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Capital gain exemptions

Section 54, 54EC, 54F: Capital Gain Tax Exemption, Deposit in Capital Gain Account Scheme

In this article, we will discuss about Section 54, 54EC & 54F of Capital Gain Tax Exemption.   Section 54, 54EC, 54F: Capital Gain Tax Exemption   Capital Gains Exemption can be claimed under the Income Tax Act by reinvesting the amount in either purchasing/ constructing a Residential House or by reinvesting the amount in Capital Gain Bonds. Seller of the asset either has the option to claim exemption or pay 20% Long Term Capital Gains (LTCG) Tax. Following exemptions can be claimed on the sale of a Long-Term Capital Asset i.e. on sale of an asset which was held for more than 2 years: Section 54:  Asset Sold – Residential Property, New Asset Purchase – Residential Property Section 54EC: Asset Sold – Any Asset, New Asset Purchase – Specified Bonds Section 54F: Asset Sold – Any Asset, New Asset Purchase – Residential House Section 54:  (Asset Sold – Residential Property, New Asset Purchase – Residential Property)   Under this section – Any LTCG arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rented) shall be exempt to the extent such capital gains is invested in the following manner:   Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or   Construction of Residential house Property within a period of 3 years from the date of transfer/sale of property. Note – 1  Provided that the New Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition. If the new property is sold within a period of 3 years from the date of its acquisition.   2. Then, for the purpose of computing the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exempt under section 54 earlier.   3. The capital gain arising from this transfer will always be a short term capital gain (STCG).   Quantum of Deduction under Section 54   Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house.   If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt.   If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption   Number of Houses that can be purchased for claiming Section 54 Exemption:   Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house, irrespective of the no. 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.   An exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once. This exemption once claimed cannot be claimed in again in any other year. For all other years, investment should be made in construction/ purchase of 1 residential house only.   Capital Gains Account Scheme    In Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, but the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, 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.   To avoid the above situation, the Income Tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme (CGAS).   The amount of Capital Gain which is not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the CGAS, before the due date of furnishing of ROI.   The details of deposit i.e. the Date of Deposit & amount deposited are required to be mentioned in the Income Tax Return while claiming the Capital Gains Exemption. In this case, the amount already utilized by the assessee for the purchase/construction of the new house shall be eligible for exemption.   In case, the assessee deposits the amount in the CGAS but does not utilized the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilized shall be charged as Capital Gains of the year in which the period of 3 years is completed from the date of sale of the Original Asset & it will be LTCG of that financial year.   Other Important Points   Allotment of a flat by DDA under the Self-Financing Scheme shall be treated as construction of the house. Similarly, allotment of a flat or a house by a co-operative society, of which the assessee is the member, is also treated as construction of the house.   The assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit.   Where the assessee made substantial payment within the prescribed time limit & acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period, exemption u/s 54 is allowed.   House Property does not mean a complete Independent House. It includes residential units also, like flats in a multi-storeyed complex.  

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