Any kind of property owned by an assessee is known as a capital asset. It may or may not be connected to business or profession.
| Category | Examples |
|---|---|
| Movable or immovable | Land, building, house property etc. |
| Tangible or intangible | Vehicles, patents, trademarks, leasehold rights etc. |
| Fixed or circulating | Machinery, jewellery etc |
Provisions of Section 54
There are two types of schemes in section 54 for rollover deduction in respect of investing in new house the capital gains from sale of residential property:
(A) A Regular scheme which an assessee can avail any number of times in his life time by investing long-term capital gains from sale of old residential house in one residential house in India; and
(B) A once-in-a-lifetime opportunity scheme where long-term capital gains from sale of residential property does not exceed 2 crores and such capital gains is invested in two residential houses in India.
The following table summarizes both the schemes and when they can be availed:
| Residential house property being long term capital asset – When transferred by assessee being individual/HUF | Amount if resulting long-term capital gains | What benefits can assessee avail/opt to avail under section 54 |
| Transferred on or before 31.03.2019 | More than ` 2 crores | Only regular section 54 scheme can be availed by investing in one residential house in India. [If more than one house invested in, assessee can claim the cost of any one of the two new houses as deduction—.in exercising the choice he should choose the one which he intends to hold on for at least 3 years] If capital gains exceed cost of the new house, relief under section 54EC can be availed by investing in specified bonds up to ` 50 lakhs. If still any capital gains remain after availing section 54EC, tax will be payable on the same at the rate of 20% + Surcharge [See Chapter 7] + Health and Education Cess |
| Transferred on or before 31.03.2019 | ` 2 crores or less | —Do— |
| Transferred on or after 01.04.2019 | More than ` 2 crores | —Do— |
| Transferred on or after 01.04.2019 | ` 2 crores or less | Assessee can avail regular section 54 by investing in one residential house in India. Alternatively, assessee can avail the once-in-lifetime facility of investing in 2 residential houses in India and claiming deductions in respect or cost of both these houses….assessee can do so provided he has not availed this in any earlier assessment year. If he has availed earlier, he can opt only for regular scheme. In addition, assessee can also avail section 54EC benefits. |
Let’s Understand both scheme in details with all provision of Section 54
1: Regular scheme for claiming deduction u/s 54 by investing capital gains from old house in one residential house in India
- How to compute capital gains explains the deduction under section 54 and conditions to be satisfied therefor as under:
- If an individual or HUF having LTCG from transfer of a residential house makes investment to purchase or construct one residential house in India, the amount invested in the new residential house is allowed as a deduction from the LTCG.
- The new residential house can be constructed within 3 years from the date of transfer or can be purchased one year before or two years after the date of transfer. If the above time limit for investment expires during the period 20.03.2020 to 29.09.2020, the time limit shall stand extended to 30.09.2020. [Section 3(1)(c) of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020; Notification No. 35/2020, dated 24.06.2020 as corrected by Corrigendum Notification No. 39/2020, dated 29.06.2020]. This extension is in view of the Corona Virus pandemic outbreak. [Section 3(1)(c) of Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020]. The time limit was further extended to 30-09-2021. It has been further extended to 31-03-2023.
- To claim this deduction, the assessee, after taking into consideration the amount that he has already invested for construction or purchase of the new residential house upto the due date of filing of return of income in his case, should deposit the remaining amount which he intends to use for purchasing or constructing the new residential house in a Capital Gains Deposit Account on or before the due date for filing of the return of income under section 139(1). Based on this he would be allowed the deduction from the LTCG for that assessment year.
- The amount which is deposited in the Capital Gains Deposit Account has to be utilized by him for the purpose of purchase/construction of the new residential house within two/three years from the date of transfer, respectively.
- In case he fails to utilize this amount either wholly or partly for the above purpose within this period the amount remaining unutilized would be taxed as Capital Gains in the year in which the above-mentioned period of three years is over.
- The cost of the new residential unit purchased/constructed would be reduced by the deduction allowed from LTCG if transferred within a period of 3 years from its date of purchase/construction.
2: Once-in-a-lifetime benefit of exemption for long-term capital gains from sale of a residential house by investment in 2 residential houses in India
The Notes on clauses to the Finance Bill clarify that the amendments to section 54 of the Income-tax Act are for to providing relief to the taxpayer.
- having long-term capital gains up to two crore rupees,
- arising from transfer of a residential house,
- by affording him a onetime opportunity, at his option, to utilize the said amount for the purchase or construction of two residential houses in India instead of one residential house as currently provided.
If during any assessment year, the assessee has exercised this option, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.
The two new provisos were inserted in section 54(1) of the Act by section 6 of the Finance Act, 2019 to provide relief as above come into force with effect from the assessment year 2020-21.
If transfer of residential house (whether situated in India or abroad) is made on or after 01.04.2019, long-term capital gains therefrom if not exceeding 2 crores may be invested in 2 residential houses in India and deduction in respect of those investments shall be allowed from long-term capital gains. This is once in lifetime opportunity.
All other conditions as regards uninvested amount of capital gains to be deposited in Capital Gains Deposit account and subsequent utilization, time limit for purchase or construction of new houses and lock in period of 3 years shall apply.
Latest Update
Budget 2023: Long-term capital gain exemption will be capped at ₹10 crores on sale of:
| Amended sections | Sale of | Sale amount invested in | Exemption Amount |
| Section 54 | Residential property | New residential property | 10 crores |
| Section 54F | Any long-term asset other than residential property | New residential property | 10 crores |
Who is eligible to avail the benefits under Section 54
According to this section, when an assessee sells a residential property, which is a long term capital asset, and buys another residential house property, he or she is eligible to claim an exemption for taxation. To avail of this exemption the individuals must satisfy the following conditions:
- Only individuals or HUF are eligible to claim this benefit. The companies cannot reap the benefits of this section.
- The house property; taxpayer is selling should be a long term capital asset.
- The property that is to be sold should be a residential house. Income from this property should be charged under the head income from house property.
- The new residential house property should be purchased either one year before the date of transfer or two years after the date of sale or transfer. In case of construction of a new house, the individual is given an extended time period to construct a house i.e., within three years of the date of transfer or sale.
- The house property that is bought should be in India.
If any of the above conditions are not fulfilled by the individual, he or she is not liable to claim an exemption under section 54 of the income tax act. Only such transaction by the taxpayer is eligible for availing the exemption under section 54.
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