Section 54, 54EC, 54F – Capital Gain Tax Exemption In FY 2022

According to the Income Tax Act, capital gains can be exempted if they are reinvested in the construction or purchase of a residential home or in capital gain bonds. The asset’s seller might choose to pay a 20% Long Term Capital Gains Tax or seek exemption. 

The following exemptions, which can be claimed on the sale of a long-term asset, or an asset held for more than two years, are explained in depth in this article.

Section 54: Residential Real Estate, Old Asset, Residential Real Estate

Any long-term capital gains made by an individual or HUF from the sale of a residential property (whether the property is their own or rented out) are free from taxes to the degree that they are invested in:

1. The acquisition of a second residential property during a period of one year or two years following the transfer of the sold property, and/or
2. Within three years of the property’s transfer or sale, a residential building must be constructed.

As long as the newly acquired or built residential property is not transferred within three years of the date of acquisition. The cost of purchase of this home property shall be reduced by the amount of capital gain exempt under section 54 previously if the new property is sold within three years of the date of acquisition, for the purpose of computing the capital gains on this transfer. This transfer’s capital gain will always be a short-term capital gain.

Deduction Amount Per Section 54

To the degree that capital gains are used to fund the purchase and/or building of another home, i.e.

1. The total capital gain shall be excluded if the capital gains amount is equal to or less than the cost of the new home.
2. The cost of the new home shall be considered an exemption if the amount of capital gain exceeds the cost of the new home.

Number of homes that may be acquired in order to qualify for Section 54 Exemption

• According to the Finance Act of 2014, the Capital Gains Exemption is only valid if it is used to fund the building or purchase of a single residential home. No of how many homes a person already owns, if he utilises the capital gain to build or buy a single residential home, he qualifies for a capital gains exemption.
• As an exception to the aforementioned regulation, the capital gains exemption would be permitted even if the investment was made in the acquisition or building of two residential homes in circumstances where the amount of capital gains does not exceed Rs. 2 Crores. However, you may only utilise this exemption once if you buy two residences for residential use. Once this exemption has been used, it cannot be used again in any other year. Investments should only be used to build or acquire one residential home throughout the remaining years. [Initiated according to Finance Act 2019].

To reiterate, it is irrelevant how many homes an individual has already purchased in order to claim exemption under Section 54. By reinvesting the capital gains from the sale of the home in another residential property, he can still make the exemption claim.

Scheme for Capital Gains Accounts

The capital gains on the transfer of the original home property are taxable in the year in which it was sold, even though Section 54 gives the assessee two years to buy the house property or three years to build the house property. The applicable assessment year’s Income Tax Return for that year must be submitted on or before the deadline for submitting the Income Tax Return. Therefore, the assessee must make a choice on the purchase or building of the residential property by the due date for filing an income tax return, otherwise the capital gain will be taxed.

The Income Tax Act offers a substitute in the form of a deposit under the Capital Gains Account Scheme to avoid the aforementioned circumstance.

Before the due date for filing the income tax return, the assessee must deposit any capital gain funds under the Capital Gains Account Scheme that were not used for the purchase or building of a new home. When claiming the Capital Gains Exemption, the Income Tax Return must include the deposit data, including the Date of Deposit and the Amount Deposited. In this scenario, the assessee will be entitled for an exemption on the money previously used for the purchase or building of the new home.

If the assessee deposits money in the Capital Gains Account Scheme but does not use it to buy or build a home within the required time frame, the money will be charged as capital gains for the financial year in which the required three years have passed since the original asset was sold. This will be a long-term capital gain.

Apartment Allocation

The DDA’s allocation of a flat under the Self-Financing Scheme will be deemed to have occurred during the building of the home (Circular No. 471, dated 15-10-1986). A similar distinction is made between the construction of a dwelling and the allocation of a flat or house by a co-operative organisation to which the assessor is a member (Circular No. 672, dated 16-12-1983). Additionally, even when the work is not finished by the deadline, the assessee is still eligible to request an exemption from capital gains in certain situations [Shashi Verma v. CIT (1997) 224 ITR 106 (MP)].

The Delhi High Court used the same analogy in CIT v. R.L. Sood (2000) 108 Taxman 227 (Del), where the assessee made a sizable payment within the allotted time frame and subsequently acquired a sizable domain over the property even though the builder failed to transfer possession within the allotted time.

Judicial rulings

1. House Property does not always refer to a finished Independent House. It also comprises residential units, such as apartments in a building with many floors. Vidya Prakash Talwar, CIT (Addl.) v. (1981), 132 ITR 661 (Del).
2. It will be assumed that the property has been acquired by the release when more than one person owns a property and another co-owner or co-owners releases his or her or their respective part or interest in the property in favour of the other co-owner(s). This release also satisfies the requirement of Section 54 with regard to purchasing. In CIT v. T.N. Aravinda Reddy (1979), 120 ITR 46 (SC).
3. In the event that a person passes away before the 2/3 years allotted under sections 54, 54B, 54D, 54F, and 54G, the unutilized deposit amount in the Capital Gains Account Saving Scheme cannot be taxed in the hands of the dead. The unutilized component of the deposit does not have the character of income in their hands; rather, it is merely a piece of the estate, thus this amount is not taxable in the hands of the legal heirs as well. 2006-05-06 circular no. 743.

Section 54EC: Any Asset for the Old Asset and Specific Bonds for the New Asset

If the assessee invests the capital gain within six months of the transfer’s due date in long-term designated bonds as announced by the government for a minimum of three years, the gain from the transfer of any long-term capital asset is exempt under section 54EC.

In the event that the long-term specified asset is transferred or converted into money within three years of the date of purchase, the amount of capital gain exempt under Section 54EC will be regarded to be the long-term capital gain of the year before to the transfer or conversion. The long-term designated asset will be considered to have been turned into money on the date that the loan or advance was taken by the Assessee if he even accepts a loan or advance against it.

The Interest Rate provided on these specified contracts, which are typically issued by REC and NHAI, is around 5.25 percent. Since the interest is not tax-free, tax must also be paid on the interest generated. These bonds aren’t tax-free bonds; they are capital gain bonds. After the lock-in period, the invested Principal is no longer subject to taxation, but the interest is still taxable.

Budget 2018 Amendment: Beginning with the Financial Year 2018–19, only sales of land or buildings would be eligible for the Section 54EC benefit (whether Residential or Non-Residential). Previously, it applied to all assets, but it is now only relevant to land or buildings. Additionally, these bonds must be held for a minimum of 5 years starting in the Financial Year 2018–19.

Deduction Amount Per Section 54EC

1. If capital gains are invested in the long-term defined assets within six months of the transfer date (up to a maximum of Rs. 50 lakhs), they would be free from tax.
2. The budget for 2014 additionally included a change to Section 54EC, which states that starting in the next financial year, or AY 15-16, an assesse’s investment in a long-term defined asset made from capital gains from the transfer of one or more original assets cannot exceed Rs. 50 lakhs.

Section 54F: Any Asset, Any Old Asset, Residential House, Any New Asset

If the entire net sales consideration is invested in, any gain that a person or HUF may realise from the sale of any long-term asset other than residential property will be completely excluded.

• Buying a single residential property within a year of the transfer of such an asset, within two years of that date, or within three years of the transfer date, build one residential home
• Three years of the transfer date, build one residential home

If just a portion of the selling consideration is invested and not the entire amount, a proportional exemption will be granted, meaning.

Exempt Amount = Capital Gain *(Amount Invested/Net Sale Consideration)

Section 54F exemption is not available under he below given circumstances

If any of the following circumstances are met, the aforementioned exemption would not be valid: –

1. On the date of transfer of such asset, the assessee does not hold more than one residential house property, excluding the one he purchased in order to qualify for an exemption under section 54F. (Note: Only if the assessee is requesting an exemption under Section 54F is the restriction on the number of homes previously owned relevant. As previously stated, if the assessee is seeking exemption under Section 54, there is no such restriction.
2. Within a year following the transfer of the old asset, the assessee purchases any residential property aside from the new asset.
3. Within three years of the old asset’s purchase date, the assessee constructs any residential home, except the new asset.

A change to Section 54F was also made in Budget 2014, and it would take effect in FY 2014–14. Under this change, an investment in a single residential dwelling in India qualifies for the exemption.

Investment in two homes would prevent Section 54F exemption from being granted. In Section 54, but not in Section 54F, you have the opportunity to invest in two homes once in your lifetime.

Prior to the deadline for filing an income tax return, the Assessee may also deposit this sum in the Capital Gains Account Scheme described in Section 54 above.