Section 54 of the Income Tax Act: A Comprehensive Insight

Shivendra Pratap Singh

Advocate

High Court Lucknow

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When it comes to real estate transactions in India, tax implications can become a major concern. While selling a property might bring in a good profit, the capital gains tax on the sale could create a significant dent in the earnings. Fortunately, the Indian Income Tax Act has provisions like Section 54, which offer relief from such taxes in specific situations. Here’s a deep dive into Section 54 and its significance.

Understanding Capital Gains:

When you sell a property for a price higher than its purchase price, the profit earned is termed as capital gain. This gain can be classified into:

  • Short-Term Capital Gain (STCG): If the property is sold within two years of its purchase.
  • Long-Term Capital Gain (LTCG): If the property is sold after two years of its purchase.

Section 54 offers relief on the Long-Term Capital Gains earned from selling a residential property.

Key Provisions of Section 54:

  1. Eligibility: The taxpayer claiming relief under Section 54 should be an individual or a Hindu Undivided Family (HUF). The relief is specifically for LTCG from the sale of a residential house property.
  2. Exemption Amount: The exemption is available on the investment of the capital gains in:
    • Purchase of another residential house property within 1 year before or 2 years after the date of sale.
    • Construction of a new residential house property within 3 years after the date of sale.
  3. Limit on Number of Houses: As per the 2019 budget amendment, the benefit of Section 54 can be claimed on the investment of capital gains in two residential house properties, but only if the capital gain does not exceed INR 2 crores. This option can be exercised only once in a lifetime.
  4. Capital Gains Deposit Account Scheme: If the capital gains from the sale are not immediately reinvested or utilized for construction, they should be deposited in the Capital Gains Deposit Account Scheme with a bank before the due date of filing income tax returns. This ensures the amount is used only for buying or constructing a new property.
  5. Partial Exemption: If the amount reinvested in a new property is less than the total capital gains, exemption is granted proportionately. The balance amount would be taxable as LTCG.

Points to Remember:

  • If the new property is sold within three years of its purchase or construction, the exemption granted under Section 54 will be reversed, and the gains would be taxed as Short-Term Capital Gains.
  • The new property bought or constructed using capital gains must not be transferred within a period of 3 years from the date of its acquisition.

Conclusion:

Section 54 of the Income Tax Act offers taxpayers an avenue to save on capital gains tax, promoting the reinvestment of capital gains in the real estate sector. It’s essential for property owners to be aware of such provisions to plan their property sales and purchases efficiently, ensuring that they make the most of their investments while staying compliant with tax laws.

Tags: #Section54 #IncomeTaxAct #CapitalGains #RealEstateIndia #TaxPlanning