Income from the sale of property attracts a huge tax liability and is hence observed as a terror by the public at large. Most people sell off their assets to improve liquidity; either to cater to immediate financial needs or to meet asset replacement costs. In any case, spending a whopping proportion of the consideration to replace an asset won’t be welcomed as a good idea by most of the sellers. This mentality would eventually result in partial or full tax evasion, which would result in a loss of revenue to the Government. In order to tackle this limitation, the IT Act has brought out provisions related to exemptions on Capital Gains, those are discussed in sections 54-54H.
The most important of these or the most widely claimed exemption is that on the Capital gain on house property (Section 54).
Breaking down section 54
Section 54 depicts the terms and conditions that are to be fulfilled by an assessee in order to get his capital gains on transfer of house property exempted from tax. Each point listed below shall be carefully taken care of while dealing with the sale and subsequent purchase of house property to save taxes.
Sale of what asset?
- Residential House Property (with land appurtenant thereto)
Conditions to avail exemption (All conditions to be fulfilled)
- The taxpayer is an Individual or HUF
- The asset sold should be a long-term capital asset
- The asset sold is a residential house property
- A residential house property should be purchased
# Either a year before the sale
# or within 2 years of the sale
# or a house should be constructed within 3 years of the transfer.
(Date of transfer for cases of compulsory acquisition shall be the date of receipt of compensation) - The new house property should be bought/constructed in India
- The purchased house property should not be transferred within a period of 3 years from the date of purchase/construction.
How much exemption does one get?
Lower of the following:
- Capital gain on transfer
- The amount of investment in a new property.
Does the assessee require to file the return before the due date?
The assessee has a claim on exemption even though he fails to file his return of income before due dates prescribed u/s 139(1), but he must purchase or start construction of the new house before the due dates.
Does the exemption get cancelled even after filing of returns?
If the new house property is sold within 3 years from the date of its purchase/construction, the whole amount so received on transfer shall be charged to tax. The amount of capital gain previously exempted shall be reduced from the cost of acquisition of the new house property while computing short-term capital gains on transfer of the new asset.
Can one claim exemption without purchasing/constructing a house?
Yes, if the assessee fails to buy a new house property or if the construction isn’t completed before the due date of filing, he must deposit the amount in a public sector bank or IDBI bank in accordance with the Capital Gains Accounts Scheme 1988 (CGAS).
The amounts already spent on the purchase of new assets plus the amount of deposit is taken as the amount of investment in the new asset.
What if the deposited amount is not utilised for purchase/construction?
The unutilised amount is taxed as Long-Term Capital Gains in the year in which the deposit expires.
Can money be withdrawn from CGAS?
There are two kinds of accounts in CGAS, which are savings and deposit schemes. Savings schemes are suitable for construction since recurring withdrawals might be needed. Deposit schemes are best for people intending to purchase property since withdrawals are restricted by several norms.
How can the money be withdrawn?
The money from CGAS can be withdrawn through Form-C, and be utilized only for the purpose mentioned, within 60 days of such withdrawal. Any amount unutilised shall be redeposited immediately.
Subsequent withdrawals shall be made through Form-D.