section  54 irrespective of the fact that Property is in the name of another person namely WIFE OR other Family or Relative 
  • The main rationale behind section 54 is to allowed Exemption benefit so even if in case  If the Builder failed to hand over the property of new residential construction to the taxpayer within 3 years of purchase, the exemption is still allowed because the main object of utilizing the Capital Gain amount is fulfilled.

Conclusion:-

It is the Core benefit given by Income Tax Law, where the Sellers are given benefit to claim under sec 54

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