Section 54 Of The Income Tax Act: Eligibility And Tax Exemption
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17 January 2022
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17 January 2022Mr Sharma is currently going through a financial crunch and is thinking of selling his residential property. However, he is wondering whether he has to pay taxes for that, and if not, what are the conditions he has to meet.
The Income Tax Act of India has extended certain exemptions for the citizens, helping them reduce their tax liability. When it comes to selling a residential property, one can avoid paying taxes under Section 54 of Income Tax Act. That said, in that case, the immovable property has to fall under the long-term asset category.
Still confused? Let us break it down for you!
Table of contents
What Are Long-term Capital Assets as per Section 54?
In terms of capital gains, there are two categories these assets are bifurcated in — long-term capital assets and short-term capital assets. The former type belongs to those assets which are held for above 3 years, 2 years, or 1 year by assesses as the case may be. When these types of assets are sold, the profit derived from that can be termed long-term capital gains.
On the other hand, properties that are held not more than 3 years, 2 years, or 1 year are known as short-term capital assets. As per the norms of Section 54 of ITA, exemptions are only available on long-term capital gains.
To claim benefits of Section 54, a taxpayer has to hold his/her immovable property for a duration of over 24 months.
Also Read: Income Tax: Allowances, Exemptions And Deductions
The Amount of Exemption Applicable u/s 54 of ITA
The tax exemption available for long-term capital gains under Section 54 of the Income Tax Act will be the lower of these two:
- Amount of long-term capital gains that arise with the transfer of residential property.
- The amount being invested for the purchase or construction of a new residential house. In this case, if there is any balance amount or remaining capital gains, it will be taxable according to the Income Tax Act, 1961.
That said, to receive such benefits, individuals must know all mandatory conditions and eligibility requirements under this section.
Eligibility Requirements for Claiming Exemptions u/s 54 of ITA?
Here are some parameters you must meet to avail tax benefits under Section 54:
- The immovable asset has to be a residential property and should be held for more than 24 months.
- You must be an individual or a member of a Hindu Undivided Family (HUF).
- The residential property should be within India. The exemptions are not available on properties outside of this country.
- The purchase of the residential house should be either 2 years after the sale or transfer or one year prior to the sale or transfer.
Apart from these, also remember that you can avail of these tax benefits only once for this kind of transaction. In case you fail to meet any of the above-mentioned criteria, tax exemption under Section 54 will be unavailable.
Also Read: Section 10 Of Income Tax Act
Additional Pointers to Remember Regarding Section 54 of ITA
Although you are aware of most of the conditions of Section 54 of the Income Tax Act, here are some additional points you must keep in mind:
- In case the total sale amount is higher than the total cost of the new house, tax exemption is available proportionately. Moreover, the remaining amount will be applicable for reinvestment and can be done within 6 months u/s 54EC.
- The seller must ensure to buy the property under his/her name.
- The exemption will be available even if the builder delays in handing over the new residential property to the assessee within 3 years of its purchase.
Final Word
Now, it is pretty clear that you can save taxes while selling your residential property under Section 54 of the Income Tax Act. Note that from AY 2020-21, a capital gain exemption will be applicable in the case of two residential house purchases within the country. However, the capital gain must not exceed Rs. 2 crores.
Frequently Asked Questions
Ans: No, tax exemptions under Section 54 of ITA are only applicable to individuals and HUFs. Limited Liability Partnerships or companies will not be eligible for such benefits. Moreover, the residential property must fall under the long-term asset category as per the norms.
Ans: Even though both these sections of the Income Tax Act deal with exemptions available for construction or purchase of immovable property, there are some major differences noticeable between these two. In the case of Section 54, it is the investment of entire capital gains upon which exemptions will be available. For the other one, it is upon the investment of the entire sale receipts.
Ans: According to the norms of Section 54 of Income Tax Act, tax exemptions are only available if you invest in the purchase or construction of a new residential house. Therefore, if you invest a substantial amount for renovating your existing house, tax benefits u/s 54 will not be available.
Ans: No, the entire amount received from the sale of a residential property is not taxable. In the case of sale of a residential property, only the profit is taxable. The profit is basically the difference between that particular property’s actual cost and its sale price.
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