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Capital Gain Exemption on Sale of Residential House Property

Section 54 of the Income Tax Act, 1961 provides tax exemption on long-term capital gains (LTCG) arising from the sale of a residential house property. The exemption is available when the proceeds or capital gains are reinvested into another residential house property.

This section is beneficial to homeowners who sell their existing property and purchase or construct another house. It encourages reinvestment in real estate for residential purposes and avoids double taxation.

 

Applicability: Who Can Claim Exemption?

Parameter Eligibility
Type of Assessee Only Individuals and Hindu Undivided Families (HUFs)
Type of Asset Sold Long-Term Capital Asset being a residential house property
Minimum Holding Period Property must be held for >24 months (to qualify as long-term)
Reinvestment Asset Must invest in residential house property situated in India only

📌Note: Companies, LLPs, firms, and other entities are not eligible for exemption under Section 54.

 

Nature of Asset Sold

To claim exemption:

  • The asset must be a residential house property.
  • It can be self-occupied or let-out.
  • It must be a long-term capital asset
  • Even co-owners can claim exemption in proportion to their share.

 

Amount of Exemption

The amount of exemption under Section 54 is calculated as:

Exemption Amount = Lower of:

  1. a) Amount of Capital Gain
  2. b) Cost of new residential house purchased or constructed
Scenario Exemption Available
If full capital gain is reinvested 100% exemption
If partial capital gain is reinvested Proportionate exemption
If no investment is made No exemption under Section 54

 

Detailed Example

Example:

  • Mr. Ramesh sells his old flat in April 2024 for ₹90 lakhs.
  • Indexed cost of acquisition is ₹40 lakhs.
  • Long-Term Capital Gain (LTCG) = ₹50 lakhs.
  • He purchases a new house in Feb 2025 for ₹45 lakhs.

Exemption = Lower of:

  • LTCG = ₹50 lakhs
  • Amount invested = ₹45 lakhs
    ✅Exemption allowed = ₹45 lakhs
    ❌Taxable LTCG = ₹5 lakhs

 

Time Limit for Investment in New Property

Nature of Investment Time Limit
Purchase of new house – Within 1 year before the date of transfer/sale
– Or within 2 years after the date of transfer
Construction of new house Must be completed within 3 years from the date of sale

📌Note: If the taxpayer purchases the house before sale, it must be within 1 year preceding the date of sale.

 

Capital Gains Account Scheme (CGAS)

If the capital gains amount is not fully utilized for purchase/construction before the due date for filing the income tax return:

  • The unutilized amount should be deposited in a Capital Gains Account Scheme (CGAS) in a nationalized bank before ITR due date.
  • The deposited amount must be used within the time frame (2/3 years).
  • If not utilized, the unspent amount becomes taxable as capital gain in the year in which the 2/3-year limit expires.

 

Multiple House Purchase – Section 54(1)(ii)

🟡 Pre-2019: Exemption was allowed for investment in only one residential house.

🟢 Post Finance Act 2019 (Applicable from AY 2020–21):

  • Exemption is allowed for investment in two residential housesprovided:
    • The capital gain does not exceed ₹2 crore, and
    • The benefit is claimed only once in a lifetime.

 

Sale of New Property within 3 Years

If the new house is sold within 3 years from purchase/construction:

  • The earlier exemption claimed under Section 54 shall be withdrawn.
  • The cost of acquisition of the new house will be reduced by the exempted capital gain.
  • The entire gain on sale of the new house becomes short-term capital gain and taxable at slab rate.

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