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Sec 54 of Income Tax Act

Sec 54 of Income Tax Act

Section 54 of Income Tax Act provides provisions for claiming an exemption on capital gains arising from the sale of a residential house property. ​Exemption under this section can be claimed only by an Individual or HUF. ​

Which capital asset is qualified for section 54 exemption?

The exemption under s​ection 54 is allowed only if the capital gain arises from the transfer of a long-term capital asset being a residential house property or land appurtenant thereto whose income is taxable under the head ‘Income from house property’.
Here, long-term capital asset means an immovable property (land or building or both), held for more than 24 months immediately preceding the date of transfer.

Which new asset should be acquired for claiming exemption under section 54?

Exemption under this section can be claimed if the capital gain amount is invested for the purchase or construction of a residential house property. However, the exemption is allowed only if such new house property is situated in India. ​
What is the maximum amount of exemption allowed under section 54?

​​​The maximum amount of exemption allowed under s​ection 54 will be lower of the following:

  1. ​Amount of long-term capital gains; or
  2. Rs. 10 crores*
  3. Aggregate of the amount invested in new house property and amount deposited in capital gain account scheme.

If the total amount invested in the new house property and the amount deposited in the Capital Gain Account Scheme exceeds Rs. 10 crores, the threshold limit will be adjusted first with the amount invested in the new house property. If the investment in the new house property is less than Rs. 10 crores, the remaining balance will be considered to be from the Capital Gain Account Scheme.​

* Inserted by the Finance Act, 2023 with effect from assessment year 2024-25. Earlier, the exemption was allowed without any threshold limit.​

Is there any limit on the number of house properties in which further investment can be made?

Exemption under s​ection 54 is allowed only for investment in one house property. However, with effect from Assessment Year 2020-21, the exemption can be claimed for the purchase or construction of 2 house properties if the amount of long-term capital gains do not exceed Rs. 2 crores. This option can be availed once in a lifetime i.e. once this option is claimed, it cannot be further availed for the same or any succeeding financial years. ​

What is the time limit for making investment in new asset under section 54?

​​To claim exemption under s​ection 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. ​

What is the Capital Gains Account Scheme?

​Accounts opened under Capital Gains Accounts Scheme are special purpose accounts which are opened with an authorized bank. If assessee could not utilise the capital gains to purchase or construct a residential house by the due date of filing return of income, he may deposit the amount of capital gains in such accounts to claim the exemption from capital gains. ​

What is the time limit to deposit the unutilized amount in Capital Gain Scheme Account?

If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme.
The amount deposited in the Capital Gains Account Scheme has to be utilised within the specified period for purchase/construction of the residential house.

Whether investment made in a plot for the construction of a residential house are eligible for exemption under section 54?

​​CBDT’s Circular 667, dated October 18, 1993, clarified that the amount invested for the purchase of a plot towards the construction of a residential house is eligible for exemption under s​ection 54. Further, it was clarified that the exemption will be allowed only if such construction is completed within the stipulated time limit. ​

What are the circumstances in which exemption under section 54 can be withdrawn?

The exemption claimed by assessee under s​ection 54 can be withdrawn in the following circumstances:
(a) Amount deposited in capital gains scheme account is not utilized in prescribed time limit: Where the amount deposited is not utilized for purchasing a residential house property within 2 years or construction of house property within 3 years from the date of transfer, the un-utilized deposit in capital gain account scheme is deemed to be long-term capital gains in the year in which the prescribed time limit expires.
(b) Transfer of new house within 3 Years: If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under s​ection 54 will be deducted from the cost of acquisition of the new house.

What happens to the unutilised amount if the assessee (individual) dies before utilising the deposit under Capital Gains Scheme Account?

​The CBDT vide Circular No. 743, Dated May 6, 1996, has clarified that if assessee (individual) dies without utilising the deposit within the prescribed period, the unutilised amount cannot be treated as income of the deceased person. This amount is not taxable in the hands of legal heirs also as the unutilised deposit does not partake the character of income in their hands. ​

 

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