Understanding Section 54: A Guide to Capital Gains Tax Exemptions on Residential Property Sales
The world of finance and taxation can often seem like a labyrinth, especially when it comes to understanding the nuances of the Income Tax Act. However, with the right guide, navigating through this complex web can become a less daunting task.
Today, we will be delving into one of the critical sections of the Income Tax Act – Section 54 – which deals with capital gains tax exemptions on the sale of residential property. This section is essential for individuals who plan to sell their residential property and are considering their options to save on capital gains tax.
2. Background
Before we plunge into the depths of Section 54, let’s first briefly understand what capital gains tax is. When you sell an asset that has increased in value since you acquired it, the profit you make is referred to as a capital gain.
The government taxes this profit under the head of ‘Capital Gains’, which can be classified as either short-term or long-term, depending on the duration for which the asset was held.
Capital gains tax can take a significant chunk out of your profits, so it’s essential to plan your taxes well. The Income Tax Act has laid out certain provisions under which tax exemptions can be claimed on capital gains. One of such provisions is Section 54, which we will be discussing in this article.
3. Detailed Explanation of Section 54
Section 54 of the Income Tax Act provides for a tax exemption on the capital gains arising from the sale of a long-term capital asset, specifically a residential house property. This exemption is applicable if the capital gains are reinvested into purchasing another residential property.
This section is applicable to individuals and Hindu Undivided Families (HUFs) who have sold a residential property and made a long-term capital gain. A long-term capital asset refers to a property held by the individual for more than 24 months. This duration is a key factor in determining whether the capital gain will be classified as a short-term or long-term gain.
4. Key Provisions of Section 54
Here are the key provisions of Section 54 that you should keep in mind:
4.1 The Capital Gain Should Arise from the Sale of a Residential Property
As per Section 54, the exemption is only available on the capital gains made from the sale of a residential house property. The property should be classified as a long-term capital asset, i.e., it should have been held by the seller for more than 24 months.
4.2 Reinvestment of Capital Gains
The capital gains from the sale must be reinvested in purchasing another residential house. The property purchased can either be an under-construction property or a ready-to-move-in house.
The reinvestment can happen in two ways:
a. Purchase of a New Property: The seller should purchase a new house one year before the sale of the original property or two years after the sale.
b. Construction of a New Property: The seller should construct a new house within three years after the sale of the original property.
| Reinvestment Options | Timeframe |
|---|---|
| Purchase of a New Property | 1 year before or 2 years after the sale |
| Construction of a New Property | Within 3 years after the sale |
4.3 Amount of Exemption
The exemption on capital gains will depend on the amount of capital gain and the cost of the new property:
a. If the cost of the new property is greater than the capital gain: The entire capital gain will be exempt from tax.
b. If the cost of the new property is less than the capital gain: The exemption will be limited to the cost of the new property.
4.4 The Option to Purchase or Construct Two Houses
The Finance Act, 2019 introduced a provision allowing the seller to purchase or construct two residential houses instead of one, provided the capital gain does not exceed INR 2 crores. However, this option can only be exercised once in a lifetime.
4.5 Limit on the Cost of the New Asset
The Finance Act, 2023 introduced a further provision that if the cost of the new asset exceeds INR 10 crores, the amount exceeding INR 10 crores shall not be taken into account for the purposes of this section.
For Any Query
5. Conditions for Non-Utilization of Capital Gain
In some situations, you might not be able to use the capital gains for the purchase or construction of a new property before the due date of filing of the return of income under section 139. In that case, the unutilized amount can be deposited under the Capital Gains Account Scheme (CGAS) in any authorized bank. The amount deposited in CGAS can be used to purchase or construct a new property within the time limits mentioned above.
If you don’t utilize the amount deposited under CGAS within the specified time, it will be treated as capital gain of the year in which the time limit for purchase or construction expires.
Here’s how it works:
- If the capital gains aren’t used to buy or construct a new property before the due date for filing income tax returns, the unutilized amount must be deposited in a Capital Gains Account Scheme with a bank.
- If the amount deposited in the Capital Gains Account Scheme isn’t utilized within the specified timeframe (2 years for purchase and 3 years for construction), it will be treated as capital gains in the year the specified period ends.
Absolutely! Let’s work through some examples to illustrate how Section 54 works in practice.
Examples
Basic Exemption Claim
Scenario:
Let’s say Mr. A sold his residential property in January 2023 for INR 50 lakhs. He purchased this property in 2000 for INR 10 lakhs (Indexed Cost). He then buys a new residential property in August 2023 for INR 40 lakhs.
Working:
The long term capital gain would be INR 50 lakhs (sale price) – INR 10 lakhs (indexed purchase price) = INR 40 lakhs.
Since Mr. A reinvested the entire capital gain in a new residential property, he can claim the entire INR 40 lakhs as an exemption under Section 54.
Partial Exemption Claim
Scenario:
Ms. B sold her residential property in March 2023 for INR 70 lakhs. She had bought this property in 1998 for INR 20 lakhs (Indexed Cost). She then buys a new residential property in September 2023 for INR 45 lakhs.
Working:
The long term capital gain would be INR 70 lakhs (sale price) – INR 20 lakhs (indexed purchase price) = INR 50 lakhs.
Since Ms. B reinvested INR 45 lakhs (which is less than the capital gain), she can claim INR 45 lakhs as an exemption under Section 54. The remaining INR 5 lakhs will be subject to long-term capital gains tax.
Exemption for Two Properties
Scenario:
Ms. D sold her residential property in May 2023 for INR 1.5 crores. She had bought this property in 1997 for INR 30 lakhs (Indexed Cost). She then buys two new residential properties in India for INR 60 lakhs each in 2023.
Working:
The long term capital gain would be INR 1.5 crores (sale price) – INR 30 lakhs (indexed purchase price) = INR 1.2 crores.
As per the provision, Ms. D can invest in two residential properties as the capital gain does not exceed INR 2 crores. Since she reinvested the entire capital gain in new residential properties, she can claim the entire INR 1.2 crores as an exemption under Section 54.
These examples cover a range of scenarios and illustrate how the exemption under Section 54 works. However, everyone’s situation is unique, so it’s always advisable to consult with a tax professional.
For Any Query
6. Frequently Asked Questions (FAQs) about Section 54
Q: Can I claim the exemption under Section 54 if I sell my property and use the proceeds to buy a plot of land?
A: No, the exemption under Section 54 is only applicable if the capital gain from the sale of the property is reinvested in buying another residential property or in constructing one.
Q: I sold a property and used the proceeds to buy a house abroad. Can I claim the exemption under Section 54?
A: No, the property must be purchased or constructed in India to qualify for the exemption under Section 54.
Q: Can I use the exemption for more than one house?
A: Yes, you can purchase or construct two residential properties in India to claim the exemption under Section 54. However, this option can only be exercised if the capital gain doesn’t exceed INR 2 crores and can only be used once in a lifetime.
Q: I sold a commercial property and used the capital gain to buy a residential property. Can I claim exemption under Section 54?
A: No, the exemption under Section 54 is only available for capital gains from the sale of a residential property.
Q: What if the cost of the new property is more than the capital gain?
A: If the cost of the new property is more than the capital gain, then the entire capital gain is exempt from tax. However, you won’t get any benefit for the excess money spent on the new property.
Q: How do I claim the Section 54 exemption in my Income Tax Return?
A: You need to disclose the capital gain from the sale of the property in the appropriate sections of your Income Tax Return. After calculating the capital gain, claim the exemption under Section 54 in the ‘Exemptions’ section. The exemption will be reduced from the total taxable capital gain.
Remember to keep all the documents related to the sale and purchase of the property safe, as they might be required to substantiate your claim.
Section 54 vs Section 54F
While both Section 54 and Section 54F of the Income Tax Act deal with capital gains exemptions related to residential property, there are key differences to understand. In this section, we’ll compare the two based on their specific stipulations and conditions.
| Criteria | Section 54 | Section 54F |
|---|---|---|
| Asset Sold | Applies to the sale of a residential house. | Applies to the sale of a long-term capital asset other than a residential house. |
| Asset Bought/Constructed | The taxpayer must purchase or construct a residential house. | The taxpayer must purchase or construct a residential house. |
| Number of Houses | One house can be bought or constructed, although an option to buy or construct two houses is available if capital gains do not exceed INR 2 crores. This option, however, can be exercised only once in a lifetime. | Only one house can be bought or constructed. |
| Condition of Owning Houses | There is no restriction on the number of houses the taxpayer can own in addition to the new asset. | The taxpayer should not own more than one residential house apart from the new asset at the time of transfer of the original asset. If the taxpayer purchases or constructs any other residential house (other than the new asset) within the specified time frame, the exemption will not be allowed. |
| Investment Amount | The exemption is available if the capital gain is reinvested. If the entire capital gain is not reinvested, the remaining amount will be taxed. | The exemption is based on reinvestment of the net consideration. If the entire net consideration is not reinvested, the exemption is proportionally reduced. |
| Investment Time Frame | The new residential house must be bought one year before or two years after the sale, or constructed within three years after the sale. | The same time frame applies as in Section 54. |
| Deposits in Capital Gains Account Scheme | Any unutilised capital gain should be deposited in a Capital Gains Account Scheme before the due date of filing income tax returns. | Any unutilised net consideration should be deposited in the Capital Gains Account Scheme before the due date of filing income tax returns. |
| Cap on Investment | From 1-4-2024, if the cost of the new asset exceeds INR 10 crores, the amount exceeding INR 10 crores will not be taken into account for exemption purposes. | A similar provision is applicable in Section 54F, but it is based on the net consideration and not on the cost of the new asset. |
To summarise, both Section 54 and Section 54F provide exemptions on capital gains tax, albeit under different circumstances. It’s critical to understand the conditions and provisions associated with each to make the most of the available tax benefits. As always, consulting with a tax advisor or professional can provide further insights based on specific individual circumstances.
Conclusion: Section 54 Capital Gain Exemption
Understanding and implementing Section 54 of the Income Tax Act can be an effective way to save on capital gains tax from the sale of a residential property. By reinvesting the capital gains in a new residential property within the stipulated time, a taxpayer can claim an exemption and reduce their tax liability.
However, it’s essential to be aware of the various conditions and stipulations outlined in this section. Failure to adhere to them could result in a loss of the exemption and a consequent increase in tax liability. These include, but are not limited to, the timing of the purchase or construction of the new property, the number of new properties bought or constructed, and the total cost of the new property.
Additionally, the introduction of new provisions in the Finance Act, 2023 has added a layer of complexity to this section, and it is crucial to stay updated with the latest amendments.
In conclusion, while Section 54 presents a valuable opportunity for saving taxes, navigating its intricacies can be challenging for the uninitiated. It is always advisable to seek the advice of a tax professional to ensure you’re accurately applying the provisions of this section and optimizing your tax savings.
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Sir, please cover case where amount deposited in Capital Gain account but not utilized.
ok will do
Explained Sec 54 & 54F and even a lay man can understand easily.
Great
Khanna
thx
Can the amount invested in capital gain bond be redeemed before the completion of the lock-in period of 5 years after the payment of tax in necessary arises?
Sir, I need your suggestions for tax on capital gain.. . Pls send me your contact details and fees.
We have shared our details on your email.
Regards,
Sir
You have mentioned capital gain on house property. Does it include vacant land sale.
Rengards
Section 54 is only applicable for house property, it is not applicable for vacant land
Is 54F applicable for sell of vacant land (Plot).
Yes
Sir, I sold a house in last fy and had capital gain of rs 10 lacs. I parked it in my savings ac. Before filing itr but In current fy I invested the sum along in purchasing a new house, hence, I didn’t declared capital gain in my return as it was utilised before return filing.did I did anything wrong ? Do I need to file revised return ?
the capital gain and exemption claimed should have been declared in return of income
Hi Sir
Can I invest my capital gain in under construction residential flat with possession timeline of say 4 years.
Please explain.
Regards
Nimish Kansal
You have to invest the money in the timeline prescribed in the section including opening a capital gain account if required.
Hello Sir,
I recently sold a residential house and investing the proceeds in a new construction.
I understand I can take capital gain exemption under section 54.
I also have 2 other residential properties besides the one I sold and the new construction I booked.
Can I still avail section 54 capital gain exemption? The table in your article for section 54 says there is no restriction on the number of houses the taxpayer can own in addition to the new asset.
Please share your contact information to my email below.
Thank you,
Ram Vasudevan
have sent and email
Sir, excellent and well clarified sec 54 and 54F. Can you please add an example for net consideration in 54F? If I sell stocks valued 50 lacks with long term capital gains of 20 lacks, then the net consideration means 50 lacks minus brokerage expenses and not 20 lacks minus exempted 1 lack ? Great if you clarify !
Yes you are correct
I have sold property in 2023 and deposited amount in Capital gain account and now I am purchasing property ,can I buy property in name of myself and my married daughter
you can buy a property in joint name, but you need to utilise the amount in CGAS for purchase of property only.
Ahuja sir,
I purchased a residential house agreement dt. Nov 2021, but I got possession in dec 23 , OC dated 31st aug 23.
Now I sold my residential property in Jan 24.
Can I claim LTCG.
hi,
this subject is not clarified directly by the act, but is considered in various case laws and is complex in nature. We would try to make a separate post on it covering all the aspects. if you need specific answer urgently, feel free to contact us on email.
What’s will be time limit to retain the new house property Purchased or constructed which is claimed for exemption u/s 54 to offer it for LTCG by sale of the same.
the holding period of 24 months will apply for house property for ltcg
I am 85 years old super senior citizen. I have sold my house for 2.5 crores. My income is about 3.3 lakhs per annum. Is there any exemption for super senior citizens?
Please do a proper computation of capital gain including finding out the indexed cost. Exemption is only if you reinvest capital gain, no other exemption is available for senior citizens specifically for capital gain.
Hi Sir,
What would be the capital gains tax if i sell under construction property after 2 years of allotment? Will I be able to claim LTCG under section 54?
Thank you,
Arjun
hi,
this subject is not clarified directly by the act, but is considered in various case laws and is complex in nature. We would try to make a separate post on it covering all the aspects. if you need specific answer urgently, feel free to contact us on email.
If I hv sold a property in 2023 and there is a capital gain involved, ltcg..n the entire proceeds are reinvested in a under construction property with possession in 4 years ,is there any tax liability involved
please provide more details, what kind of property sold etc.
Hello Sir,
This is by far the most well-articulated and concise piece of information on Capital Gains.
After hrs. of reading through and trying to make sense of this stuff, I am saying so.
Thanks a bunch.. !! Extremely helpful.
Regards,
Arun.
Thanks for appreciating the effort
Hello Sir,
I’m planning to sell my residential property in this financial year (2024-25) and buy plot for construction of house. Possession of plot is by end of December 2024.
Can I avoid capital gain by constructing house on plot that I bought? Also what if I’m not able to construct house by July’2025 , do I need to save capital gain money in Capital Gain Saving Account and then withdraw as I start construction post July’2025
For construction the time period allowed is 3 years from date of sale of asset. If the amount is utilised at due date of filing of income tax return, the same has to be deposited in capital gain scheme account.
For any specific query, feel free to contact us
For 54 is the below still applicable:-
There is no restriction on the number of houses the taxpayer can own in addition to the new asset.
I am planning to sell a house. Out of the three in my name currently. After selling Can I aquire a new one and claim tax rebate in section 54.
Please do let me know.
There is currently no restriction on the number of houses that a tax payer own for claiming exemption u/s 54
I purchased a new residential house on 23 Feb 23 out of my savings. Thereafter I sold my ancestral house property on 21 Feb. 24.
Can I claim deduction under Sec 54 on account of capital gain arisen out of sale of my ancestral property, though I have directly not utilized the capital gain arisen from the sale of ancestral house, but I am meeting the required condition of purchasing the house property within one year of the sale of ancestral house
Please clarify.
Yes you can claim, direct correlation is not required in this case.
-educational purposes only
Sir, i have 2 residential houses. I would like you to sell one of them purchased in 2011 and reinvest in new property during this FY. I have taken exemption once in 2014 for another property. Can I claim exemption under 54 for this property as well or it is allowed only once.
Dear Sudhir,
There is no limit to number of time exemption can be claimed under section 54. However, if you sell a property bought for claiming this exemption before three years, the cost is reduced.
– education purposes only
I am going to sale residential flat in May 24. Long Term Capital Gain will be Rs. 35 Lakhs. This old flat is in my name. I want to buy another flat in May-June 24 at cost of Rs. 95 Lakhs. I want to include my spouse and daughter’s name for buying new flat. I will invest Rs. 90 Lakhs in new flat and balance Rs. 5 Lakhs by spouse.
Can I claim exemption of Rs. 35 Lakhs under Section 54, when old flat is in my name but in new flat wife and daughter included in addition to myself ?
Santosh
Yes you can claim even when you buy partial share in a new house property.
Hello sir, can I construct a house in a land which I bought 3 years ago to claim exemption.please reply
your query is incomplete, do you already have a land and want to construct to claim capital gain exemption from sale of another house property
hello Sir,
I had sold an old residential property in 2018 and claimed LTCG exemption under 54 by purchasing a property in 2019. I would now like to sell another property and purchase another residential property.
Can i again claim exemption under 54 or is there a limit to the number of times exemption can be claimed.
Section 54 don’t have any limit to number of times it can be claimed
Sir, can the 2nd exemption under section 54 include 2 residential properties instead of 1. If yes, what is the criteria
sir is my understanding correct. i.e. in sec 54F once in life time option is available while we claim 2 house for exemption, and if we claim only one house , we can claim 54 exemption for in buying and selling for multiple times.
Can you redraft the query properly, I can’t understand
Sir, I booked new house property in Apr-2024
I will sale my old house property in Dec-2024 which was purchased in 2006. Can i save capital gain tax?
yes, provided the house property bought is a complete house. it falls under the rule of purchase of a new house property one year before or two year after.
Hello Sir,
During may 24 sold a residential property own alongwith my wife since 2000 and have CG of 53 lacs after indexation. During feb 24 we already bought a house by investment of equal to 105 lacs by each .I already have house jointly with my wife bought during march 2018.
Can i take capital gain exemption under section 54 as i have 2 other residential properties besides the one I sold in may 24when 3 rd flat eas bought
Regards/Rajkumar agrawal
Mumbai
Dear Mr. Agrawal,
for specific queries you can contact us through our contact us page.
Regards,
Sir,
A simple question. Can you define what is a new residential property? What is the criteria for determining if a property is new in terms of years?
Alternatively can 54 and 54F be utilised to buy existing residential properties that are say 10 years old?
New residential property means a property which is new for you i.e. you have bought it. It has nothing to do with how old a property is. I hope this clears your doubts.
Hi Sir,
I bought a residential flat in 2004 and gave it to my wife in 2022 with a settlement registration in her name; she wanted to sell the flat now (before 2 years); will it acquire long-term or short-term capital gain for tax? Please advise.
Thanks.
Note: we both are NRIs.
for specific queries, please contact us through our contact page
Hell sir,
My father sold a property last year in mid-2023 with a registration amount of 35 lakh. We bought this property in the 1990s for 2-2.5 lakh and constructed 3 floors over the years, spending money on the construction. How can we compute the final Long Term Capital Gains (LTCG) on the property? Please guide.
Additionally, my mother and I purchased a house in 2020, for which I took a loan from the bank and borrowed money from relatives. We used the 35 lakh fund to repay the loan and the money borrowed from relatives. Can we account for this in our LTCG computation? Please suggest.
for specific queries, please contact us through our contact us page.
Nicely compiled my Friend..
thx much appreciated
Sir kindly tell what is included in the cost of the new property purchased ?
Amount paid to the builder plus
Registration and other taxes plus
Cost of internal finishes done by buyer such as shelves and countertops?
cost of interior decoration is not part of cost of acquisition
I had three residential flats, I sold them in three different financial years and invested the total proceeds in construction of a new hose for self. The construction cost of the new house in all the three years exceeds the proceeds from the sale of respective flats for that year. Obviously the cost of investment in the new house in all the three years exceeds the capital gain amount of that year. Can I claim deduction under section 54 in all the three years?
Sushant
for specific queries please contact us through our contact page
Hello sir,
My wife has one flat where she is joint owner with myself. Now her ancestral house has got sold where she has got one third of sale proceeds along with her two brothers. If she now invests the capital gain amount in acquiring new property will she get exemption of capital gains under section 54 despite owning one residential flat already.
Please reply.
Section 54 does not have any limitation due to existing ownership, that is only applicable if taking exemption under section 54F
Hi Sir,
i have bought a new house in dec2023 and i have sold it in sep 2024.
so can section 54 will be applicable for me if i go for Capital gains exemption?
As this is a short term capital gain will section 54 is applicable in my case?
if not applicable then please suggest me how can i proceed with Capital gains exemption on Short term capital gains. Kindly help me
there is no exemption on short term capital gain
Dear Sir,
if we sell multiple properties say 3 at Rs.2 crore each and baught new property of Rs. 5Crore.
can we claim exemption under 54 of entire 5cr.?
for specific queries feel free to contact us
Sir I had sold my residential house and had long term Capital gain. The entire capital gain had invested in new residential house and registered the property within year from date of sale but the possession of new purchase house is 4 years from the date of sale. Do i need to qualify for long term exemption u/s 54 since i had invested n registered new residential house. Thanks in advance.
courts have held in various case laws that construction completion can take more than 3 years but if money is invested within 3 years then exemption will be available
Sir If I had invested the entire long-term gain within 06 to 09 months from the date of sale of old residential flat in under construction residential flat constructed by builder then the possession or date mentioned in agreement (as possession date) of new residential (flat) property is compulsory within 2 years or 3 years from the date of sale of old residential flat. further the new agreement entered with the builder mentioned the date of possession beyond 2 years from the date of sale then in such scenario can I claim the exemption u/s 54 or not.
My questions:
1. Is possession or possession date mentioned in agreement matters for exemption or only entire long-term gain to be invested within 2 years
2. If possession date is also the criteria, then is it 2 years or 3 years in case of under construction of flat by builder from the date of sale of old flat.
Please suggest.
in various case laws courts have examined this aspect and held that it may not be possible to construct the whole property in the time line prescribed but if a genuine effort is there and the whole amount required for exemption is utilised for construction within the timeline then exemption will be granted. So it depends on the facts of the case but the basic principle is the same.
Hi,
My query is I sold one property( residential Land) in July, 2023 for which I bought in 2006. The Capital gain Amount is Rs. 31 Lakhs as per inflation index. No TDS was deducted since it was less then 50 lakhs. By mistake, the transaction was not showed in FY year return 2023-24. Now wanted to file revised return before Dec, 2024. Can I bought another property before July, 2025 as capital gain reinvestment section. or if make payment as profit out sales how the tax get calculated and what are the ways out for saving the payment of Tax.
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