When you relocate from one residential property to another, the motive is not to earn income from selling your old house but to find a suitable and comfortable base. It could be financially challenging if you are accountable for paying income tax from the capital gained after selling your house. Therefore, the IT Department prepared a list of Capital Gain Exemptions for selling specified assets. Exemptions under Section 54 of Income Tax Act are available on the capital gained after selling one residential property and building another. Are you planning to buy a new home with capital gains? You can know about the capital gains exemption under Section 54 in the article.
Exemption Under Section 54 of the Income Tax Act
A person or a HUF member selling a home can avail of capital gains tax exemption under Section 54 of Income Tax Act. It can only happen if capital gains are invested while buying or building a residential property. Taxpayers like partnership organisations, associations or other entities can not claim tax exemptions under Section 54. The conditions that are required to be fulfilled to avail of the exemption on capital gains in the specified sections are as follows:-
- An asset should be categorised as a long-term capital asset, i.e., the residential property sold after 24 months.
- The sold asset should be a residential property. The income earned from such a property must be chargeable as income earned from residential property.
- The seller must buy a residential property one year before the sale date or transfer and two years after selling or transferring the residential property. If a seller is building a house, the seller has additional time; that is, the seller should construct a residential property within three years of selling or transferring it. The acquisition tenure or construction will be ascertained from the compensation receipt date if there is a mandatory acquisition.
- The new residential property must be situated in India. You can not purchase or trade a residential property overseas and claim the capital gains exemption under Section 54 of Income Tax Act.
- The capital gains exemption under Section 54 to Section 54F will be limited to ten crore Indian rupees. Initially, there was no benchmark limit.
- If you buy or build more than one residential property, you can only claim an exemption for one property.
The conditions specified above are accumulated. Therefore, even if a condition isn’t met, you can not avail of the capital tax exemption under Section 54.
What is the Capital Gain Exemption Amount Available Under Section 54?
Section 54 of Income Tax Act lets a lower of the following as the exemption of capital tax amount:-
- Capital gains amount on transferring residential property
- The made investment in buying or transferring a residential estate.
According to the 1961 Income Tax Act, if there is any balance amount, it will be taxable. With effect from the 2024-25 assessment year, the 2023 Finance Act has limited the maximum allowed exemption under Section 54. If the price of the new asset is beyond ten crore Indian rupees, the surplus amount would be ignored for calculating the exemption under Section 54.
Difference Between Section 54 and 54F
Automatically earning income casts a responsibility to pay tax on such income, as is the scenario with capital gains. Nonetheless, income tax laws let you claim specific exemptions against capital gains, which can help you decrease your tax outgo. You can claim two vital exemptions under Section 54 of Income Tax Act and Section 54F. The exemptions under Section 54F are available on capital gains in the long run for selling any asset except residential property. On the other hand, the exemption under Section 54 of Income Tax Act is available on selling or transferring residential properties.
Now that you know, Section 54 of Income Tax Act can aid you in dodging your capital gains taxation and instead claim taxation after selling a residential property. Nevertheless, to achieve it, you should be eligible for purchasing or building a new residential property within a stipulated duration according to this law. When you do this, you can successfully avert paying the tax on your capital gains. While designing methodologies, a vital component, i.e. tax planning, needs to be addressed. You can plan to sell your immovable property or reinvest with proper planning and claim capital gains exemption under Section 54 of the 1961 IT Act.
Frequently Asked Questions (FAQs)
1. Can you claim an exemption if you purchase your new property in your spouse’s name?
To claim an exemption under Section 54 of the 1961 Income Tax Act, the property that a taxpayer buys should be in the seller’s name. The exemption is unavailable if a new property is purchased in the spouse’s name.
2. Can a non-resident Indian claim an exemption under Section 54 of the 1961 Income Tax Act on buying a new property?
A non-resident Indian can claim an exemption under Section 54 of the 1961 Income Tax Act. However, it is compulsory that the old house be sold, and the new home purchased should be in India.
3. When can a taxpayer gain benefits under Section 54 of the 1961 Income Tax Act?
When you buy a new residential property within a year or two of the sale of the original property or build a new home within three years of selling the old property, you can gain benefits under Section 54 of the 1961 Income Tax Act.
4. How many exemptions are allowed under Section 54 of the 1961 Income Tax Act?
The capital gain amount on selling the original residential property or the new residential property amount, whichever is less, is exempted under Section 54 of the 1961 Income Tax Act.
5. Are exemptions allowed if a property’s builder fails to hand over the property within three years, and the sale of which property type you can avail under Section 54 of the 1961 Income Tax Act?
You can avail of exemptions under Section 54 of the 1961 Income Tax Act even if you fail to hand over your property. Exemptions under Section 54 of the 1961 Income Tax Act are allowed while selling a long-term capital asset residential property.