At some point, you might feel the need to sell your older house to buy a newer one that fits your needs better or has better investment opportunities. You sell your old house and purchase a new one, only to find out that you may have to pay taxes on the gains from the sale of your old property. Here, Section 54 of the Income Tax Act allows you to claim an exemption when you reinvest the capital gains from the sale of one residential property in purchasing another.
What is Section 54?
Section 54 allows tax exemptions to individuals and HUFs for long-term capital gains when selling a house and reinvesting the proceeds in another house property. To qualify for this exemption, you need to meet certain conditions:
- The property sold should be a long-term capital asset and a residential property.
- You must purchase a new house property before 1 year or after 2 years from the sale of the previous house property. In the case of construction of a new house property, the construction must be completed within 3 years.
- The new property must be located in India.
How much exemption is allowed?
The allowed exemption is the lower of:
- The long-term capital gains from selling a residential house.
- The investment made in purchasing or constructing a new residential house property.
Any remaining capital gains will be taxable.
In Budget 2023, FM, Nirmala Sitharaman has announced that capital gain tax exemption is capped at Rs 10 crore under section 54.
Let’s understand better with an example
Ashish sold a house property in FY 22-23 for ₹1 crore, which was purchased in FY 14-15 for ₹70 lakhs. Now, he has purchased another property for ₹80 lakhs in FY 22-23.
The calculation of the exemption is as follows:
Index Cost of Acquisition = Cost Price * Cost of Inflation in the year of transfer / Cost of Inflation in the year when purchased.
Withdrawal of section 54?
If the new house property is sold within 3 years from the date of purchase or construction, then exemption u/s 54 is withdrawn.
The amount of capital gain claimed as exempt under section 54 will be deducted from the cost of the acquisition of the new house.
What if you don’t reinvest the sale proceeds before filing ITR?
If you can’t reinvest the money from selling your long-term asset in a new property before filing your tax return, you can deposit it into a Capital Gain Account Scheme (CGAS) before filing to claim the Section 54 exemption.
But if you don’t use that deposited money to buy or construct a new house within 3 Years, it will be considered capital gains, and you’ll have to pay tax on the same.
From FY 2020-21, you can claim Section 54 exemption for investing in two residential house properties. However, this exemption is applicable only when the long-term capital gains are less than Rs. 2 Cr and can be used just once in a lifetime.
Read more about Section 54 Here!
Have Doubts? Ask away!