Section 54, 54EC, and 54F: Capital Gains Tax Exemption in 2022

 

Capital Gains Exemptions can be claimed under Income Tax Act. This is done by either purchasing or constructing a Residential House and/or reinvesting in Capital Gain Bonds.

The seller has two options: claim exemption, or pay 20% Long Term Capital Gains Tax. (Refer Computation Long-Term Capital Gain Tax).

This article details the exemptions that can be claimed when a Long-Term Asset is sold. on the sale of assets that have been held more than 2 years.

1. Section 54: Residential Property, Old Asset. Residential Property is the New Asset. Residential Property is the New Asset.
2. Capital Gains Account Scheme
3. Section 54EC: Old Assets: Any Assets, New Assets: Specified bonds
4. Section 54F: Residential House: Any Asset, Old Asset
5. A detailed ebook on Levy of Capitalgains Tax and Exemptions, with Examples

Section 54: Old Asset: Residential property, New Asset Residential property

Section 54 - Any long-term capital gain arising to an individual or HUF from the Sales of a Residential property (whether self-occupied or on Rented), shall be exempted to the extent that such capital gains are invested.

1. Purchase of another residential property within 1 year of or 2 years following the transfer of the Property.
2. Construction of residential property within 3 years after the date of transfer/sale

If the residential property is purchased or constructed within 3 years of its acquisition, it will be considered a transfer. The cost of the acquisition of new property must be paid within 3 years of its acquisition. Capital gain from the transfer will always be short term capital gains.

Quantum of Deduction in Section 54

Capital Gains will be exempted to the extent that it is used in the purchase and/or reconstruction of another house, i.e.

1. If the Capital Gains amount equals or lowers the new house cost, then the entire capital gains shall be exempt
2. Capital Gain exceeding the cost of a new house is allowed to be exempted if it exceeds the amount of capital gain

No. There are no houses that can be bought to claim Section 54 Exemption

1. The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. Regardless of the number. of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house - then capital gains exemption can be claimed.
2. Exclusivity to the above rule: Capital Gains in excess of Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. The exemption from purchasing 2 residential properties can be claimed only once. This exemption can only be claimed once and cannot be claimed for again in any year. In all other years, only one residential house should be purchased or constructed. [Introduced by Finance Act 2019.

I will reiterate, Section 54 exempts the following: The number of houses owned by the individual is irrelevant. You can still get exemption by investing the Capital Gains on Sale of Houses in another Residential House.

Capital Gains Account Scheme

Section 54 gives the assessee 2 years to purchase the property or 3 years to build the property. However the capital gains on the sale of the original house are taxable in that year. The income tax return from that year must be submitted in the applicable assessment year before the deadline for filing the Income Tax Report. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.

The Income Tax Act offers an alternative form of deposit to avoid the above scenario. It is called the Capital Gains Account Scheme.

The Assessee must deposit the Amount Of Capital Gain not used by him for the purchase of or construction of the new home before the due day for furnishing his Income Tax Return. The details of the deposit, i.e. When claiming Capital Gains Exemption, the date of deposit and amount must be listed in the Income Tax Return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.

If an assessee deposits capital gains account scheme money but does not use it within the prescribed period for purchase or construction, the Capital Gains Account Scheme amount shall be charged as Capital Gains. This long term capital loss will be applied to the financial year.

Allotment of Flats

DDA shall treat allotment under the Self-Financing Scheme as construction of the house (Circular No. 471, dated 15-10-1986. Similar to construction, the allotment of a house or flat by a cooperative society of which an asseessee is a member is also considered construction (Circular Number. 672, dated 16-12-1983). These cases also allow the assessee to claim exemption from capital gains tax, even if construction is not completed within the prescribed time limit [Shashiverma (1997) 224ITR 106 (MP).

Delhi High Court used the same analogy, where the assessee made substantial money within the time limit and so acquired substantial domain control over the property. However, the builder did not hand over the possession in the stipulated time [CIT v R.L.]. Sood ((2000) 108 Taxman 227) (Del).

Judicial decisions

1. House Property doesn't necessarily mean an independent house. It can also include residential units such as flats in multi-storey buildings. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
2. When a Property is owned jointly by more than one person, the release will make it clear that the property has been bought by the release. The release is also a condition of section 54 regarding purchase. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
3. If a deceased person dies before the end of the 2/3 year stipulated period under section 54B. 54D. 54F. 54G. 54F. 54G., the amount of unutilized Capital Gains Account Saving Scheme deposit cannot be subject to tax. This amount is not subject to tax in the hands the legal heirs, as the unutilized part of the deposit does NOT have the income character in their hands. It is only a portion of the estate. (Circular No. (Circular No. 743, 06-05-1996)

Section 54EC: Old Assets: Any Assets, New Assets: Specified Bonds

Section 54EC allows gains from the transfer of any long-term capital asset to be exempted if the assessee invested the capital gain within 6 months following the date of such transfer in long term specific bonds, as notified the Govt. for a minimum of three years.

The capital gain exemption u/s 54EC will be applied to any long term asset that is transferred or transformed into money during the 3 year period following its acquisition.

If the Assessee ever takes a loan, or advances on the security of a long term specific asset, he is deemed to be having converted the asset into money on that date.

These binds are normally issued by REC, NHAI, and the interest rate offered is around. 5.25%. The Interest you earn is subject to tax. These are Capital Gain Bonds. They are not Tax-Free bonds. While the principal is now exempted from tax after the lock-in period ends, interest will still be taxable.

Budget 2018 Amendment. Section 54EC is now only available for the sale of Land or Buildings (regardless of whether they are Residential or Non-Residential). While it was earlier available for all assets it is now only applicable to Land or Building. Additionally, the minimum holding period for these bonds is 5 years, starting with Financial Year 2018-19.

Section 54EC - Quantum of Deduction

1. Capital Gains will be exempted to the extent that it is invested into long-term specific assets (subjected to a maximum of Rs. 50 Lakhs) within six months of the date of such transfer.
2. Budget 2014 introduced an amendment of Section 54EC. For AY 15-16 and beyond, the assessee's investment in the long term specific asset is limited to capital gains from the transfer of one or several original assets. This means that the amount invested in the asset by the assessee does not exceed Rs. 50 Lakhs.