Section 54 - Exemption on Capital Gains

Income Tax Income from Capital Gains
1

Are you looking to sell your house property but concerned about paying tax for capital gains?

Then, section 54 is one of the prominent options for saving taxes on capital gains for an individual or HUF who sells their residential house and from its sale proceeds, acquires another residential house.

What is section 54 of the Income Tax Act?

This section allows tax exemption on the long-term capital gains earned from selling a house property and reinvesting the sale amount in the purchase or construction of another house property.

Simply when you shift from one residential house to another to acquire a suitable house, in such a case rather than paying income tax on long-term capital gains, you can purchase another house to reduce your tax liability subject to certain conditions.

  • The asset sold must be Long Term Capital Asset, which is a residential house property
  • An individual must purchase a new house property before 1 year or after 2 years from the sale of the previous House Property, within 3 years in case of construction of a new house property
  • The house property should be sold and bought only in India.

Read more about the eligibility on Section 54 of Income Tax Act on Sale of House- Learn by Quicko

According to the exemptions under section 54, whichever is lower between the capital gain and the investment in new property, will be exempted from taxation.

Let’s understand by an example,

Raju sold a house property in December 2022, for ₹1 crore, which was purchased in November 2014 for ₹70 lakhs, Now he has purchased another property for ₹80 lakhs in the year 2022.

The calculation of the exemption is as follows:

Taking inflation into consideration, the cost price will be adjusted, and the indexed cost of acquisition will also be taken into account.

Index Cost of Acquisition = Cost Price* Cost of Inflation in the year of transfer (FY 2022-23) / Cost of Inflation in the year when purchased (2014-15)

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In Budget 2023, FM, Nirmala Sitharaman has announced capital gain tax exemption on the sale of the first residential property under sections 54 and 54F, capped at Rs 10 crore.

What does it mean?

An individual who reinvests the entire amount from the sale of assets to purchase or construct a residential house can claim a capital gains exemption of up to 10 crores, earlier, there was no threshold limit. Applicable from FY 2022-23.

When will the section 54 exemption be withdrawn?

An individual claiming an exemption has a lock-in period of 3 years, in case the new residential house is sold within 3 years from the date of purchase or construction then the exemption under Section 54 is withdrawn.

If the cost of the new house purchased is more than capital gains, then the cost of purchase will be the Total Purchase Price less Exemption u/s 54.

Here’s a detailed article on Section 54 of Income Tax Act on Sale of House- Learn by Quicko.

If any queries, you can ask them out.

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 ?

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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.

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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)

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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 ?
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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.