Capital Gains Exemptions under the Income Tax Act can be claimed by reinvesting your capital in either purchasing/constructing a residential house or capital gain bonds.

Either the seller of the asset can claim an exemption or pay 20% Long-Term Capital Gains Tax. (Refer The calculation of long-term capital gain tax

This article describes in detail the following exemptions that may be claimed for the sale or transfer of a Long Term Asset. when the asset was held for over 2 years.

  1. Section 54: Old asset: Residential property, new asset: Residential property
  2. Capital Gains Account Scheme
  3. Section 54EC
  4. Section 54F, Old Asset: Any Asset. Residential House.
  5. Detailled e-book about Levy of Capital Loss Tax and Exemptions. Includes Examples

Section 54: Residential Property - Old Asset. Residential property - New Asset : Residential Property

Section 54: Any Long Term Capital Gain arising from an Individual or HUF's Sale a Residential Property (whether it is Self-Occupied, or Rented), shall qualify for exemption to the extent these capital gains are invested.

  1. Purchase of another residential Property within 1 Year or 2 Years after the transfer.
  2. Construction of residential property Property within three years from the date on which the property was transferred/sold

Provided the new Residential House Property that was purchased or built is not transferred in less than three years after its acquisition date. If the new house property is not sold in the three-year period from its acquisition date, the cost to acquire this property shall be reduced according to the amount of capital gains exempted by Section 54 earlier. Capital gains resulting from this transfer are always short term capital gains.

Quantum of Deduction as Per Section 54

Capital Gains shall be exempted in the event that they are invested in the construction or purchase of another house.

  1. If the Capital Gains amount is greater than or equal to the cost for the new house, then all capital gains are exempt
  2. Capital Gains greater than the price of the new property shall be considered an exemption.

No. No.

  1. The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in construction/purchase of 1 residential house [Introduced vide Finance Act 2014]. No matter the number of houses that the person owns, the capital gain exemption is only allowed if it is used to construct/purchase one residential house. of houses already owned by the person, if he invests the capital gain in construction/purchase of a single residential house - then capital gains exemption can be claimed.
  2. There is an exception to this rule. If the amount of Capital Gains is less than Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in purchase/construction of 2 residential houses. However, the exemption for buying 2 residential homes is only available once. This exemption cannot again be claimed in any other year. All other years, the investment should be in construction/purchase of 1 residence. [Introduced pursuant to Finance Act 2019].

You will need to provide the following information in order to claim exemption under Section 54: Is irrelevant the number of houses already owned. You can still qualify for exemption by reinvesting Capital Gains on Sale of Houses into another Residential House.

Capital Gains Account Scheme

Section 54 allows the assessee to purchase the house and build it within 2 years. Capital gains on the sale of the house property are not taxable. The income tax returns for the relevant assessment years must be submitted within the stipulated deadline. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income tax return otherwise, the capital gain would become taxable.

The Income Tax Act describes an alternative deposit option under the Capital Gains Account Scheme in order to avoid the above.

The Assessee's Amount of Capital Gain should not be used to buy or construct the new house. He must deposit it under the Capital Gains account Scheme before the due date for furnishing return. The details of deposit, i.e. In order to claim Capital Gains Exemption the Income Tax Report must include the Date of Deposit as well as the amount deposited. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.

If the assessee deposit the amount in Capital Gains Account Scheme but fails to use it for construction or purchase of a residential dwelling within the stated period, the Capital Gains will be charged as Capital Gains of that year.

Flat Allotment

DDA's under the Self-Financing Scheme shall consider the allotment a flat as construction (Circular No. 471, 15-10-1986. Also, co-operative societies can allot a flat, or a house, and the member of the society is treated as the construction of the house (Circular no. 672, 16/12/1983). In these cases, an assessee can claim exemption from capital gains even if the construction does not take place within the statutory deadline [Shashiverma v CIT (1997) 224 ITR106(MP)].

Delhi High Court has used the same analogy. In this case, the assessee paid a substantial amount within the given time limit. This allowed him to acquire substantial domain over the property. But the builder failed the deadline [CIT. v R.L. Sood (2000) Taxman 227 (Del).

Judicial Decrees

  1. House Property is not synonymous with a whole independent house. It also includes residential units like flats in a multistorey building. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR 661 (Del)].
  2. The release will be used to determine if a Property is purchased by multiple owners. This release also fulfills Section 54 the purchase condition. [CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
  3. The Capital Gains Account Saving Scheme's unutilized amount cannot be taxed if an individual dies within the two-year deadline under section 54,54B,54D, 54F, 54F or 54G. The unutilized portion in Capital Gains Account Saving Scheme is not taxable by the legal heirs. This is because it does not have the same income character as the deceased, but only a fraction of the estate. (Circular No. 743, dated 06/05/1996)

Section 54EC

Gains from the sale of any long-term capital assets are exempted under section 54EC if an assessee invests the capital gain within 6 month of such transfer in long-term specific bonds. for a minimum period not less than 3 years.

The capitalgain exempted by u/s54EC is calculated if the long-term asset is sold or converted to money in any year after the acquisition.

If the Assessee is granted a loan to or advances against the security of long-term specific assets, he shall be deemed as having made money from such long-term assets on the date such advance or loan was taken.

These binds, which are often issued by REC and NHAI, have an interest rate of approximately. 5.25%. Tax on the interest earned may also be liable to being paid because the Interest isn't tax-free. These are Capital Gain Bonds. The principal invested in these bonds is tax-free after the lockin period, but interest is still taxable.

Budget 2018 Modification: The Section 54EC benefit will be only available to residential and non-residential land or buildings that are sold after the financial year 2018-19. Although it was previously available to all assets, it would now be limited to Land or Building. Furthermore, the bonds would need to be held for a minimum of 5 years beginning in Financial Year 2018.

Section 54EC, Quantum of Deduction

  1. Capital Gains shall be exempted in the amount it is invested long term specified assets (subjected to a maximum limit o Rs. 50 Lakhs) within 6 month from the date such transfer was made.
  2. Budget 2014 also amended Section 54EC. Onwards, the capital gains of a transfer of an original asset or assets to which the assessee has made an investment in the specified asset for the long term, i.e., AY 15-16, are not more than Rs. 50 Lakhs.