Capital Gains – when and to what extent are they exempt from tax

The Income-tax Act grants total/partial exemption of capital gains under section 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54H. It is possible to avail of multiple exemptions under these sections. However, the aggregate amount of exemption cannot exceed the quantum of capital gain. In this article I shall be explaining exemption of capital gains under section 54, 54EC & 54F.

 
Capital gains arising from the transfer of residential house property [sec. 54] – The provisions of section 54 are given below –
 
Who can claim exemption
An individual or a Hindu undivided family
Which specific asset is eligible for exemption
If a residential house property (long-term) is transferred
Which asset the taxpayer should acquire to get the benefit of exemption
Exemption is available if another residential house is purchased or constructed
What is time limit for acquiring the new asset
Purchase – Residential house can be purchased within 1 year before transfer or within 2 years after transfer.
Construction – Residential house can be constructed within 3 years from transfer.
In the case of compulsory acquisition, these time-limits shall be determined from the date of receipt of compensation (original or additional)
How much is exempt
Investment in the new asset or capital gain, whichever is lower.
Is it possible to revoke the exemption in a subsequent year
If the new asset is transferred within 3 years of its acquisition exemption will be taken back. For calculating capital gain on transfer of new asset, cost of acquisition will be calculated as (original cost of acquisition – exemption availed under section 54).
Scheme of deposit – If the new asset is not acquired up to the due date of submission of return of income, then the taxpayer will have to deposit the money in “Capital gain deposit account scheme” in the deposit account, exemption will be given to the tax payer.

The tax payer can acquire the new asset by withdrawing from the deposit account. But the new asset should be acquired within the above mentioned time-limit mentioned. If the deposit account is not fully utilized for acquiring the new asset, the unutilized amount [but in case of section 54 and 54F when the 3- year time limit expires], will be taxable as short-term/long-term capital gain depending upon the original capital gain. The unutilized amount can be withdrawn by the tax payer after the expiry of the aforesaid time-limit. If the tax payer dies before the expiry of specified time-limit (for making investment in the new asset), then unutilized amount paid to the legal heirs is not taxable in the hands of recipient.

 
Other points – A few points which are relevant for availing of exemption under section 54 are given below –
 
Ø  Construction of the residential house should be completed within 3 years from the date of transfer. Date of commencement of construction is irrelevant. Construction may be commenced even before the transfer of house. Case of allotment of flat under the self-financing scheme of DDA (or similar scheme of co-operative societies or other institutions) is treated as constructions of house for this purpose.
 
Ø  Investment in residential house would not only include cost of purchase of house but also cost incurred for making house habitable.
 
Ø  Holding of legal title is not necessary. If the taxpayer pays full consideration or substantial portion of it (in terms of the purchase agreement) within the period given above, the exemption under section 54 is available. This rule is applicable even if possession is handed over after the stipulated period or the sale deed is registered later on.
 
Ø  Exemption is not limited to acquisition of one house property. For instance, a taxpayer may purchase two houses, or he can purchase a house and construct first floor of the house so purchased or a person can construct two or more houses, etc. Similarly, a taxpayer may sell two house properties and he may purchase one house property for the purpose of availing the exemption.
 
Let’s take the case of Mr. Sinha and Mr. Goyal who had –
Residential house property situated in Delhi
   Mr. Sinha
         Rs.
  Mr. Goyal
         Rs.
Date of transfer of the property
July 10, 2011
September 19, 2011
Date of purchase of the property
October 6, 1984
April 10, 1983
Sale consideration received
  18,00,000
 14,50,000
(Stamp duty value)
(20,00,000)
(17,50,000)
Cost of acquisition
       50,000
       90,000
Expense on transfer
       10,000
         6,000
To get the exemption under section 54, the following residential house properties are purchased b Mr. Sinha and Mr. Goyal at Noida –
 
Date of Purchase
December 20, 2011
March 1, 2011
Cost of acquisition
20,00,000
16,00,000
  
Exemption as per section 54 is calculated as under (in Rs.)                                                                                                                                                                              
Sale consideration (i.e., stamp duty value)
20,00,000
Less:
Indexed cost of acquisition [Rs. 50,000 X 785 / 125]
3,14,400
Expenses on transfer
   10,000
Balance
16,76,000
Less: Exemption under section 54 [amount of investment in new residential property, i.e., Rs. 20,00,000 or amount of capital gain, i.e., Rs. 16,76,000, whichever is lower]
20,00,000
Long-term capital gains chargeable to tax for the assessment year 2012-13
      NIL
[The article has been written by Aashish Ramchand. Aashish Ramchand is a Chartered Accountant by qualification and the Co- founder of makemyreturns.com, an online tax advisory and filing site. He is very passionate about Indian taxes and loves to write articles about the Indian tax system. He has worked with KPMG and JRC advisory both in international and domestic taxation respectively. His cumulative experience in taxation is 5 years. He has also completed level 1 of CFA (USA) exam. ]

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Capital Gains – when and to what extent are they exempt from tax

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