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Business Standard
Understanding capital gains tax exemption under
Section 54
Taxes are levied on carnings made from sale of residential property as well. It is known as capital gains
tax. But did you know that in some cases you can save yourself from this tax? Find out how
Krishna Veera Vanamali | New Delhi June 10, 2022 Last Updated at 07:00 IST
I The profit
; eared from
; the sale of a
house is
taxed as a
capital gain,
Depending
on the
holding
period, the
house may be
classified as
either a short-
term ora
long-term
capital asset.
A tax rate of
20% is levied
along with
surcharge and
cess as
applicable if|
the property
is held for 24
‘months or
more, known
as long-term,
While the gains are taxed at slab rates if held for a short term, i.e for less than 24 months.
Let us say a person wanted to shift his residence due to certain reasons and hence he sold his old house. From
the sale proceeds, he decides to purchase another house.
In this case, the objective of the seller was not to earn income by the sale of the old house but to acquire another
suitable house. If in this case, the seller was liable to pay income tax on capital gains arising from the sale of the
old house, then it would impose a hardship on him.
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Under Section 54 of the Income Tax Act, a seller can avail of tax exemption on the capital gain arising from the
transfer of a residential house property. This benefit is available only to individuals and Hindu Undivided
Families (HUFs).
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Further, the asset transferred should be a long-term capital asset, held for at least 24 months. The taxpayer
should have purchased the second house within India either one year before the date of sale of the old house or
two years after.
If the assessee is constructing a house, then construction expenses incurred within three years from the date of
sale of the first house would qualify.
‘The exemption under Section $4 will be lower of the amount of capital gain on the sale of residential property or
the amount invested in the purchase or construction of a new residential property. Any remaining amount is
taxable.
The exemption can be claimed only in respect of one residential house property purchased or constructed in
India. If more than one house is purchased or constructed, then, exemption under section 54 will be available in
respect of one house only. No exemption can be claimed in respect of a house purchased outside India.
But with effect from Assessment Year 2021-22, the Finance Act, Section $4 has been amended to extend the
benefit of exemption in respect of investment made in two residential house properties, provided the amount of
long-term capital gain does not exceed Rs 2 crore. This option can be exercised by the taxpayer only once in his
lifetime.
‘The exemption under section 54 is available in respect of the rollover of capital gains arising on the transfer of a
residential house into another residential house. However, to keep a check on misuse of this benefit and to
ensure it is available only to long-term buyers, restrictions have been put in place.
Ifa taxpayer purchases or constructs a house and claims exemption under section 54 and then transfers the new
house within a period of three years from the date of its acquisition or completion of construction, then the
benefit granted under section 54 will be withdrawn.
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