As per the provision of the Income Tax Act, if there is any transfer of capital assets, the provision of Capital Gain will be applicable. If any person wants to sell his house property, then the provision of the capital gain will be applicable i.e. such person is required to make the payment of income tax on the amount of capital gain. This situation will be considered a hardship for such a person. To remove such hardship, Income Tax Act 1961, which introduced section 54, section 54 will provide relief to the taxpayer who sells his house property and he purchases an another residential house property from the amount of sales consideration.
Section 54 exempts the amount of Long Term Capital gain which arises on the sale of house property if such sale consideration is invested in another residential house property.
Eligibility for taking the benefits of section 54-
- The assessee must be an individual or HUF. Exemption under section 54 is only for the individuals and HUF.
- The asset should be a long term capital asset.
- The amount of Capital Gain should be arising from the transfer of residential house property.
- The income from such house property should be taxable under the head “Income from House Property”.
- After the sale of such asset, the new residential house property must be purchased either 1 year before the date of sale or 2 years after the sale or transfer. If the seller is constructing a house property, the seller will have to construct it within the period of 3 years from the date of such transfer of sale.
- The new residential house property should be in India.
If all the conditions are satisfied then the assessee will be eligible to take the benefit of section 54 i.e. if any of the above conditions is not satisfied, the benefit of section 54 is not available.
As per the Finance Act 2020 the benefit of section 54 has been extended from 1 house property to 2 house properties i.e. with effect from the AY 2021-22, the assessee can invest in 2 residential house properties to take the exemption of section 54.
Amount of Exemption under section 54
The amount of exemption under section 54 will be
- Amount of capital gain arising on the transfer of residential house property or
- Amount invested in new residential house property (including the amount which is deposited in Capital Gain Deposit Account Scheme).
Whichever is lower.
Capital Gain Deposit Account Scheme-
This scheme is introduced by the central government to promote reinvestment of capital gain which is earned from the transfer of any residential house property.
As per section 54, if there is any amount of long term capital gain which arises on the transfer of residential house property and the amount of consideration is required to invest in a new residential house property within the specified time period, but in some cases, the assessee is not able to invest such amount in new residential house property before the due date of filing of the income tax return for the year of transfer. In this case, the assessee will deposit all the unutilized amount of capital gain which arises on the transfer of sale of old house property in the capital gain deposit account scheme.
If there is any amount deposited in such scheme, needs to be withdrawn for the investment in new house property within the period of 3 years (in the case of construction) or 2 years (in the case of purchase) after the date of transfer of such property. If the assessee fails to withdraw such amount within the specific time period then the amount of capital gain will be taxable in the hands of the assessee and the assessee will make the payment of tax on the amount of capital gain.
Consequences of selling or transferring new house property within the period of 3 years
To claim the exemption of section 54, the assessee will purchase/construct the house property within the specified time period and take the benefit of such exemption. But if such new house property is transferred or sold by the assessee within the period of 3 years from the date of purchase or construction, then the amount of exemption which is claimed earlier will be taxable i.e. the amount of capital gain which is claimed under section 54 will be deducted from the cost of acquisition of new house property.