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Capital gain exemption on sale of property used for residence-Section 54

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Exemption of profit on sale of property used for residence-Section 54

Eligible Assessee: Individual or HUF

Nature of Capital Asset transferred: Long-term residential building or lands appurtenant thereto (residential house), income from which is chargeable u/h Income from House Property.

Re-investment Conditions/New Asset: The assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house one residential house in India.

Computation of taxable amount of Capital Gain

 

Situation Taxable Capital Gain If new residential house transferred within 3 years of its purchase or construction
If amount of capital gain is more than cost of new residential house purchased or constructed Capital Gain  () Cost of new residential

House purchased    or

Constructed

COA of new residential house shall be nil
If amount of capital gain is equal or less  than cost of new residential house purchased or constructed Nil COA of new residential house shall be reduced by the amount of the capital gain exempted

 

Therefore, capital gain to the extent of cost of new residential house purchased or constructed shall be exempt.

  • The expression ‘a residential house’ has been replaced with ‘one residential house in India’ by the F.A. 2014 w.e.f AY 2015-16. This amendment has removed the controversy arising out of conflicting judgments of different High Courts that the expression ‘a residential house’ permits use of plural. Hence, benefit of investment u/s 54 shall now be available in respect of investment in only one residential house in India.

Deposit of unutilised capital gain amount in Capital gains accounts: The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return under the capital gains account scheme within the due date applicable for furnishing of return u/s 139(1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset.

What if the amount deposited is not utilised  If the amount deposited in capital gains accounts is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

  • Unutilised amount shall be taxed as long term capital gain.

Case Laws

Several units within one house If a residential house consists of several independent residential unit it would not take away deduction under section 54/54F, provided the building is for residential use and not for commercial use. CIT v Gita Duggal (2013) 214 Taxman 51(Delhi)

Investment in joint name If assessee had invested capital gain amount in the purchase of residential house in joint name with her husband, she could not be denied benefit of section 54 if no amount had been contributed by her husband. What is material is the investment of the sale consideration in acquiring the residential premises or constructing a residential premises. In the absence of an express provision contained in these section that the investment should be in the name of the assessee only, assessee could not be denied benefit of deduction. Director of I.T. (Intl. Taxation) v Mrs. Jennifer Bhide (2012) 349 ITR 80 (Kar)

Loan amount used in purchase of house property The assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The wording of the section itself would make it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property. The main part of section 54 provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which the transfer of his property took place or he should have constructed a house property within a period of two years after the date of transfer. Further, no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset. CIT v K.C. Gopalan (1999) 107 Taxman 591 (Kerala)

Capital gain amount not invested in residential house neither deposited into bank before due date of return filing: If assesee had not utilized entire amount of capital gain for the purpose of construction of new house, nor were unutilized amounts deposited in notified Bank Accounts before filing return of income, Assessing Officer rightly restricted exemption under section 54F proportionately to amount invested. Humayun Suleman Merchant v CCIT (2016) 73 Taxmann.com 2(Bombay)

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