Section 54 - Exemption on Capital Gains from House Property

Income Tax Income from Capital Gains
1

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:

  1. The property sold should be a long-term capital asset and a residential property.
  2. 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.
  3. The new property must be located in India.

How much exemption is allowed?

The allowed exemption is the lower of:

  1. The long-term capital gains from selling a residential house.
  2. The investment made in purchasing or constructing a new residential house property.

Any remaining capital gains will be taxable.

:bulb: 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:

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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If the new house property is sold within 3 years from the date of purchase or construction, then exemption u/s 54 is withdrawn.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.

:bulb: 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!

2 Likes
2

what if it is a commercial property ?

as per the recent budget announced : the limit is capped to 10 crores ! am i right ?

3

Hi @HIREiN,

The asset has to be a Residential House Property only, under section 54.

Yes, as per the budget announced in 2023, the capital gain exemption limit is capped at ₹10 crores.

Hope it helps.

4

so . is there any section or provision for tax saving in case of commercial property ?

5

Hi @HIREiN,

Yes, under section 54F, a taxpayer can claim a capital gain exemption on the sale of a long-term capital asset to purchase or construct a new Residential House Property, if specified conditions are fulfilled.

Hence you can sell a commercial house property to purchase residential house property.

Read more about the eligibility criteria to claim an exemption under Section 54F of the Income Tax Act.

Hope it helps.

1 Like
6

Hi. In October 2022, I sold my residential flat for Rs. 20 lakhs (originally purchased in July 2012 for Rs. 8 lakhs). Long Term Capital gains after indexation works out to Rs. 5 lakhs (rounded off).

I am currently purchasing a residential flat under construction. I have come to understand that in order to claim exemption under 54, construction has to be completed within 3 years of flat sale.

Till date, I have made part payment of Rs. 21 lakhs (out of 50 lakhs total cost) towards new flat under construction. Since the amount spent towards new flat (under construction) exceeds the sale proceeds of my previous flat, is it sufficient to claim full exemption under 54 ?

7

Hi Radhesh,

As per your stated case, you are eligible to claim the total amount of LTCG of ₹5 lakhs under section 54 of the income tax act.

1 Like
8

Hi, my father had sold out residential property and bought new one in the name of my mother and all of the payments are done by my father only, will he eligible for all exemptions?

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Hi @Rahul_Tyagi

Yes, your father will be eligible for the capital gain exemption. However, if he has taken any loan, he won’t be able to claim the interest and principle components of home loan repayment.

10

Hi @Shrutika_Shah,
I have already purchased a property worth 45L by taking a home loan of 30L. I have sponsored remaining 15L from my savings.

Now, if I sell shares worth 45L (25L is initial capital, 20L is profit) which are long term holdings,

  1. Does 54F applicable if we take home loan cases.
  2. Can I show full proceeds (45L) used for property purchase and claim full exemption under section 54F
  3. Can I also claim tax exemptions for principle and interest on house loan after claiming 54F.

The article at Can you take a Home Loan and also Claim LTCG Tax Exemption? talks about court uphelding similar scenario during a house sale (Section 54), i would like to know about 54F (share sale)

11

Hi @csteja

  1. You can claim exemption u/s 54F, even if you have taken a home loan.
  2. Yes, you can claim the exemption maximum up to the amount of LTCG.
  3. Yes, you can claim tax exemptions for principal and interest on a home loan.

You can read more about Section 54F of Income Tax on sale of LTCA except house- Learn by Quicko

1 Like
12

Hi, is the exemption available on purchase of a flat if I already have ownership of two other flats in different cities.

13

Hello @Abhinav_Agrawal

Yes, you can claim exemption on LTCG from sale of residential property under section 54 on purchase of another flat.

14

If I buy 2 properties in an year can I make use of the capital gains from sale of shares on each of them ? (Lets assume, I have no properties in my name apart from these 2)
Is there any gap limit exist between the purchase of both the properties ?

15

Hi @csteja

You can avail the deduction u/s 54F when you have income from the sale of shares and you invest the amount in the purchase or construction of a residential house property.

However, on the date of sale, you should not own more than one house property, other than the one bought for claiming exemption under this section.

17

Thanks for the reply

  1. Let’s say for example sale of shares gave capital gain profit more than 50L (surcharge is applicable generally). Can I avoid surcharge if I buy property under 54F.
  2. Lets say the salary is 49L and capital gains is 2L, does the person need to pay surcharge here as well given total is > 50L. Can he avoid it by using that 2L under 54F ?
18

Hi @csteja

Surcharge is an additional tax payable when the taxable income exceeds a certain threshold limit. For STCG u/s 111A and LTCG u/s 112A, the surcharge rate is 10% for income above ₹50 lakhs and below ₹1 crore.
If you invest the capital gains u/s 54F, you will be reducing your capital gains and hence the taxable income, and hence the chances of surcharge levying are less.

Hope this clarifies.

19

Hi @Shrutika_Shah,

Can we use 54F, even for foreign stocks holded for more than 3 years.

20

Hey @csteja,

Yes, exemption u/s 54F can be claimed against any long term asset except residential house property.

Hope this helps!

21

I am planning to construct a house in a land, which was purchased on 2020.

Ie; I held the land more than 3 years but house in the plot is only going to build.

Also the capital gain will be used for purchasing another residential property.

In this case, if I sell the house within 6 months after construction, can I claim for tax exemption under Section 54 or 54F?