Capital GainsDeductionsHouse Property

Exempt capital gains by investing in residential house property – Section 54 and 54F

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Ever wondered what does it mean when people say that you can save your taxes by investing in Section 54 and Section 54F? These are the sections which can bring relief when there is a capital gain. Here is a contrast of these two sections detailing which exemption is allowed to whom.

When a property (shares, immovable property, gold, etc.) is sold, the profit realised therefrom is taxable as capital gain in the Income-tax Act. However, there are certain Sections which allow exemption from such capital gains.  By leveraging these sections, the amount of capital gains is reduced by the exemptions allowed. Most common exemptions which are allowed when the capital gain is invested in a new residential house property are – Section 54 and Section 54F. What is the difference between these two exemptions have been elaborated below?

1. When allowed?

[Section 54] This exemption is allowed to an individual or HUF who transfers a residential house property and invests the long-term capital gains earned therefrom in new residential house property.

[Section 54F] This exemption is allowed to an individual or HUF who transfers a capital asset other than a residential house property and invests the long-term capital gains earned therefrom in new residential house property. The exemption is allowed if the taxpayer does not own more than one house on the date of transfer.

2. Amount to be invested

[Section 54] To claim a full exemption under Section 54, the entire amount of capital gain has to be invested in a new house. In case entire capital gain is not invested, the amount not invested is charged to tax as long-term capital gains.

[Section 54F] To claim a full exemption under Section 54F, the entire (net) sale consideration has to be invested in a new house. In case entire sale consideration is not invested, the exemption is allowed proportionately (Exemption = Cost of new house x Capital Gains/Sale Consideration)

3. Withdrawal of exemption

[Section 54] The exemption given will be taken back if the taxpayer sells the new house property within 3 years of purchase or construction. The exempted amount would be disallowed. This is done by deducting the earlier exempted amount from the cost of a new property while calculating the capital gains. Capital gains, in that case, from the sale of a new property will be taxed as capital gains.  The gains arising from such property can be long term or short term depending upon the period of holding of this new housing property.

[Section 54F] The exemption will be taken back if a taxpayer sells the new house property within 3 years of purchase or construction or if he purchases another house within 2 years of the sale of original asset or constructs another house within 3 years of the sale of the original asset. In this case, the exemption allowed earlier will be taxed as long-term capital gains. Capital Gain/loss from the transfer of a new house will be chargeable to tax under the head capital gain separately.

4. Number of Houses to Invest

[Section 54] This exemption is allowed for the investment made, by way of purchase or construction, in two residential houses provided the amount of capital gains does not exceed Rs. 2 crores. If assessee exercises this option, he shall not be subsequently entitled to exercise the option for the same or any other assessment year, i.e., the assessee can exercise this option only once in a lifetime. Once this option is exercised, the exemption under this provision can be claimed in subsequent years in respect of one house.

[Section 54F] The exemption under Section 54F shall be limited to the investment made in one house.

Related Topics

  • Save tax on profits earned from the sale of residential house by using section 54 (Read)
  • Save tax on profits earned from the sale of an investment by using section 54F (Read)

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