At life’s crossroads, we often seek new beginnings. Whether it’s a new job, a different country, or the serenity of retirement, selling our homes is a common step forward. Yet, this journey is filled with complexities that demand our careful attention. That’s where Section 54 of the Income Tax Act comes into play, offering a valuable opportunity to ease the transition. By understanding and utilising the provisions of this section, you can potentially save a substantial amount of money on taxes. In this article, we will unravel the mysteries surrounding Section 54 and explore how it can be your financial ally during this pivotal phase of your life.
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What is Section 54 of the Income Tax Act?
This act states that the individual or HUF selling residential property can avail tax exemption under section 54 from Capital Gains, only if the capital gains are invested in the purchase or construction of the residential property. One must note that the individual cannot buy a residential house abroad and then claim the exemption.
Contrary to misconceptions, the entire amount of income is not subject to taxation. Rather, it is solely the profit derived from the sale of a property that falls within the taxable purview. This is attributed to the classification of the sale of a residential property as a capital asset, thereby rendering the accrued profit as a capital gain.
Who is Eligible to Avail the Benefits Under Section 54?
A great benefit of an asset becoming classified as a capital asset is that the investor can become eligible for the benefit called indexation – system used by governments to connect asset values and associated prices. With the help of indexation, for example, you can not only reduce your long-term capital gains but also bring down the income taxable under the law – making it a win-win situation for investments over time. In the following sections, you will read about the exemptions under each section 54 conditions if unmet collectively, the seller will not be eligible to get the benefit of the exemptions under section 54.
Exemption Under Section 54 Explained
This act states that the individual or HUF selling residential property can avail tax exemptions from Capital Gains, only if the capital gains are invested in the purchase or construction of the residential property. However, taxpayers such as LLPs, partnership firms, or any other association body cannot claim this tax deduction under section 54.
What is the Amount of Capital Gain Exemption Available Under Section 54?
When it comes to the sec 54 capital gain available under section 54, it is the lower exemption amount for a taxpayer on the amount of capital gains or transfer of residential property. It is also the lower amount for a taxpayer of the investment made for purchasing or constructing a new property.
Read: Increase the Value of Your Home: Smart Strategies for 2024
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What are the Mandatory Conditions for Availing Exemptions Under Section 54?
These are some of the criteria that need to be followed to be eligible for section 54.
- The asset needs to be a long-term capital asset.
- capital gain on sale of house property section 54, It has to be a residential house, as the income garnered from this house should be chargeable as income on house property.
- Section 54 of income tax acts on more than one house, the seller should buy a residential house either 1 year before the date of sale or 2 years succeeding the date of sale. It is important to note that if the seller is constructing a house, the seller will have to construct the residential house within 3 years from the date of sale.
- The individual cannot buy a residential house abroad and then claim the exemption.
If you want to avail of the deduction under section 54, you will need to make sure all these criteria are met. This exemption is only available once in the life span of the individual/seller.
Note that in terms of Section 54 of Income Tax Act, more than one house cannot mean you can get the exemption for both. As per sec 54 of Income Tax Act, the exemption can only be claimed by only one house, and no exemptions can be claimed if the property exists or is purchased outside of India.
Also, under Section 54 of Income Tax Act joint ownership, a sale of a long-term capital asset (a residential property for example) with joining names of two or more people, if the assessee has constructed a residential house in India within a period 1 year before/2 years after/ or the date of the transfer. In this case, the proceeds of the sale and flow of money are traced to the assessee to know he/she has really invested the amount as proof. Or else, the claim for exemption under Income Tax Section 54 can be denied.
Read: Pune, It’s Time to Buy and Sell Homes the Smart Way
If the residential property is sold within 3 years from the date of purchase or the date of construction, then the tax under section 54 exemption, claimed earlier shall be indirectly taxable in the year of sale of the new house property.
What is Meant by the Capital Gains Account Scheme?
When a capital asset is sold, the money received from the sale is referred to as Capital Gains. These gains are encouraged to be reinvested due to the tax relief provided by the government for specific assets and over a stipulated period.
In 1988, the government introduced the Capital Gains Account Scheme. This scheme enables individuals to retain their capital gains until they can be reinvested in specific assets under sections 54 and section 54F of the Income Tax Act 1961. By taking advantage of this scheme, you not only have the opportunity to deposit your under-used capital gains but also benefit from exemptions on reinvestment. Moreover, it serves as an excellent way to safeguard your long-term capital gains.
Difference Between Section 54 vs Section 54F
| Section 54 | Section 54F | |
| Tax Exemption | Invest in indexed long-term capital gains | Long term capital gains on the sale of any asset that isn’t a residential house |
| Investment Requirement | Long-term capital gains on the sale of any asset that isn’t a residential house | Invest the net consideration of the particular asset |
| Uninvested Amount | Charged as long-term capital gains | Exemption calculation: Cost of new house x Capital Gains / Net Sale Proceeds |
| Ownership of Multiple Houses | No restriction | Cannot own more than one residential house at the time of sale of an old asset |
| Reversal of Exemption | If new residential property is sold within 3 years from purchase, exempted capital gains will be taxed | Long-term capital gains on the sale of a residential house |
In conclusion, Section 54 of the Income Tax Act sheds light on the valuable exemptions available for residential properties. If you aspire to make significant savings through Section 54, we invite you to explore the wide range of houses and commercial properties available on NoBroker. Discover options that suit every budget, and enjoy the added advantage of saving on brokerage fees.
Read: Deemed Owner of House Property: Legal Guide
Frequently Asked Questions
Q1. How can I use section 54 and section 54F simultaneously?
Ans. These two sections are mutually exclusive and cannot be used at the same time, because of the various assets that come under each section. Either Section 54 exemption will be available for you or exemption under Section 54F will be available, depending on the asset.
Read: Demystifying Section 54B: Capital Gains on Sale of Agricultural Land
Q2. What is section 54 under income tax?
Ans. This act states that the individual or HUF selling residential property can avail tax exemptions from Capital Gains, only if the capital gains are invested in the purchase or construction of the residential property. One must note that the individual cannot buy a residential house abroad and then claim the exemption.
Q3. What is Section 54 of the Income Tax Act Bare Act?
Ans. Section 54 Series of the Income Tax Act refers to a provision in the Indian Income Tax Act that allows individuals and Hindu Undivided Families (HUFs) to claim tax exemption on capital gains arising from the sale of a residential property, provided the gains are reinvested into purchasing or constructing another residential property within specified timelines.
Q4. What are the tax implications under Tax Implications Under Section 54 for Under Construction Property for investors?
Ans. The Tax Implications Under Section 54 for Under Construction Property allow investors to claim tax relief when they sell a residential property and reinvest the capital gains into purchasing or constructing a new property, helping to mitigate the tax burden associated with property transactions.
Q5. What are my capital assets?
Ans. A capital asset is any property owned by an assesses that may be in connection with business or may not be connected as well. Thereare three main categories of capital assets. First, we have moveable or immovable capital assets, for example, land, buildings, houses, and property.
Secondly, we have tangible or intangible capital assets, which are leasehold rights, vehicles, patents, trademarks etc. And lastly, we have fixed or circulating capital assets like machinery, jewellery, and so on.
Q6. How much capital gain can I get for my asset under section 54?
Ans. When it comes to the sec 54 capital gain available, it is the lower exemption amount for a taxpayer on the amount of capital gains or transfer of residential property. It is also the lower amount for a taxpayer of the investment made for purchasing or constructing a new property.
