People might buy capital assets to
ensure present and future financial security, be independent in any event of
financial hardship or create a source of funds for their future financial
goals. But, when they sell these capital assets, the profit that they earn from
such a sale is called a capital gain. Such a gain is chargeable to tax under
the Income Tax Act, 1961. However, certain provisions of the Income-tax law
allow taxpayers to claim specific exemptions against such gains, which help
them reduce their tax liability. So, are you wondering how to save capital
gain tax? You can save tax on your capital gains by availing the
benefit of the provisions of two important sections of the Act,which are
sections 54 and 54F.
Let’s look at what these sections are
all about by giving a read to this article.
1: Exemption under Section 54
As per Section 54 of the Income-tax
Act, an individual or HUF can avail tax exemptions on long-term capital gains
arising on transfer of a residential house property if the amount of such
capital gains is invested in purchasing or constructing another residential
house property.
The primary conditions that need to be
satisfied to avail the benefit of this section are as follows:
- The exemption under 54 is available
only to an individual or HUF. Taxpayers such as partnership firms, LLPs,
companies, AOPs or BOIs cannot claim relief under this section.
- The transferred asset should be a
long-term capital asset, being a residential house property.
- Income (if any) from such transferred
residential house should be chargeable under the head 'Income from House
Property’.
- The seller should, within one year
before or two years after the date on which the transfer took place, purchase,
or within three years after that date, construct one residential house.
- The new residential house property
should be in India. The taxpayer cannot purchase or construct a residential
house abroad and claim the exemption under this section.
The conditions mentioned above are
cumulative. Hence, even if one requirement is not fulfilled, the assessee will
not be able to claim the benefit of the exemption u/s 54.
With effect from AY 2021-22, section
54 has been amended to extend the relief of exemption for the investment made
in two residential house properties in India. The exemption for the
investment made to purchase or construct two residential house
properties shall be available only if long-term capital gains do not exceed Rs.
2 crores. It must be noted that once the taxpayer avails of this option, he
shall not be eligible to exercise it again for the same or any other assessment
year.
Amount of Exemption
A taxpayer can avail exemption on
long-term capital gains of an amount lower of the following:
- Capital gains arising on transfer of
the long-term residential house property; or
- Amount invested in purchasing or
constructing new residential house property.
Restriction on Transfer of the New
Residential House Property
The government has inserted a
restriction in section 54 to ensure that the new house property purchased to
claim the exemption under this section is retained for a particular period, and
the provisions thereof are not taken undue advantage of. The restriction is in
the form of prohibition on the sale of the new house property within three
years from the date of its purchase or construction, as the case may be.
If the exemption is claimed under
section 54 and the new house is sold within three years from its purchase or
construction, then at the time of computation of capital gain arising on
transfer of such new house, the amount of exemption claimed on capital gains
u/s 54 will be subtracted from the cost of acquisition/construction of the new
house. Consequently, the cost of acquisition/construction of the new house
property will decrease or become nil, as the case may be, resulting in higher
capital gains on the transfer of such property.
Let us have a look at the below
illustrations to have a better understanding of the provisions of section 54:
Illustration 1
Mr. Verma purchased a residential
house in May, 2015 and sold the same in May, 2021 for Rs.7,45,000. He made a
capital gain of Rs.1,50,000 on such sale. Can he avail the benefit of section
54 by purchasing/constructing another residential house from the capital gain
of Rs.1,50,000?
Ans.Exemption u/s 54 can be claimed in respect of
capital gains arising on transfer of a capital asset, being a long-term
residential house property. This relief is available only to an individual or
HUF. In this case, all the conditions provided in section 54 are satisfied.
Hence, Mr. Verma can claim the benefit of section 54 by purchasing/constructing
a residential house within the time limit as provided under section 54
(mentioned above).
Illustration 2
Mr. Kapoor purchased gold in June,
2016 and sold the same in August, 2021 for Rs.8,90,000. Capital gain arising on
the transfer of gold amounted to Rs.1,30,000. Can he claim the exemption u/s 54
by purchasing/constructing a house from the capital gain of Rs.1,30,000?
Ans. Exemption u/s 54 can be claimed on
capital gains arising on transfer of a capital asset, being long-term
residential house property. In this example, since the capital asset is gold,
i.e., other than a residential house, the exemption of section 54 is not
available. However, in this case, the benefit can be claimed under section 54F
subject to certain conditions defined in that provision (Discussed in
subsequent paragraphs).
Illustration 3
Mr. Goyal purchased a residential
house in October, 2021 and sold the same in May, 2022 for Rs.9,40,000. Capital
gain arising on such sale amounted to Rs.3,50,000. Can he claim the exemption
under section 54 by purchasing/constructing another residential house from
the capital gain of Rs.3,50,000?
Ans.Exemption u/s 54 can be claimed on capital
gains arising on transfer of a capital asset, being long-term residential house
property. An immovable property qualifies as a long-term capital asset if its
holding period exceeds 24 months. In this case, the house property is
transferred after holding it for less than 24 months and, therefore, it is a
short-term capital asset. The benefit of section 54 cannot be availed in
respect of a short-term capital asset, and, thus, in this case, Mr. Goyal
cannot claim the benefit of section 54.
I. Exemption under Section 54F
As per section 54F of the Income-tax
Act, an individual or HUF can avail tax exemptions on capital gains on transfer
of a long-term capital asset other than a residential house if the amount of
such capital gains is invested in purchasing or constructing a residential
house property in India.
The basic conditions that need to be
satisfied to avail the benefit of section 54F are as follows:
- The exemption under 54F is available
only to an individual or HUF.
- The exemption is available on the
capital gains arising on the transfer of any long-term capital asset other than
a residential house property.
- The taxpayer should invest the net
consideration received on transfer of the original asset in either of the
following:
- To purchase one residential house in
India within a period of one year before or two years after the date of
transfer of the original asset.
- To construct one residential house in
India within three years after the date of transfer took place.
For this section, the ‘net
consideration’ in respect to the transfer of a capital asset means the total
value of the consideration received or accruing in relation to the transfer of
the capital asset as reduced by any expenses incurred exclusively in connection
with such transfer.
Amount of Exemption
Case 1: Cost of the new asset exceeds the net
consideration in respect of the original asset
If the cost of purchasing or
constructing the new asset is more than the net consideration received or
accrued in relation to the transfer of the original asset, the whole amount of
capital gain shall be exempted under section 54F.
Case 2: Cost of the new asset is less than
the net consideration in respect of the original asset
In case the entire sale consideration
is not invested in the new asset, i.e., if the cost of the new asset is lower
than the net consideration in relation to the original asset, then exemption
shall be allowed proportionately in the following manner:
Amount
of exemption = Long-term capital gain * (Amount invested in the new asset/Net
saleconsideration)
Circumstances in which Exemption u/s
54F is not Available
The circumstances in which the
exemption u/s 54F is not allowed are as follows:
- The taxpayer has more than one
residential house, other than the new asset, on the date of transfer of the
original asset.
- The taxpayer purchases any residential
house, other than the new asset, within one year after the date of transfer of
the original asset, and the income from such residential house is chargeable
under the head 'Income from house property’.
- The taxpayer constructs any residential
house, other than the new asset, within three years after the date of transfer
of the original asset, the income from which is chargeable under the head
'Income from house property’.
In case of the taxpayer purchases,
within two years after the date of the transfer of the original asset, or
constructs, within three years after such date, any residential house, the
income from which is chargeable as 'Income from house property’, other than the
new asset, the amount of capital gain on transfer of the original asset that
was exempted u/s 54F shall be charged as long-term capital gains in the
financial year in which such residential house is purchased or constructed.
Restriction on Transfer of the New
Residential House Property
As in the case of section 54, the
similar lock-in period of three years on the transfer of the new residential
house from the date of purchase or construction, as the case may be, is
applicable u/s 54F also.
If the exemption is claimed under
section 54F and the new house is transferred within three years from the date
of its purchase/construction, the amount of capital gain arising from the
transfer of the original asset exempted in the year of such transfer shall be
charged as long-term capital gains of the financial year in which such new
asset is transferred.
Note: For section 54F, if the assessee
owns more than one residential apartment or residential unit in the same
building on the date of transfer of the asset, it will be treated as one
residential house property only. This view has been constructed by placing
reliance on the following case judgements:
1. SHRI. NAVIN JOLLY C/O NAVIN
ARCHITECT PRIVATE LIMITED VERSUS THE INCOME-TAX OFFICER, WARD 11 (1) [2020] 424 ITR 462 (Kar)
It was held that “The assessee
even otherwise is entitled to the benefit of exemption under Section 54F(1) of
the Act as the assessee owns two apartments of 500 square feet in the same
building and therefore, it has to be treated as one residential unit”.
2. SRI S.M. VINOD, L/R OF LATE SM
MUNIYAPPA VERSUS THE INCOME TAX OFFICER, WARD 7 (2) (1), BANGALORE [ITA No.192/Bang/2020 (Assessment
year: 2016-17)]
It was held that “The assessee owns
one independent building which has two units one in the ground floor and
another in the first floor and having two units cannot change the nature of the
building, it remains as “one residential house” as in the case of Shri Ramaiah
Harish [2021 (9) TMI 1138 - ITAT BANGALORE]. Thus, we direct the AO to allow
deduction u/s. 54F of the Act. The grounds raised by the assessee are allowed.”
Now that we have gone through the
provisions of section 54F, let us have a look at the below illustrations to
understand the section better:
Illustration 1
Mr. Sharma purchased a residential
house in March, 2016 and sold the same in May, 2021 for Rs.7,50,000. Capital
gain on sale of the house property amounted to Rs.2,50,000. Can he claim the
benefit of section 54F by purchasing/constructing a house from the capital gain
of Rs.2,50,000?
Ans. Exemption under section 54F can be claimed in respect of capital
gains arising on transfer of a long-term capital asset, not being a residential
house property. In this case, since the capital asset is house property, the
benefit of section 54F will not be available.
Illustration 2
Mr. Jain sold a long-term capital
asset, other than a residential house property, for Rs. 60 lakhs and made a
capital gain of Rs. 6 lakhs. He invested the entire amount of Rs. 60 lakhs to
purchase a house property in India. He owns only one house on the date of sale
of the asset. Calculate the amount of capital gain that would be exempt under
section 54F.
Ans. Since Mr. Jain has invested the whole
amount of capital gains in purchasing the new house and satisfies all the
required conditions to claim the exemption, he can claim the entire amount of
long-term capital gain, i.e., Rs. 6 lakhs, as exemption under section 54F.
Illustration 3
In illustration 2 above, assume that
Mr. Jain invested only Rs. 35 lakhs towards the purchase of the house property.
Now, calculate the amount of exemption on capital gains that he can claim u/s
54F.
Ans. Since, in this case, the amount
invested in the new asset is less than the net sale consideration, the
exemption would be calculated as follows –
Amount
of exemption = Long-term capital gain * (Amount invested in the new asset/Net
sale consideration)
= 6
lakhs * 35 lakhs/60 lakhs
= Rs.
3.5 lakhs
Hence, in this case, Mr. Jain can
claim the exemption of Rs. 3.5 lakhs under section 54F.
Concept of Capital Gains Account
Scheme
As mentioned above, to claim benefits
under sections 54 and 54F, the taxpayer must purchase a residential house
within a period of one year before or two years after the date of transfer of
the long-term capital asset or should construct the same within three years
from the date of transfer. If till the date of filing the Income-tax return,
the capital gain, in case of section 54, and net consideration, in case of
section 54F, on the transfer of the original asset, is not utilised (in whole
or part) to purchase or construct the new house property, then the benefit of
exemption can be claimed by depositing such unutilised sum in Capital Gains
Deposit Account Scheme. The new house property can be purchased or constructed
by withdrawing the amount from the said account within the specified time limit
of two years or three years, as the case may be.
Unutilised amount in Capital Gain
Account Scheme
If the sum deposited in the Capital
Gains Deposit Account Scheme in respect of which the assessee has claimed
exemption under section 54 or 54F is not utilised within the specified period
for purchasing or constructing the residential house, then the unutilised
amount will be taxed as long-term capital gains in the year in which the
specified period of three years from the date of transfer of the original asset
gets over.
Similarities between sections 54 and
54F
There are several common provisions
under section 54 and section 54F that are as follows:
- A new residential house property must
be purchased or constructed to claim the exemption.
- The new residential house property
must be purchased within one year before or two years after the transfer of the
original asset.
- Alternatively, the new residential
house property must be constructed within three years from the date of transfer
of the original asset.
- Both the sections state a similar
lock-in period of three years for transfer of the new asset from the date of
purchase or construction of the original asset, as the case may be.
- The option of depositing the
unutilised amount of capital gains in the Capital Gains Account Scheme is
available under both sections.
Section 54 v/s Section 54F
Section 54 and section 54F differ in
various aspects, some of which are as follows:
- The main difference lies in the asset
on which the exemption is available under each section. The exemption u/s 54 is
available on long-term capital gain on the transfer of a residential house
property. Whereas, under section 54F, the exemption is available on long-term
capital gain on the transfer of any asset other than a residential house
property.
- To claim full exemption u/s 54, the
entire capital gains must be invested in the new asset. In contrast, the total
net consideration must be invested in the new asset to claim full exemption
under section 54F.
- Once in a lifetime option is available
of claiming exemption on capital gains under section 54 on investing such gain
in two properties if the amount of capital gains does not exceed Rs. 2 crores.
No such option of investment in two assets is available u/s 54F.
- The taxpayer should not own more than
one residential house, other than the new asset, on the date of transfer of the
original asset to claim exemption u/s 54F. There is no such restriction stated
in section 54.
- In case the entire capital gains are
not invested in the new asset, then u/s 54, the invested amount is exempted,
and the remaining amount is charged to tax as long-term capital gains. Whereas,
u/s 54F, if the entire net consideration is not invested, the exemption is
allowed proportionately (explained in the above paragraphs).
Summing up
After reading this blog, it can be
concluded that if the sale and purchase of capital assets are planned keeping
in mind the provisions of sections 54 and 54F, a taxpayer (individual &
HUF) can save a considerable amount of taxes. Hence, the taxpayers must
carefully understand these provisions and plan their investments in such a way
so that they are able to reap the benefits of the relief provided under the
said sections. If the taxpayers face difficulty on how to compute capital
gain tax or have confusion in calculating capital gain exemption on sale
of house property or any other capital asset, they should consider
consulting a capital gain tax expert who can provide them with
the correct guidance.
Source:https://www.manishanilgupta.com/blog-details/decoding-sections-54-and-54f-of-the-income-tax-act-1961
