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Arun Balaji

Ca @ B Arun Balaji & Associates

Know Your tax Basics – SEC 54 Relief on Captial Gains arising from sale of Residential Property

Section 54 of the Income Tax Act provides the seller of a residential property with relief from capital gains tax, if the proceeds from the sale are used to acquire another residential property.The following conditions must be satisfied by the taxpayer to claim benefits under Section 54 of the Income Tax Act:

  1. Taxpayer is an individual or HUF. Exemption under Section 54 is not available for companies or LLPs.
  2. The asset transferred should be a long-term capital asset, being a residential house property.
  3. Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house.

Short-term capital asset is an asset which is held not more than 36 months or less. Any gain from selling a short-term capital asset, is termed as short-term capital gain. Long-term capital asset is an asset which is held more than 36 months. Any gain from selling a long-term capital asset, is termed as long-term capital gain. To claim benefit under Section 54, one of the important criteria is that the residential property has to be a long-term capital assets. Hence, to claim capital gains exemption, the property must have been held by the taxpayer for a period of more than 3 years from date of purchase.Transfer of Property After Claiming Benefit under Section 54Further, if a taxpayer claims benefit under Section 54 of the Income Tax Act and purchases or constructs a new house, he/she must hold that property for a minimum period of three years. If the taxpayer sells the property before the end of three years, then the benefit granted under Section 54 will be withdrawn and the taxpayer would have to pay the capital gains due on the previous transaction.Amount of ExemptionThe amount of capital gains exemption under Section 54 of the Income Tax Act will be the lower of:

  • Amount of capital gains arising on transfer of residential house.
  • Investments made in purchase or construction of a new residential house property.

Capital Gains Deposit Account Scheme

If the asset is sold in the PY, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).